It has been fascinating to watch the consumer and media response to the recent increase of interest rates above the Reserve Bank rate by the Commonwealth Bank.
Many have expressed their opinion that the Commonwealth Bank is destroying its brand by such a callous action. But this view ignores the market reality in Australia that organisations that have extreme market power – such as the ‘big four banks‘ – are not subject to the normal realities of branding and business.
Due to their market power and the difficulty of switching to other providers the ‘big four’ Australian banks are in a unique ‘quadropoly‘ position. They are seen as big organisations who are safe for consumers. And, most importantly, the cost of switching from one to another is very high.
Sometimes the switching cost is an upfront fee to move a loan from one bank to another, but often the switching cost is the sheer effort of transferring all of the automatic payments to another bank.
The other issue is the incumbency effect. For many of us, we still bank with the organisation that gave us our first money box as a small child. The Commonwealth Bank benefits strongly from this effect (many of its customers started with a ‘Dollarmite‘ account in primary school).
All of this means that the big banks are different from other companies. Most companies exist in an open market, without large numbers of long-term incumbent customers, and the switching costs are not very high in most cases. Bank brands are almost irrelevant for the big banks. I suspect that for the Commonwealth Bank – and any of the others that follow suit – this is a mere blip on their brand and that their brand will suffer little (if any) long term damage.
I think that this video sums up the position of the Australian banks (HT: @TRON_Lord):