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.
Posts Tagged ‘banks’
ACCOUNT CHARGES
Saturday, September 19th, 2009Internet and other electronic banking
Wednesday, August 26th, 2009During the period of the Internet boom a number of stand-alone Internet banks were established by non-bank companies. Their business model was based on rapidly attracting a large, retail deposit base by marketing aggressively and offering higher rates than traditional banks. They then planned to market mortgages, credit cards and other retail products to that base. Other less ambitious operators chose to offer specialist services such as searching the Web to get the best terms for a mortgage loan, car loan or insurance policy. Only a few of the hopeful new entrants have survived the test of time.
Larger, established banks saw the Internet as less of a threat than an opportunity. They already had the customer relationships and multiple distribution channels that would make it difficult for new entrants to compete. Some did establish their own “Internet bank” with different branding from their parent (and these are among the few survivors) but most eventually decided that it was better to simply use the Internet as one more delivery channel.
Some estimates put the cost to a bank of a customer making a transaction through the Internet at less than 1% of the cost of having it done through a branch. The emergence of Internet banking has had three major effects on competition. The first is that it has raised customer expectations on pricing and availability of service. The second is that it is helping to force banks to strive for an optimal balance between providing services through branches, ATMs and other delivery channels. The third is that it has increased the level of potential scale economies and hence pressures for consolidation.
Phone banking
Thursday, August 20th, 2009In many countries, phone banking has become highly automated providing similar functionality as an ATM machine. Call centers have become increasingly sophisticated and automated. A few banks established stand-alone phone-based banks differentiated from their parent through branding and pricing. The loss of business due to cannibalization of customers in their traditional bank has to be balanced with the new business gained by attracting customers from other traditional competitors. The reduction in telecommunication costs has also enabled large, global banks to locate call centers in countries where labor costs are low. India, for example, has a relatively well- educated English-speaking workforce but labor costs are but a fraction of those in OECD countries.