In most countries as deposit rate liberalization has progressed banks have moved to offset the cost of higher rates that competition has produced by introducing account charges for selected retail deposit accounts. The most common fee structure is for the bank to impose account charges if the balance in a low or non-interest-bearing account falls below some specified minimum amount.
Many companies prefer to pay charges than be required to leave non-interest-bearing compensating balances with a bank. The charges are tax deductible while foregone interest has no tax benefit.
The structure of these charges varies between banks and also between countries. Banks love fees and are always looking for ways to extract more of them from customers. Retail customers hate bank fees and in many countries have got used to the idea that basic bank-such as the number of checks written, standing order instructions and bounced (or returned) checks.
In many businesses an approximate 80:20 rule applies, that is 80% of a company’s profits come from 20% of its customers. At many retail banks in developing markets this is probably more like a 150:20 rule, with the other 80% of customers loss making. This can have important social and competitive implications. Banks play an important social role in any economy. Large domestic banks in developing markets cannot turn away mass-market customers simply because they are unprofitable. They also find it difficult to impose onerous account charges because of political considerations.
The more sophisticated foreign banks do not generally experience such constraints. They try to impose high minimum balance requirements in order to “cherry-pick” the most profitable customer segments while avoiding having to service those that are loss making.