[Dave Birch] The cost structure inherent in retail banking makes it difficult for banks to deliver low-cost services,  but there is considerable pressure for them to do just that. I saw an interesting comment on this in American Banker. In essence, it suggests that because taxpayers supported the big banks, who were than able to continue their “business as usual”, there was a missed opportunity to make a radical change to bank cost structures.

When GM and Chrysler went broke, the “Auto Czar,” who is accorded far too little credit for his good work, closed 1/3 of their dealerships, making the car companies more efficient. That’s what it took to thin out the sales and service points. Shall we wait for the next solvency crisis to thin out our service costs? Or can you imagine winning by eliminating just 10% of your employees and doing more outsourcing?

[From It s Finally Time to Wean Customers Off of Paper – Bank Think Article – American Banker]

From a US perspective, this focus on branches as the place to cut costs is rather obvious (and a favourite topic of Forum friend Brett King, who has consistently argued that the branch structure is ripe for disruption). Branches just aren’t good value for money. I only go to one to pay in cheques, which is something I don’t actually want to do.

What is most conspicuous in this is the crushing structure of costs that are perceived as fixed and allocated to checking — primarily associated with branches and paper. A checking account is seen as “costing” over $300 per year. Who would pay $25 per month for a transaction account? Who would need to do so? If not many consumers will, then we better think again about how we structure and deliver our services.

[From It s Finally Time to Wean Customers Off of Paper – Bank Think Article – American Banker]

A very sensible observation. And banks in the UK are indeed making an attempt to shift to new cost structures. RBS made the obvious and sensible decision to stop customers from using non-RBS ATMs for free. (This is for “basic” customers only, the premium customers can still use them for free.) Lloyds followed suit. I mention these two simply because they are owned by the taxpayer (well, Lloyds is almost owned by the taxpayer) and therefore subject to parliamentary bullying. So the question is: how long will this last?

In a rational world, no banks would allow this. It is crazy to subsidise the least-efficient payment instrument (cash) instead of surcharging for it. And for the big banks with large ATM estates, the idea of giving away their use to small banks without many (or any) ATMs is crazy. The cost of maintaining ATMs is crazy, the cost of cash-in-transit is crazy, the cost of armed robberies is crazy and the cost of handling cash is crazy. But the UK is not part of the rational world, and it will surely only be a matter of time before one of the tabloids launches a campaign to force the banks to end its policy. I can see the headlines now “penniless pensioner forced to pay £2 to get the £10 she needs to pay the gas bill and avoid freezing to death” and similar. In the meantime, MPs have taken up the cudgel.

A senior MP has written to the Royal Bank of Scotland and Lloyds Banking Group raising concerns about restrictions on some account holders using rivals’ ATMs.

[From Finextra: MPs take RBS and Lloyds to task over ATM access]

If the Treasury Select Committee under Andrew Tyrie had any vision for the future of the UK that included a more efficient payments sector and reduced social costs then they would be encouraging all banks to make using ATMs more expensive and they would be promoting competition in the non-bank sector to encourage providers of pre-paid cards and the like to substitute expensive bank accounts with inexpensive pre-paid accounts. Why on Earth they would be encouraging the least-efficient and most expensive payment method is beyond me. That’s not to say, by the way, that encouraging the more efficient payment mechanisms without taking into account other government policies actually works. Manifestly it doesn’t.

Here in Belgium there is a mandate for banks to offer a BBA (Basic Bank Account) to anyone that wants one – unless they’ve been blacklisted. This means that only 6000 or so adults in Belgium don’t have a bank account (National Bank figures). However, Belgium has one of the highest usages of cash versus electronic payments (over 80% cash).

[From Everybody should have the right to a bank account]

Anyone who thinks that cash is a benefit to society is dead wrong: it’s only a benefit to tax-evaders, money launderers, criminals and corrupt politicians. The total social cost of cash is too high and it falls unevenly on the least well-off: surely it should be government policy to minimise its use and to encourage alternatives (and, specifically, mobile phone-based alternatives). It’s about time we had something like M-PESA in the UK so that the unbanked and underbanked could conduct “simple” transactions outside of the banking sector.

Meanwhile, the US banks are also going bonkers, charging for debit card use. Whether this encourages poor people to close their bank accounts and quit bothering retail bankers it’s hard to say, but I’ve observed before that forcing banks to offer “basic” accounts that they don’t want to provide to poor people who don’t want to use them doesn’t seem like the most effective way to obtain a more efficient payments sector to the benefit of the society as a whole.

For those customers who prefer to use a card for transactions and those for whom other fees and costs make bank accounts costly, they may find a switch to a prepaid card is their best option. Most prepaid cards charge fees that are $5 or less, and many fees are waived when the customer signs up for direct deposit. In comparison with a checking account that charges $5 for a debit card, the prepaid industry has a stronger case that its products serve as a low-cost option for receiving financial services.

[From PaymentsJournal – With New Fees Big Banks Force Customers Toward Cash and Prepaid]

I can’t help but notice that decision to charge for debit cards has now led to a backlash against the backlash against interchange, and there are now machinations under way for repeal. These will be hard fought.

repealing the Durbin Amendment would cost consumers more than $6 billion in interchange savings that merchants plan to pass on to their customers.

[From Untitled]

Hilarious. The idea that the merchants will knock 20 cents off of every debit card transaction is simply fantastic. If I go into a shop in the US anytime during the next 12 months and see a sign that says “20 cents off if you pay by debit card” I swear I will faint with shock. The NRF has adopted a sociopathic tactic in its war against bank overcharging. What it should have done is to have agitated for more competition in the payment space with a Federal equivalent of the European Payment Services Directive and Electronic Money Directive. That way, if Walmart think that the payment system is inefficient, they can run their own.

I’m not arguing that banks should be able to do what they like. Interchange fees in the US were much higher than in Europe and the amount of money that banks earned from them was, let’s face, quite large.

Banks don’t have an inherent right to oversized profits. No industry does. Banks play a special role in society, and they get special protections from the government. In return, government has the right to impose special responsibilities.

[From Revenge of the Gougers – NYTimes.com]

Indeed. And this ought to be the basis of the “settlement” between the bank payment sector and the rest of commerce and industry. In my opinion, providing a free PIN debit service to current account customers should be a condition of getting a banking licence. It’s a key social obligation and the benchmark against which other payment options should be considered. Whether the interchange on that debit service should be managed through regulation or competition (naturally, I would always favour competition) depends on the market. In Australia, where caps on interchange were (naturally) accompanied by the introduction of surcharges, only one retail sector saw a fall in card payments, and that was restaurants.

The only sector that experienced an increase in the proportion of payments made using cash was the restaurant business, which the RBA attributed to the imposition of surcharges on credit card payments.

[From Cash transactions drop as Aussies favour debit cards – Mozo]

Since I don’t know why this is, I can only speculate that it is related to tax in some way, but I don’t know how to find out whether the declared revenue (and therefore tax paid) by restaurants changed or not. However, there is another Australian idea that might be worth considering.

Eftpos Payments Australia’s new fee structure that came into effect on October 1 is designed to encourage shoppers to use Eftpos instead of cash for small purchases under $15, for which there is no fee.

[From A cashless legacy for Steve Jobs | Technology Spectator]

This is absolutely opposite to the US situation where, absolutely predictably, the fees for debit will rise to the highest level.

MasterCard will impose the highest fees permitted on all debit transactions, including so-called small-ticket purchases, for cards issued by the biggest U.S. banks, said a person with direct knowledge of the matter. Visa will do the same,

[From Visa, MasterCard to Raise Fees on Small Buys – Bloomberg]

Since getting rid of cash is good for all of society, forcing banks to provide zero interchange and zero merchant service charge low-value payments (in other words, the contactless and mobile no CVM segment) in order to displace cash might be a good idea. The banks could recover the costs from the reduced costs of cash handling and charges for ATM use. In the US, much of the current growth in debit volume is for low-value payments, so simply taking them out of the interchange/fee equation and making banks provide them as a service in return for the privilege of credit creation would make a big impact.

In 2009, 58 percent of all debit transactions were less than $20.

[From PULSE Finds Consumers Increasingly Prefer Debit Cards Over Cash]

Think what impact this could have, compared to the current dynamic. Instead of seeing banks use new technology, new processes and new ideas to deliver low-cost services, American consumers see the banks carrying on as if nothing had happened and charging them $5 to use their debit card. Robert Smith, the former CEO of Security Pacific, is direct. In an American Banker piece called “Have Bank of America’s Managers Lost Their Minds?” he points out that

The direct bank operating costs of a debit card transaction are less than a penny

[From Have Bank of America s Managers Lost Their Minds? – Bank Think Article – American Banker]

In which case, making banks provide the service at no charge to consumer or retailers might well the most efficient and most effective way forward. I wish that matters such as these were accompanied by informed public debate and considered expert opinion leading to decisions that are the best for society. But these are very political times. In the recent US bank vs. merchant interchange smackdown, I’ll bet that considerably more money went on politicians than on, say, economists.

The banking industry and the merchants coalition have each hired more than a hundred former government officials to lobby for their interests, according to Sunlight Foundation.

[From Banking Groups Stir Consumer Fears on Debit Card Regulations via Twitter – ProPublica]

I hope that the UK can make decisions on a more appropriate basis than either the fancies of MPs or corporate lobbying so that the payments sector can support the modern economy in the right way. I think I’m starting to agreed with Steve Mott that so far as Durbin is concerned

a closer look might suggest a rare opportunity for the central bank to promote technological change and reform in the payments system was lost in the process.

[From ngenuity Journal | Fall 2011 | A Lost Opportunity to Reform The Payment System]

So let’s have a new but more radical Durbin with a strategic focus and the clear goal of reducing the total social cost of payments.

These are personal opinions and should not be misunderstood as representing the opinions of 
Consult Hyperion or any of its clients or suppliers


Leave a Reply


Subscribe to our newsletter

You have successfully subscribed to the newsletter

There was an error while trying to send your request. Please try again.

By accepting the Terms, you consent to Consult Hyperion communicating with you regarding our events, reports and services through our regular newsletter. You can unsubscribe anytime through our newsletters or by emailing us.
%d bloggers like this: