What is loyalty tax?
There’s a new thing on the block and it’s called “loyalty tax.” So called ‘loyalty tax’ because it’s the tax you pay for your loyalty to your banks. It happens when new customers are offered discounts while long-term clients pay a much higher fee, particularly for mortgage products.
Recently, when the Reserve Bank of Australia (RBA) has cut the official cash rate by 0.25 basis points for the third time in five months, and the four big banks failed to pass on the full cut to their customers for the third time, as well, treasurer Josh Frydenberg brought the matter up to Australian Competition and Consumer Commission (ACCC). And one of the key points of investigation of the ACCC will be, you guessed it, loyalty tax.
Inertia of Customers Causes Banks to Get Away with Loyalty Tax
Mr Frydenberg believes banks are profiting off customer inertia and slugging loyal customers with higher mortgage interest rates, secured in the knowledge that these customers won’t switch because they neither have the time nor the inclination to.
Could he be right? Maybe. But one of the goals of the investigation is to make it easier for customers, especially home-loan borrowers, to switch banks and hopefully get the full benefit of cash rate cuts.
According to the treasury numbers released by Mr. Frydenberg, the refusal of the four big banks– who have a 75% market share of home-loan customers—to pass the rate cut in full and the ensuing delays in their reductions will see them pocket $569 million in revenue.
Price Discrimination Is Not Illegal
Whether these banks are deliberately profiting off ignorance and inertia of loyal mortgage customers, RBA board member Ian Harper pointed out that price discrimination is not illegal or even unusual.
He said different people are prepared to pay different prices and cited examples of sectors that practice price discrimination. Mr. Harper said consumers are familiar with the practice in airlines, for example, where it is not unusual to sit in a plane beside somebody who probably paid a lower price than you did.
The key to solving loyalty tax, he said, is improved transparency so that costumers, armed with the right information, can make better choices.
Customers Ought to Shop Around
Mr. Frydenberg and Mr. Harper are in agreement that the only way one can avoid loyalty tax is by shopping around.
Property investors and home-loan borrowers should look for lower rates or more features and improved service. Don’t settle for the often-offered packages but opt instead for a more basic loan. Ditch mortgage that includes unnecessary features like credit cards or offset accounts– though offset accounts may be good for certain situations and people.
If you don’t have the energy to switch lenders, then ask your lender to give you a better loan. Yes, you can do this. You’ll see the wisdom of it if you consider how much you will save—it’s not pocket change.
A home-loan borrower with $1 million loan package whose repayment is reduced to say $370 a month, for example, can save more than $130,000 in interest in a 30-year mortgage. That. Is. A. Lot.
So next time you feel the urge to say, ‘I’m sorry mate, I’m not interested, I’ve got better things to do,” as Mr. Harper admits most people are prone to say in the face of a new offer, think about that figure.
There’s a lot of hassles involved, but don’t worry, the action and decision-making won’t be left entirely in your hands. The ACCC inquiry into “loyalty tax” is expected to have findings on March 30, 2020, and the final report that will identify why loyal customers find it difficult to switch banks will be in on September 30.
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