If you thought tens of billions in state money and an IMF bailout would be enough to save Ireland's banks, think again. Banks are preparing to extract more money from hard-hit taxpayers by charging more money for basic banking services everybody uses, such as cash withdrawals and bill payments.
Just before Christmas, Bank of Ireland confirmed it was tightening the conditions for customers to get free banking on current accounts. The other four banks offering current accounts – AIB, Permanent TSB, National Irish Bank and Ulster Bank – are expected to follow suit in the coming months, leaving customers with little alternative to paying fees.
It is part of a global move to revive transaction-based banking for personal customers as financial institutions scramble for revenue to replace the easy money from the pre-crisis lending boom. But the difference between here and the rest of the world – so far – is how easy it has been for banks to put up prices.
The development fits into a general trend of banks charging fees through packaging their account products, as Bank of Ireland has done, according to Andrew Neeson, head of research at financial services consultancy Lafferty Group in London. He said Scandinavian and UK banks have been leading the way. But in Britain, where free banking has long been the norm, banks have had limited success growing revenues by introducing fees and charges as customers rebel.
Neeson said in some countries there have actually been forced reductions in late charges and administration fees for missed payments, bounced cheques and unauthorised overdrafts as banks bowed to public and political pressure to give customers a break. This trend has been most prominent in Britain, Australia and the US but the banks there are finding ways around it.
In the US, where bank bailouts were politically unpopular, the Obama administration and Congress even passed new regulations last year curtailing the aggressive penalties many banks charged customers for overdrawn accounts and late payments. Now American banks are slapping maintenance fees on cards and checking accounts instead as a way to get around the restrictions on revenue.
British banks are permitted to charge administration and late fees freely, but public outcry has forced them to cut the charges anyway – and to replace the revenue elsewhere as in the US, said Neeson.
For more than a year, Irish bankers, including Bank of Ireland chief Richie Boucher, have been arguing that the only way to work themselves out of the crisis is by becoming more cost-effective and profitable. With little lending to create revenue, banks will have to charge higher interest rates and add more fees and charges.
Last year, every lender in the market, led by Permanent TSB and EBS, put up interest rates on mortgages – some by as much as 1.5% – to try to improve margins.
But this year, banks are going straight for the easy money sitting in people's current accounts by extracting more income from everyday transactions, like ATM withdrawals and card payments, according to informed industry sources.
As of 21 February, Bank of Ireland account holders will have to keep a €3,000 quarterly balance and make at least nine payments online or by phone to avoid regular fees and charges of 28c per transaction. Customers who choose a flat quarterly fee instead will be charged only after 90 transactions. The move is expected to affect a majority of the bank's 1.2 million daily banking customers.
More than 700,000 Bank of Ireland current account customers get free banking under the current, less-stringent rules, but all will have to keep more money in their accounts and use more automated payments to retain the privilege. The bank said one million of its customers have signed up for telephone and online banking, while the majority of customers meet the required monthly turnover of €1,000.
What Bank of Ireland is doing is not really revolutionary. Until Halifax entered the retail banking market in 2006, the norm was transaction-based banking for current accounts: the more transactions, the higher the charges. After Halifax introduced free banking and other incentives, the market drifted toward the UK norm and evolved the packaged approach. Now Bank of Ireland is adding the fees back.
Consumer groups were quick to criticise the bank for its change in policy last month, with both the National Consumer Agency and the Consumer Association of Ireland encouraging customers to switch. The choices for customers are limited, however. Only AIB, Ulster, NIB and PTSB offer current accounts.
AIB, Bank of Ireland's historical competitor, has been badly tarnished by a series of overcharging scandals. The bank had to pay a €2m fine – the largest ever levied on a retail bank – to the Central Bank last month for charging irregularities.
NIB has abandoned branch banking altogether, forcing its customers to use only electronic channels for day-to-day banking.
One in 10 banking complaints to the Financial Ombudsman in the first half of 2010 concerned fees and charges. Nearly half were upheld, versus slightly less than a third for banking complaints in general, suggesting fees and charges remain a problem for customers.
A recent study by the European Commission found the fee structures of current accounts were "opaque" and that price information was often "incomplete". The study also found wide variation in typical charges across European countries. Italy had the highest, averaging €253 per customer per year. Bulgaria was at the other end of the spectrum with average annual charges of €28.
Typical charges at an Irish bank fall somewhere in between. The most recent Irish Banking Federation (IBF) assessment of Irish banking charges, which drew on a survey by CapGemini, put the customer average at €59 per year, below the EU average on a GDP per capita basis.
"Our belief is that charges here still compare favourably internationally," a spokesman for the IBF said.
What distinguishes Ireland in the EU context is the level of taxpayer support for the banks since the financial crisis began in 2008. The billions being used to recapitalise Ireland's failed banks and building societies have led to tougher budgets. Consumers here are being hit three ways: taxes, interest rates, and fees and charges.
It might aggrieve hard-pressed consumers to know that the Financial Regulator has final say over the fees banks may charge. According to Section 149 of the Consumer Credit Act, the regulator has to clear any changes a bank makes to its fees and charges. Banks have to make a case based on four criteria: the promotion of fair competition, commercial justification, financial impact on customers, and passing on costs to customers.
For Bank of Ireland – or any bank – to charge more, the regulator has to agree it is necessary.
It wasn't supposed to be like this. The EU's Single European Payments Area (SEPA) programme was supposed to usher in an era of declining transaction costs and minimal fees as customers migrated to cheaper forms of automatic banking.
The way Bank of Ireland has structured its fees, however, suggests SEPA is having little impact in Ireland. Bank of Ireland charges the same for a Laser purchase as for processing a cheque, although the cost to the bank for paper transactions is far greater. The bank also excludes direct debits from the automated payments customers can use to avoid transaction charges, despite direct debits being one of the cheapest transactions a bank has to process.
"The charging structure reflects the fact that the majority of our customers are multi-channel users," a spokeswoman for the bank said. "This element of our new criteria for free banking is designed to reward customers for using our phone or online channels and specifically for using a range of functions such as bill payments, funds transfers to savings or beneficiary accounts and mobile top-ups."
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