Foreign exchange fees, a major source of income for Australia’s major banks, are likely to fall in the years ahead due to increased competition in the sector, Macquarie Bank has warned.

“The increased focus from the regulator and new competitors providing superior, innovative products at a fraction of the majors’ costs suggest that banks are facing a material reduction in volumes and will need to significantly lower the pricing gap to competitors to stay relevant,” Macquarie said in a note.

Using mystery shoppers to evaluate the competitiveness of major bank FX pricing, Macquarie found that fees were 10 to 20 times higher than those charged by non-banks and emerging FinTech players.

Given the substantial gap in pricing and increasingly competitive marketplace for FX services, Macquarie says the major banks will face revenue pressures from either a loss of market share or having to bring their pricing in line with new entrants to the market.  

“We estimate FX fees contribute 4 to 10 per cent of the majors’ banking operating incomes, or around $1 billion per annum,” it said. “FX fees could contract to around $200 million if banks were to adopt pricing which is more aligned to non-bank competitors.”