Banks feed off charges to undiscerning consumer base

FTC reports lack of competition on fees in commercial banking sector

By Alicia Roache Sunday Finance reporter roachea@jamaicaobserver.com

Sunday, January 09, 2011

Bank charges do not factor heavily in the competitiveness of local commercial banks and is a major reason why consumers continue to get hammered by exorbitant service fees, a report by the Fair Trading Commission (FTC) suggests.

The report — based on a FTC and Consumer Affairs Commission (CAC) survey which focused on fees charged for ancillary services offered by banks — stated that most customers rely on their historical relationships with banks and the convenience and accessibility of services rather than information on fees and charges to make their banking decisions. The upshot, the FTC suggests, is that consumers typically do not switch banks because of fees and are themselves a major part of the reason financial institutions get away with high service charges.

The survey showed that 67 per cent of customers choose banks based on convenience and location or accessibility, while 63 per cent still bank with the institution at which they opened their first account.

The study also revealed that despite charging comparatively higher fees, the two largest banks, National Commercial Bank (NCB) and Scotiabank, still retain the largest market share because of their expansive branch network (NCB has 45, Scotiabank has 40) and the perceived differences in their services. Together the banks account for 74 per cent of deposits and 73 per cent of gross revenues for the sector as at September 2010.

"NCB and BNS have consistently maintained a large share of the market despite charging, on average, the highest fees and charges," The FTC stated.

Against this background is a consumer base that is largely under-educated about what banks are charging for the simplest of transactions. Indeed, the survey revealed that 41 per cent of customers were completely unaware of bank charges.

Some of the blame for educating customers was placed squarely at the feet of the commercial banks by Commerce Minister Karl Samuda. Supporting his assessment is the fact that just 31 per cent of the consumers surveyed indicated that they were notified of bank charges, 30 per cent said they were made aware after the changes were made, while only eight per cent were made aware of changes in the bank charges before they were made.

Speaking on Thursday at a press conference to announce the results of the survey, Samuda said banks should provide adequate information on their services and be obligated to communicate clearly to customers the services and situations under which fees and charges would apply prior to the fees being applied. He said this should allow customers to make informed decisions when shopping around for bank services and improve competition within the sector.

"So that if you go to a bank and say 'I would like to do this, or I would like to do that', they are obliged to inform you of the charges that are going to be attendant to that activity," Samuda said.

The FTC report also advocated for the institutions informing customers of ways in which they can avoid or minimise fees and charges.

In addition to legislation that could force the banks to disclose information on fees and charges to customers before they are engaged in transactions, Samuda argued for greater involvement from the CAC in educating consumers on the banks' fees.

"If you don't have the ability to advise consumers as to what the position is you cannot have an impact on the competition," Samuda argued. "That is going to be the job of the Consumer Affairs Commission, to provide information to our consumers. That is what is our responsibility and so no longer will we simply go along and accept what is thrown at us. But we will be monitoring it and we will highlight instances where we feel there is unreasonable activity taking place."

"At the moment there is no comparative shopping. You've heard that over 50 per cent said they would change, but most of them don't know what to change to or where to go to experience a favourable change," added the minister.

According to the FTC report, NCB and BNS earned $5.5 billion and $4.5 billion respectively in fees and commission income during the period, with the closest competitor RBTT Jamaica in distant third with $899 million. The lowest earnings in fees and commission income went to PanCaribbean Bank with $58 million. RBTT has 20 branches, while PanCaribbean has five.

"There are significant differences in the level of fees charged by these banks compared to those charged by the smaller banks," Samuda said of the big two. Income from fees and commission contribute between seven and 20 per cent of net revenue for commercial banks the study claimed.

The survey looked at the fees associated with transactions relating to credit and debit cards, bill payment, wire transfer, manager's cheques, standing orders and chequing accounts, minimum balance violation, in-branch withdrawals, cash deposits and dormant accounts.

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Banks feed off charges to undiscerning consumer base