The question some organisations and individuals ask at times is \"Why do banks now charge for most services provided to their customers, and why do these fees & charges appear high?\"
Well, it is common knowledge that Banks around the world as financial intermediaries take deposits and lend funds, and earn profits primarily from the difference between the interest rates they charge on loans and those they pay on deposits.
In Fiji Banks are no different. They however also provide a range of other financial services. Insurance, funds management, advisory services, financial markets products, a wide range of transactional services, in-house trading activities, provision of products such as foreign exchange to customers, etc., are some examples. The income earned from all these activities is known as \"non-interest income\". Within this category of \"non-interest income\" there is a smaller component which covers fees and charges for account-servicing, loans and advances, foreign exchange transactions, and other services.
It is this component which attracts a great deal of public interest among people in Fiji. Perhaps this concern was one of the major reasons for the Commission of Enquiry into the Banking Services which Government initiated in 1998. Its Report was presented in 1999 to Parliament where its findings generated considerable debate, particularly in respect to fees and charges that Banks were levying.
In this segment of its website the Association seeks to address some of the related issues, and attempts to provide a broad insight into what has long been a particular feature of banking relationships - FEES.
But first of all, let us see why some customers object to fees and charges.
The community at large does not perhaps understand the economics of charging fees - Banks, like other businesses, are required by their shareholders to make profits. Another consideration might be that a major portion of the community may not be traditionally accustomed to paying fees. To many, bank fees and charges look to be unfair. They seem high! But people are not probably aware of the level of costs that banks have to incur in order to provide the extended variety and quality of banking services offered in Fiji now - the expenditure necessary to earn that \"non-interest income\".
Obviously therefore, Banks become soft targets for consumer advocates, politicians, business and community service leaders, workers\' representatives and other similar groups. On the other hand however, some do understand the banks\' position but say that the Banks have probably not done enough in explaining themselves and educating the public in this regard.
Banks in Fiji are now following an international trend by Banks to seek to recover costs for services.
Here, in the past there has been a high degree of \"cross subsidisation\" - profits made on loans and deposits subsidising the losses made on various banking services. This move towards charging for banking services is partly due to the fact that non-bank competitors, especially in the market for loans do not have to bear the costs of everyday banking services. Banks would not be competitive in the market for loans if they did not charge for banking services, but at the same time they consider that it is not fair that certain customers (ie: borrowers) subsidise other customers who do not borrow but make extensive use of transactional services.
It should also be noted that certain fees and charges reflect costs resulting from Acts and Regulations (for example the Consumer Credit Act). Then there are third party costs and charges such as solicitors\' fees, surveyors\' charges and valuers\' expenses that also require to be collected.
While concerns are raised by some sections of the community on the level of fees and charges made by commercial banks for various services, it must be recognised and taken on board that regulation and pricing control is not the best way to contain banking costs. It has been seen in many instances that price controls usually don\'t produce the intended results, because businesses find ways around these sorts of controls. The use of competitive pressures and disciplines of the market economy would obviously be considered as more appropriate and acceptable, and it makes commercial sense to do so.
A better solution than more price control is to help to ensure that there is better competition. And this would in turn provide bank customers the option to \"acquire the best service at the cheapest price\". There is an increasing competition among the five commercial banks when it comes to collecting fees and charges revenue from banking services - there is enough evidence of it to conclude that it is not fair or accurate to say there is a cartel operating among banks.
In July 2002 the Reserve Bank of Fiji, in consultation with the Association of Banks developed and provided a standardised format of disclosure requirements to ensure that commercial Banks and other financial institutions clearly disclose all their fees and charges in a uniform manner so that customers can easily make comparisons among Banks now to see how much a particular service will cost them before they ask for it.
This move of increased disclosure and better, comparable information has helped in promoting competition among Banks, to the advantage of customers. As such it would be counter-productive to regulate bank fees and charges. The ABIF is pleased to observe that there is no such proposition at present.
One may ask what are the factors that lead banks to determine the level of fees and charges they should levy. There are numerous specific and broad considerations that banks take into account when determining how much a particular banking service or product would cost. Some of them could be ............
Contribution to the Fiji economy through taxation - Company taxes paid, and PAYE taxes flowing from the industry\'s significant expenditure base.
Consider the level of Company Taxes that Banks pay annually. Government takes one-third of their profits in tax, not including what is paid through indirect taxes - Customs duties and VAT for goods and services they acquire. The percentage of total tax income from all Banks against Government\'s company tax revenue is significant. As good corporate citizens Banks pay their taxation dues regularly and punctually, and provide full and open disclosures in this regard every year.
Employment - Salaries and Wages paid, FNPF and other fringe benefits provided to the total number of Salaried, Service, Part Time and seconded employees.
The banking industry is considered to be among the larger private-sector industries in Fiji, employing over 1,600 people. Despite advancements in technology, employment in the banking sector continues to rise, contrary to the the popular belief otherwise.
Consider the extent of employment thus created and the resultant indirect contribution through employees\' PAYE Taxes. Consider the indirect taxes from fringe benefits provided, and the money that enters the economy and generates economic activity, further employment and resultant tax revenue for Government.
During the past twelve months, bank employees received a total of $32.741 million in salaries and wages, from which banks deducted and paid varying levels of PAYE taxes to Government. In addition, Banks paid to their employees a further $ 6.452 million in FNPF contributions, and taxable fringe benefits from which Government would collect tax.
Banks\' human resources are required to possess skills, risk management specialisation attributes and financial strength of their off-shore parents which makes a major contribution to the stability of the financial system. Training and development of staff at different levels also comes at a cost.
Growing sophistication of the market and related infrastructure costs in a relatively small customer base.
In comparison to Australia and New Zealand, Banks in Fiji are small but operating costs are relatively high even after taking advantage of assistance from offshore points.
Banks here spend huge sums on Infrastructure and System costs and these considerations form an integral basis of calculating charges in relation to the cost of providing various services.
To appreciate the size of the banking industry, and cost thus necessary to run it, let\'s briefly look at some major aspects. From last available data, the five commercial Banks presently operating in Fiji, collectively:
• deploy a capital base in excess of $100 million
• have a combined Asset Value of over $1 billion
• have more than 60 Branches
• have several 14 Agencies and Service Centres
• provide 165 Automated Tellers Machines (ATM\'s) around the country
• have so far installed 2,100 EPTPOS machines
Banks have also ventured into telephone and Internet banking, rural banking, and will shortly be into microfinance and mobile phone banking. ABIF also supports its member-Banks\' initiative to pursue cheque truncation with a view to further reduce clearance times of cheque paper.
The present commercial banks have been here through Fiji\'s hard and good times and have made significant contributions. They have been able to sustain their existence here and consistently improve their standard of customer services. The costs Banks bear for running and maintaining their operations here are expensive.
Some major international Banks have come and gone: Bank of New Zealand, First National City Bank, Barclays Bank International, Hong Kong and Shanghai Banking Corporation, Bank of Hawaii. Could one of the reasons have been that they were not able to sustain the cost of maintaining their operations ?
The progress and advancement Banks have made here over time has been tremendous and has assisted Fiji in its endeavour to keep up with ever advancing global technology and delivery channels, products, initiatives and world best practice.
Looking at Fiji\'s population and size of its formal workforce, and given the total number of commercial banks and all other financial institutions, no other country of this size has such market concentration to service.
The unit cost of each service is calculated and includes direct and indirect costs incurred in Fiji and externally, to achieve and maintain infrastructure, services and ever changing global advances in banking together with the related ongoing maintenance costs in many instances.
Fees change as costs change, specially with new technology. Like upward movements, any downward fluctuations are also passed on to customers. During the recent past there have been modest moves by some Banks to reduce bank fees and charges. This was done as their respective costs to provide the relative services reduced. In some instances fees have even been withdrawn. This clearly demonstrates that Banks charge fairly and equitably for the services they provide.
Certain types of services in some Banks are provided free of cost. There are also some services for which fees and charges are scaled on volume or extent. Banks also provide incentives to encourage use of certain lower-cost delivery channels. Some examples of this are:
• Number of free ATM withdrawals monthly
• Cost : ATM vs Counter Withdrawals
• In-house transacting through e-banking
These concessions are some of the genuine attempts which Banks make while trying to achieve their objective to recover costs and meet their shareholders\' aspirations. The global banking system continues to operate with increasing effectiveness, with enhanced regulation and protection requirements, and Banks in Fiji have to keep up pace with it, but obviously not at a small price. The strong management of systemic and reputation risk is and will remain pivotal to the health and advancement of Fiji\'s financial system, and the Banks continue to play their part in advancing the country\'s standing internationally.
Market dynamics and niche players
Banks need to remain competitive with those non-bank institutions and other niche players in the market that do not provide full banking facilities. In comparison to other financial services players in the Fiji market, banks provide a high level of transactional banking services - these account for a sizeable portion of banks\' operating costs. Financial services that banks provide are now more extensive and advanced, and their quality is competitive. The public of Fiji is now getting better banking services.
Credit Risks and Cost of Capital
Banks take large credit risks and have very substantial capital deployed in Fiji, which has and remains subject to currency uncertainties, and has lost considerable value over the long period of time that Banks have been supporting Fiji\'s development.
Interest rates relativity to other major countries, reflecting strength of each economy.
Borrowing rates for customers have come down and remain relatively low in comparison to larger, more developed and mature economies. Interest margins continue to decline.
Whilst it might be said that there are some inadequacies in information, it is definitely possible to reach some tentative conclusions about the role of bank fees and their necessity. Over the past, say a decade, commercial Banks in Fiji have earned a slowly rising proportion of their total income from \"non-interest\" income, with the increase gradually coming from fees and charges as opposed to other \"non-interest\" income.
A major reason for this finding is the slower growth of interest income due to declining margins. When the growth of fee income is compared to the growth of banks\' total assets, fees have grown no faster than assets for much of the past decade. The gains in income that Banks have made from increases in fees have not been sufficient to offset the decline in interest margins. Thus, on average, customers are better off, although those with small balances and a lot of transactions could be worse off.
Banks in Fiji have been able to maintain their profitability in the face of falling interest margins, mainly and wherever possible by cutting costs, rather than raising fees & charges.
It is difficult to make international comparisons of fees and charges income because of difference in banks\' approaches to charging for services in different countries. The best approach therefore for measuring the cost to consumers of bank fees and charges is to take a standard basket of transactions undertaken through different channels, assume that an account-servicing fee applies, and find the total cost for a range of countries.
Commercial Banks operating in Fiji presently have a structure of fees and charges that would place them towards the bottom of the range of comparable countries.
One cannot underestimate the integrity and creditability of Banks in Fiji. The banking system here has a good reputation. Banking is a core industry here, with major local purchases of goods and services supporting other businesses.
Given all these surrounding factors and economic realities, the Association of Banks believes that its member-Banks charge fairly for the variety, quality and the standard of services that are now being efficiently provided.