Bank leaders like to project themselves as environmentally and socially friendly champions of good governance. The reality from the perspective of their customers is often quite different.
Banks make money from current account customers in two main ways: hidden fees and cross-selling. The perception that banking was ever free is, as Bank of England Governor Andrew Bailey once said, a “dangerous myth”. Banks that offer ‘free’ accounts cover the cost of running them with high penalty charges and hidden fees.
Yet, when so-called free banking comes to an end, the most vulnerable customers often end up paying a disproportionate price. Bank of Valletta, Malta’s largest bank, recently raised its administration fees for business account holders from €10 to €30 monthly “due to added costs related to regulatory checks and balances”.
HSBC made similar increases in 2019. One of the smaller banks increased its charges for online business transactions from €4 to €20.
Such increases hit big and small customers alike. The CEO of the Chamber of Small and Medium Enterprises, Abigail Mamo, has described BOV’s fee hike as “daylight robbery”. She went on to call it a case of “complete abuse of dominance”.
She also pointed a finger of blame at the regulators for doing nothing about it when they should be safeguarding fair competition and the interest of smaller players.
It is, in fact, the consumer that will ultimately have to pay for these increased business expenses.
The end of ‘free’ banking is not necessarily a bad thing. Bailey called the myth a dangerous one because it encourages product mis-selling. BOV can vouch for the truth of that statement as, in the first decade of the millennium, it had to deal with the notorious Property Fund mis-selling saga and the equally notorious Deiulemar trust debacle.
The costs to settle these issues out of court ran into hundreds of millions of euros and have heavily depleted the bank’s reserves. The issue of €350 million non-preferred notes at an interest rate of 10 per cent to strengthen the bank’s capital base was a prudent move.
However, it is a sad reality that, when banks fail to perform well for any reason, it is relatively easy for them to use their dominant position to mitigate the weight of this burden by increasing their service fees. And consumers of those services often do not understand what they are paying for.
In recent years, banks have had to deal with increasing regulatory pressures to fight money laundering, negative interest rates that have eroded their profit margins and stricter credit risk management that has reduced their risk appetite.
While banks, like any other businesses, are not expected to bear the full brunt of increased operating costs, they would do well to act transparently and responsibly towards their customers at all times as well as to consider their long-term interests. Acting responsibly implies fair treatment of customers and banking practices underpinned by high standards of competence and integrity.
BOV’s general aspirations appear to run along those lines. In a recent interview with Times of Malta, its chairperson, Gordon Cordina said: “Our society faces a future of EU and national regulations that will leave us no option but to operate in an environmentally and socially friendly way and to employ good governance leadership and we feel responsible to drive our customers in that direction”.
Regulators need to play their part too. They need to be as proactive in protecting the interests of bank customers as they are in ensuring the solidity and sustainability of the banking system.