Bank charges not so bad.Let me re-educate you!
Published:Friday | December 3, 2010 | 12:00 AM
The following is excerpted from a speech given by Minna Israel, president of the Jamaica Bankers' Association (JBA), to the Rotary Club of St Andrew, on Tuesday, November 23.
In recent weeks, you would have been hearing heated debates in several circles about a number of issues affecting the financial sector, the main ones sharing the spotlight being interest rates and fees.
Most recently, the issue of Government's intervention to regulate the industry, as far as the establishment of rates and fees is concerned, has taken on even greater momentum, making our discussion today an even timelier one.
The banking sector pays around J$6 billion in taxes, and provides employment - directly and indirectly - for thousands of Jamaicans as a result of our operations.
The financial sector remains one of the key cornerstones of this country's economy. Undisputedly, Jamaica has a sound and secure banking sector, of which we can all be proud. We boast a financially sophisticated marketplace which is often used as a selling point to attract potential investors.
I will now go to the topic of 'The Power of Choice in a Competitive Financial Sector'. Regulatory oversight and our banking business model have contributed to the strength and resilience of the industry. Regulation, therefore, protects our depositors and ensures mandatory disclosures to ensure transparency.
Ultimately, these safeguard the integrity of the industry, and complete an environment in which client welfare and confidentiality, and the highest standards of quality in banking, are paramount. The capital reserves requirement of our regulator also ensures sustainability of each entity and protects the interest of depositors and shareholders.
Despite the turmoil in the global financial marketplace, our local banking sector remains stable based on the adherence to these standards, as well as stringent credit, operational and risk-management principles.
In this global environment, it is essential for the sector to remain competitive, which, in turn, forces players to be creative, or face the threat of becoming extinct.
The average rate of return is comparable to that of other successful companies in the distribution or telecommunications sectors, which have demonstrated superior value propositions to their customers.
Downward trend
A recent survey highlights the downward trend on the average return on equity and the return on asset between 2007 and 2009, and projections for 2010 show a continued contraction.
Without competition, there would be very little product innovation. There would be very little incentive to drive individual banks to develop top-quality products and services for our clients. What would differentiate each player in the marketplace and force individual firms to enhance their value to the market?
With technological advancement, delivery channels for banking services, for example, have expanded, providing increased options to the consumer while providing opportunities to the banks for the containment of overheads.
In a recent survey done by the Bank of Jamaica, the report indicates that although fees have increased in a number of service areas, some banks offer a variety of technology-driven delivery channels which offer more cost-effective options for the customers.
For example, in the case of one bank, transfers between accounts cost J$250 when done in-branch. The same service costs J$25 at the ABM; J$10 by telephone banking and is free through the Internet.
Banks generally apply an over-limit charge on overdraft facilities and penalty rates and fees on late payments, over limits, and so forth. These are considered nuisance fees and can be avoided, if clients comply with the agreed terms and conditions.
This BOJ survey also highlighted the point that fees in the Jamaican banking sector, with the exception of Trinidad, tended to be lower than its counterparts' in the region: Barbados, Cayman, Bermuda and Turks and Caicos.
I have to admit that, yes, we have not been doing a good job at educating our clients on their options, and this is something that the JBA is committed to improving in the very near future. Are there opportunities for us, as an industry, to offer our clients ongoing financial counselling and advice? Are there opportunities to utilise the services of retired bankers who have the know-how and expertise that we can pass on to our clients?
Recently, there has been some discussion regarding the need for more banks, citing that there is not enough competition, which has led to excessive fees and spreads. Let us not forget the lessons that were learned from our own financial crisis in the 1990s.
Having more players in the market does not necessarily result in better competition.
More effective competition
What we need is not excessive concentration in the commercial banking space but rather more effective competition in the wider financial industry. What should be our primary interest at this time is to ensure efficiency in our operations, continuous education, improved transparency and awareness, thereby increasing value to our clients and shareholders.
The financial sector in Jamaica comprises various actors, including commercial banks, merchant banks, credit unions, building societies, securities dealers, and so forth. Each segment of the market competes based on a particular business model, and the regulatory structure that governs the activities that can/ cannot be engaged in by an institution also varies.
That being said, commercial and merchant banks, in particular, although contributing significantly to the economic development of Jamaica, cannot undertake the activities that a development bank or venture capital fund are able to undertake.
In the context of an economy that has been showing negative growth for the last three years, we appreciate and understand the 'noise' we are hearing about the role of banks; and this leads me to the controversytopic of lending rates.
Lending rates are the lowest they have been in decades. For banks to reduce rates in a more timely manner, certain factors will have to be considered.
In an environment of increasing non-performing loans, there needs to be sustainable reduction in credit losses and a cheaper mechanism to determine the credit history and capacity of potential borrowers.
Banking 101 dictates that loans are priced based on the level of credit risk, which is assessed on the credit history and reputation of the borrower, type of collateral, financial performance and projections, and general economic conditions.
In the absence of a credit bureau, banks expend considerable amount of resources to properly assess the credit risk of a customer. It is for this reason that for years the JBA has lobbied for legislation to allow credit bureau services to be introduced in Jamaica.
In some cases, pricing policy is not the major determinant of why a customer will choose one entity over another. The decision by a consumer or business to go with one provider over the other is also driven by:
Confidence in the institution;
convenience in terms of location, opening hours, channels, etc;
Level of customer service;
Availability of products to meet goals and needs;
Sentimental/historical factors, for example, family has always banked with a particular institution or first loan;
Loyalty developed and nurtured over the years; and
Customer engagement.
Jamaica boasts a stable and sophisticated banking sector. Banks, like any other business, aim to satisfy the requirements of our customers and shareholders.
We provide convenient access to world-class banking services which enable customers to conduct day-to-day transactions, with many alternative channels to choose from.
You will find that for some transactions that attract a fee, a lower or no-cost option also exists; therefore, we encourage all our customers to be empowered to make informed choices. And, as an industry, we commit to improving the financial literacy of our clients.
Minna Israel is president of the Jamaica Bankers' Association and country manager of RBTT Bank Jamaica.
Minna Israel, Guest Writer