Consumers at mercy of banks

DO you know how much your bank charges you in interest fees for services like your credit card? Chances are that, if you tried to find out, you would be unlikely to succeed.

The banks argue otherwise, but a telling exercise carried out this summer on behalf of a UK Treasury select committee tasked with unravelling the mystery of various financial service charges shows how incomprehensible many bank charges are to the average person.

APR (annual percentage rates) are supposed to make credit card fees understandable and comparable. Yet when the Treasury committee asked one prominent Cambridge mathematician to calculate the charges for one apparently simple credit card deal.

It took him most of an afternoon and numerous mind-bending calculations such as, "£1,000 x 22/31 x 1.385% = £9.83” before he came up with an answer. Eventually, Robert Hunt, the deputy director of Cambridge University's Isaac Newton Institute, testified that “to the man in the street, these things are totally impossible to work out. Even for a professional mathematician it took some time.”

The lesson is simple: banking interest charges and the manner in which they are implemented leaves the average private consumer and small business customer helpless to decipher what’s going on and the bank is free to take advantage of this knowledge deficit.

According to the latest and only comparisons available, Irish bank customers suffer more than most in Europe from excessive charges. It’s all down to a lack of competition. AIB and Bank of Ireland between them lord over 83% of Ireland’s banking pie.

Throughout the 1990s, Irish banks had higher return on assets than any other banks of all EU nations. They are nearly three times more profitable than German banks, and 11 times more profitable than French banks. Consumer bodies say a sizeable slice of that profitability derives from excessive fees and interest charges as well as cost-cutting measures which ultimately reduce the service provided to the consumer.

Three European comparisons stand out. Overdrafts, unsecured personal loans and credit cards are all far more expensive in Ireland than most other countries. Tellingly these three fees are based on interest charges.

Irish banking fees in general are regulated and must be approved by the office of the Director of Consumer Affairs, but interest charges are not covered by the Director’s remit.

An Irish bank can set whatever interest charge it likes on services like overdrafts so long as the market will support it and, with effectively no competition in much of the Irish banking sector, the market will support higher than normal charges compared with more competitive countries. It should be no surprise then that the gross profit margin charged by Irish banks on overdrafts is amongst the highest in the eurozone, second behind Portugal at 9.86%. By contrast, French margins are one-third below Irish margins.

In a review of European bank pricing in May 2000, researchers used unsecured personal loans of £3,000 as a base and found that Irish interest rates ranked as the second most expensive in Euroland after the Netherlands. Irish gross profit margins stood at 6.87% while gross profit margins for equivalent loans in France and Germany were 3.46% and 5.84% respectively.

Meanwhile, the average APR on Irish credit cards was found to be 7% above the EU average, creating a gross profit margin for Irish banks which was almost twice the EU average. As if this weren’t enough, despite the vast profits made, some banking services available were found to be far below that of our European counterparts.

For example Ireland has a bank branch density per head of the population which is 33% lower than the EU average. ATM's here clock in at 40% below the EU average.

Most of the data showing just how poorly the Irish banking customer fares is available in a little-known Government report. The report, entitled Banking Sector: Some Strategic Issues, was issued some 18 months ago but never formally published. It contains the only available comparison of banking charges throughout Europe. The lack of publicity surrounding the report’s existence is a telling point, believes Jim Curran, head of research with ISME which has been fighting a battle for years against the charges small businesses have to pay for banking services. Those charges are routinely much higher than the rates larger companies are paying.

“Banks have used their dominant position to take advantage of small businesses which has manifested itself in extreme charges to our members. An example is the fact that lending rates to small firms are between 4% and 7% higher than to large business customers,” Mr Curran said.

The bank’s tactics were exposed in 1999 when bank of Scotland appeared on the Irish mortgage market forcing the Irish banks to drop their margins by 80%, he noted. This is a sore point from a consumer point of view and led the Director of Consumer Affairs, Carmel Foley, to express concern over the uncompetitiveness of some Irish bank charges. “She would be concerned that although some institutions did reduce their charges for mortgages when Bank of Scotland came in, they didn’t reduce them in terms of their other services,” said a spokesperson.

Bank of Scotland’s chief executive in Ireland, Mark Duffy goes further: “We wouldn’t exist here if the mortgage market was competitive. Because it wasn’t competitive, we went from a market share of zero to 18% or 19% today. If it wasn’t for the lack of competitiveness we wouldn’t have been able to get in.” But other sectors remain uncompetitive and overpriced. “There is only one sector in Irish banking that’s competitive and that’s the mortgage sector,” said Eddie Hobbs, director and financial spokesperson with the Consumer Association of Ireland.

Naturally the banks disagree. “I will argue with anybody until the cows come home that the Irish banking market gives value for money,” said Felix O’Regan of the Irish Bankers’ Federation which represents 60 banks and institutions. “It’s unfair to pick a product and simply take the top line assuming that that’s the whole picture.”

Mr Hobbs rubbished this claim saying profit margins were still the same: “The facts are there. The banks will argue that it’s old information but that’s just evasion. The margins are still the same. There is no evidence to show a shrink in margins.”

Bank of Ireland failed to respond to requests about how much their margins on overdrafts, unsecured loans and credit cards had changed since the government report. The bank, which has commissioned a more recent report into comparisons between European banking charges, said the research was internal and could not be released.

AIB said the actual margin of profitability on individual products was market sensitive information and could not be released, but that Irish banks depended more on interest charges.

So, with the banks admitting that they are relying on interest charges to keep up high profits and no one authorised to regulate those charges, who is looking out for the consumer?

No one, says ISME’s Jim Curran: “They are a law onto themselves and dominate the market with a profit at all costs policy.” Mr Curran believes the Revenue have been shown to be lax in regulating bank’s affairs. He also rubbishes the Central Bank’s regulatory role as far as consumers are concerned. “If the Central Bank was concerned about consumers than how come the European Commission were going to take action against Irish banks for cartel-like activities,” Mr Curran asked.

Despite today’s news the banking sector is to face a probe into its competitiveness there is no guarantee anything will change for the consumer.

As part of the Central Bank and Financial Services Authority of Ireland Bill 2002, a new Director of Consumer Protection is to be established, but while the new director could be seen as a positive consumer development, how willing he/she will be to take on the banks depends on the appointee.

Fed up from years of frustration not everyone is confident the right person will get the job. “I wouldn’t be surprised if they appointed a Telly Tubby on Prozac. They won’t be bitten by a Telly Tubby,” said Mr Hobbs.

In many ways Mr Curran agrees, saying the responsibility for the failure to protect consumers from banking charges lies ultimately with the government, but it won’t stop until it has to.

Part of the government’s comparative report reads: “Appropriate arrangements need to be made to ensure that the regulatory regime for the banking sector gives a high priority to regular monitoring and evaluation of the competitiveness of the banking sector as it affects customers.” To date there has been no regular public monitoring and no public evaluation of competitiveness. Until that happens nothing is likely to change. “People at the moment don’t even bother complaining because there is no one to complain to,” Mr Hobbs said.