Weighing in on the bank fees debate - CaPRI
The following is a contribution from the Caribbean Policy Research Institute.
Are bank fees too high?
Jamaica's largest bank, NCB, made a record-breaking $14 billion in profits last year, up 17 per cent from the previous year. The second-largest, Scotiabank, made $12 billion up to October last year - a 14 per cent increase. With returns like these, it's hardly surprising that members of the public have been crying out against high banking fees.
Exacerbating the effect was the $1,385 fee Scotiabank began charging to cash a cheque from other banks in November - an almost 900 per cent increase from its previous fee. This was subsequently reduced to $385 the following month, due to the public outcry. This, along with the anomaly of charges levied on fairly commonplace activities, has led many observers to characterise these charges as unfair. But are bank fees actually too high?
CaPRI, in 2014, released a study on the issue, seeking to provide clarification by highlighting the driving forces behind trends in Jamaican bank fees and charges. This study demonstrated that in Jamaica, since the mid- to late-2000s, income earned by banks from fees and commissions has increased significantly, as has been the case in many other economies since the early 1990s. The data presented provided some preliminary support for the conjecture that Jamaican banks increased fees in a bid to maintain profit levels amid declining interest revenues. The trends suggest that decreasing net interest income and net fees and commissions caused profits to fall in 2006, to which banks responded by increasing both net interest income, and net fees and commissions in 2007.
Although providing little comfort, the data (2010 to 2011) also support the fact that fees charged by Jamaican banks are not generally significantly higher than those of banks in other parts of the world.
CAPRI's assessment indicates that the international trend of increased profits from heightened bank fees is partially due to a proliferation of relatively large banks, and banks that operate in more than one market. Banks which have been impacted by lowered interest revenues have also been shown to profit more from fees charged, reinforcing a popular perception of such banks as opportunistic.
Other results, however, provide a more nuanced picture. In spite of having relatively low interest revenues, the banks that earn the most from their fee-based services tend to be well-managed institutions, maintaining high standards of efficiency, solvency and liquidity.
These banks also seem to have positioned themselves to focus on fee-based activities, as they were shown to spend relatively large sums of money on building the technological capacity needed to offer extensive fee-based services. In addition, where banks incur increased costs in providing services, these costs are typically passed on to consumers through higher fees; how easily these fees are passed on to the consumers is relative to the degree of competition in the financial sector.
CaPRI found that in Jamaica, as it is internationally, the tendency towards higher bank fees also reflects customers' demands for increasingly sophisticated financial services, and the availability of said services.
In addition, the results indicate that bank fees tend to be higher in financial sectors in which a few large banks control a large share of the total assets of the industry, as in the case of Jamaica.
Regulators are now grappling with increased pressure to manage the tendency of multinational banks to earn higher profits from fees. Very few would seek to expel such banks from the market in an attempt to lower fees, and even if they did, the consequence would be lowered competition in the local banking sector, which has been shown to cause heightened fees.
In addition, although higher standards of efficiency, solvency and liquidity, along with greater sophistication of the services supplied by the banking sector have been shown to be associated with higher profits from fees, regulators clearly would have no desire to reduce any such standards.
While these fees remain a pressing concern, CaPRI's findings and analysis warn against the proposals to cap fees. This proposal have wisely been rejected in most countries. Regulators do not have any control over how banks internally allocate their costs between different products and services.
Increased lending rates
Just as how the data showed that reduced net interest income led to increased reliance on fee income, a cap on fees is likely to cause banks to increase lending rates in a bid to maintain overall returns, in turn incurring higher borrowing costs. The results also suggest that popular efforts to force banks to provide customers with increased and more accurate and accessible information on fees, while increasing the cost of service provision, may precipitate an increase in fees, as banks seek to pass on the increased costs to consumers.
The analysis suggest that lobbying efforts by powerful persons and groups in society can yield some fruit in countries where such groups are highly regarded, as can increased assertiveness by local consumers. Ultimately, however, increased competition in the banking sector is needed if fees are to be lowered on a sustained basis.