Austria's Consumer Protection Ministry Mandates Action Against Banks for Low Interest Rates

PeoplePoliticians ♦ Published: August 16, 2023; 20:37 ♦ (Vindobona)

According to the Consumer Protection Ministry, the practice of Austrian banks of charging high-interest rates on overdrafts while granting no interest at all on credit balances is meeting with growing resentment among consumers.

The fact that banks constantly raise debit interest rates while leaving credit interest rates at zero is unacceptable according to the Ministry of Consumer Protection. / Picture: © Wikimedia Commons, Håkan Dahlström from Malmö, Sweden, CC BY 2.0

The Federal Ministry of Social Affairs, Health, Long-Term Care and Consumer Protection has now reacted and commissioned the Association for Consumer Information (VKI) to initiate a representative action against the banking sector. The focus of this lawsuit is the business policy of the banks, which continuously raise debit interest rates while credit interest rates remain at zero. Minister Johannes Rauch emphasizes that this practice harms consumers at the expense of lavish bank profits and is considered unacceptable.

Most citizens in Austria have a checking account, which is essential for everyday payment transactions. Despite this central role, banks usually charge excessive debit interest for overdrafts. At UniCredit Bank Austria AG, these currently amount to an exorbitant 12.5 percent. However, it is striking that for credit balances on salary accounts UniCredit Bank Austria charges an interest rate of zero percent.

The Association for Consumer Information conducted a comprehensive investigation and found that this practice is not limited to one particular bank, but affects the entire banking industry. Bank Austria was already reprimanded in June on behalf of the entire industry due to its role as market leader. However, since the bank refused to issue a voluntary cease-and-desist declaration, the VKI has now filed an action by association on behalf of the Ministry of Consumer Protection. The first instance will decide on a decision before the end of this year.

The variable and high debit interest rates in contrast to the fixed and low credit interest rates raise the question of whether this practice is fair to consumers. While interest rates depend on a variety of factors, banks often have markups on loans. However, in the case of current accounts, colloquially known as salary accounts, banks pursue a different strategy. Debit interest rates are variable and rise in line with changes on the money market. In contrast, credit interest rates remain at zero, regardless of possible further interest rate increases.

A comparison website of the Chamber of Labor for current accounts in the Austrian banking sector shows that debit interest rates for account overdrafts range from 6.75 to 13.25 percent. In contrast, zero or 0.01 percent interest rates are offered for account balances. Consumer Protection Minister Johannes Rauch sharply criticizes this disparity and sees it as a uniform business practice of the banks that is unacceptable. He therefore instructed the VKI to take legal action against this practice.

The Ministry of Consumer Protection considers zero interest rates for balances on current accounts to be justified as long as interest rates on the money market are low or even negative. However, interest rate increases in recent months have prompted banks to make significant savings on refinancing. In June, the 3-month Euribor, which reflects short-term lending between banks on the money market, already reached 3.48 percent.

Rauch underlines the dependence of consumers on current accounts and accuses banks of exploiting this dependence. In his view, this business practice violates the principle of equal treatment and two-sidedness and is undoubtedly inadmissible. It was unacceptable that only the banks profited from the upward trends on the money market.

So far, the Ministry has only taken measures against the lack of interest on balances in salary accounts. There was a similar situation with savings interest until early summer 2023. However, banks have already announced or implemented changes here. The ministry plans to review the situation with savings interest rates again in September 2023 and then decide on possible legal action. Rauch assures that the ministry will continue to closely monitor the business policies of Austrian banks and will take decisive action in the event of any disadvantages for consumers.