Driving competition in the banking sector

Kevin Harriott, Contributor

Consumers play a critical role in stimulating competition among suppliers. Unless consumers are sufficiently informed and purchase goods from only suppliers who meet their demand for high-quality, affordable products, suppliers will have insufficient incentives to compete. Competition is about suppliers seeking to serve consumers better than their rivals do.

Consumers have expressed dissatisfaction with what they perceive as exorbitant fees associated with services provided by commercial banks. Given the integral role consumers play in any competitive market, as well as the importance of the banking sector to the overall functioning of the Jamaican economy, the Fair Trading Commission (FTC) became interested in the commercial banking sector.

The FTC has been encouraging public discussion on the functioning of the sector; and its September 2010 Shirley Playfair Lecture discussed the theme 'Competition and Regulation in the Commercial Banking Sector'. The pertinent issue to determine is not whether banks should continue to operate in a free market, as that is a given, but rather, whether banks have the proper incentives to operate competitively in the free market.

Earlier this month, through its study on the commercial-banking sector, the FTC weighed in on the prospects for improving competition therein. The study notes that the sector is highly concentrated with the two largest banks, Bank of Nova Scotia Jamaica (BNS) and National Commercial Bank (NCB), together operating 85 of the 130 branches islandwide and accounting for more than 70 per cent of the market in terms of deposits and revenue. BNS and NCB are the only banks with branches in each parish and, further, they are the only banks located in the parishes of Hanover, Trelawny, St Thomas and St Mary.

The main source of income for the sector is interest charges, which contribute between 60 and 80 per cent, while income from fees and commission contributes between seven and 20 per cent to net revenue. The net profit margin on the total operation of the commercial banks ranged from 10.13 to 24.45 per cent for financial year 2008; and from 7.99 to 22.25 per cent for financial year 2009.

Of interest, there are significant differences in the level of fees charged by the larger banks, compared to those charged by the smaller banks; and over the period 2005-2009, this gap has widened considerably, suggesting that the smaller banks have exerted limited competitive restraints on the larger banks. The study confirms that there is room for banks, BNS and NCB in particular, to lower revenue from fees without compromising their operations. It shows that had revenue from fees been 25 per cent less for financial year 2009, NCB would have earned a net profit margin on its total operation of 20.24 per cent instead of the 22.25 per cent it earned. Likewise, BNS would have earned 18.06 per cent instead of the 20 per cent it earned. Based on this result, among others, it is unlikely that lower fees, stimulated by greater competition, would compromise their sustainability.

Consumer unawareness

An important aspect of the study is the fact that the views of consumers were taken into consideration. In a July 2010 survey conducted by the Consumer Affairs Commission, it was found that there are considerable gaps in consumer awareness of fees and charges; and, therefore, it is concluded that there is inadequate information available to consumers for them to engage in comparative shopping.

Despite the fact that banks use various methods of informing consumers of fees, 41 per cent of consumers reported that they are unaware of bank fees; 62 per cent reported that they were not aware of any change in fees; and only eight per cent were aware of changes in fees before these changes were implemented. Further, 63 per cent reported that they still bank with the institution at which they opened their first account; and 59 per cent indicated that they would switch banks for lowered fees.

Recommendations

Given the observed lack of information on the part of consumers and the disparity in the level of fees across banks, the most obvious means of promoting competition is through cultivating a more informed consumer base whereby consumers are routinely provided with relevant and timely information in clear language. At the same time, consumers should ensure that they act on the information provided.

To facilitate consumers making informed decisions, there must be improvements in the provision of information by the banks to make it is easier for consumers to do comparative shopping. For example, at point-of-sale and ATM terminals, consumers should be alerted to the relevant fees prior to completion of a chargeable transaction. Where fees or charges are imposed, banks must clearly communicate to customers the related services or situations under which those fees and charges apply prior to the fee being applied. The labels 'service charge' and 'miscellaneous charge' are insufficient to advise customers of the services to which the fees are applied.

While commercial banks have the responsibility to make the information available to consumers, consumers also have the responsibility to keep abreast of the relevant information and act upon it. For example, consumers should monitor their accounts, know what they are being charged for, and know how they can avoid these charges ... even if it means switching banks.

The report, titled The Nature and Extent of Competition in the Commercial Banking Sector, is available at http://www.jftc.gov.jm. Send your comments to ftc@cwjamaica.com.