High banking fees: The antithesis of financial inclusion
National Commercial Bank building

I was sitting in First Global Bank in Liguanea waiting for a customer service agent. There was a queue of people, social distancing, waiting on tellers. The next available teller beckoned a gentleman at the front of the line to approach the counter. While conducting the transaction the gentleman exclaimed, “Suh mi haffi pay fi lodge mi money. This wuss dan Dudus extortion.” I sat listening to a subsequent discussion among the other customers in which the consensus was: There are too many bank charges and they were too high. This took place in October of 2021.

If we assume that this vignette is representative of the general banking population in Jamaica, the recent announcement of increased banking fees (now rescinded) by National Commercial Bank (NCB) and Bank of Nova Scotia (BNS) was very unwelcomed news.

Banks are the engine of the capitalist economy. As one person explained, it is the heart and circulatory system of the capitalist economy. Banks create credit out of thin air using the legal reserve ratio. They provide inexpensive, accessible financing, and generally make commerce more viable and stable. Banks are not necessarily free enterprise enterprises, as some, like NCB, are too important to the economy to fail.

As of 2020 there were eight commercial banks operating in Jamaica. However, the market is highly concentrated with two banks, NCB and the BNS, both holding approximately 60 per cent of the assets and deposits as per Bank of Jamaica (BoJ) data. The concentration of power in two banks create an oligopoly which provides an opportunity for collusion in the setting of banking rates. When these rates are set the smaller banks are forced to follow suit. This negatively affects consumer welfare. This will also negatively affect the governments financial inclusion strategy, which was launched in 2016.

According to the Inter-American Development Bank (IDB), financial inclusion is typically defined as the proportion of individuals and firms that use financial services. Financial inclusion is important for development and poverty reduction, and the poor stands to benefit considerably from the use of basic payments, savings, and insurance services.

Data from the IDB has shown that the high cost of financial services in Jamaica is a deterrent to financial inclusion. The new increased rates will be a further deterrent to financial inclusion. The high costs of opening and maintaining accounts, a lack of accessibility of financial service providers, and a lack of required documentation were among the most common reasons for Jamaicans remaining outside of the formal financial system.

Besides fees, another indicator pointing to the high cost of financial services is the spread between deposit and lending rates. The World Bank indicates that high interest rate spread makes borrowing less attractive and/or feasible for consumers and businesses alike and tend to dampen incentives to both save and invest.

Jamaica's interest rate spread of 9.6 per cent is the highest in the region. Trinidad and Tobago is 5.1 per cent, Grenada 5.7 per cent, Guyana 8.6 per cent, Barbados 7.9 per cent, and The Bahamas 3.8 per cent. It is noteworthy that Jamaica's interest rate spread has declined from 13.1 per cent in 2015 to its current rate. This is based on the 2020 World Bank data.

The World Bank data also indicate that the Jamaican banking sector is moving towards increased automation, with the number of automated banking machines (ABM) increasing from 30.69 per 100,000 people in 2015 to 39.7 per 100,00 in 2020. Simultaneously, the number of bank branches per 100,000 people have declined from 6.67 to 6.35 per 100,000 people between 2017 and 2020.

Despite the move towards more automation, the volume of ABM transactions has remained relatively flat at approximately 5.5 million transactions per month based on BoJ data. The value of these transactions is growing despite fluctuations peaking at $162.5 billion in June 2021. This suggests usage has not grown; however, the amount withdrawn per transaction has increased.

The increase in withdrawal value is not surprising as banks have increased the withdrawal limit since lockdown. However, the limit per transaction has remained unchanged, which means that customers are required to conduct more transactions to reach the withdrawal limit. With new fees per transaction the banks need to increase the per transaction limit so that customers don't have to make three transactions to reach their limit.

Experts in the banking industry have explained that ABMs are expensive machines to manage. In addition to paying for the hardware and software, servicing the ABM is among one of the biggest costs. This includes counting, auditing, recycling, and transporting cash. This is in addition to other costs, including maintenance, depreciation, and rent.

During the period June 2019 to June 2021, point-of-sale (POS) transactions, by volume, has declined from 4.1 million to about 3.98 million, while the value of transactions has increased from $54.8 billion in June 2019 to $67.7 billion in June 2021. This suggests that fewer people are using debit/credit cards; however, they are spending more. This is similar to what takes place at the ABM, same or less volume but larger transactions.

In addition to these trends, the financial bottom line for NCB has been declining. The company's net profit in 2019, which was an unprecedented $31 billion has declined to $20 billion in 2021. See Table.

Using NCB as a proxy for the industry, there are some simple conclusions that we can draw from this analysis. The profits of banks are declining, their customer base is stagnant, and these customers, especially at ABM and POS systems are making bigger transactions. Therefore, to increase profits, banks are increasing fees to their captive customers. While the fee increase has only been instituted by the two largest banks, to date, the smaller banks will follow suit. The fee structure suggests that banks are promoting online banking, which attracts little or no fees.

One other strategy open to the bank is to increase its customer base, which would be consistent with the Government's desire to increase financial inclusion and its associated benefits to the economy.

This fee increase is the antithesis of financial inclusion.

Some quick suggestions to consumers to keep cost down:

*Use online banking for all transactions where possible;

*Cheques are passé, kick the habit;

*Instead of using cash, use a debit card or a credit card;

*Limit the number of times you use ABMs, especially for withdrawals.

It is little consolation to the Jamaican consumer that other banks around the world are also increasing their fees.

Professor Paul Golding is former dean of the College of Business and Management at the University of Technology, Jamaica. Send comments to the Jamaica Observer or pgolding@utech.edu.jm.

Paul Golding

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