Wednesday, March 21, 2007

Banks & Fees

  
The Toronto Star, James Daw, 21 March 2007

Finance Minister Jim Flaherty was not asking for much when he urged big banks to lower convenience fees on instant teller machines.

The buck-fifty charge for dispensing cash to customers of other banks and credit unions is neither a big money maker for them, nor a large expense for most consumers. Yet, the fees do annoy many consumers.

"If the average person says $1.50 is excessive when it all appears to be done by computer, for a low-income person it is prohibitive," argues Rick Eagan of St. Christopher House community centre in Toronto. "The perception is that (cash dispensers) are costing the banks nothing."

Banks raised an estimated $154 million from convenience fees in 2005, or about $4.70 per Canadian.

The effective cost of using another bank's machines could balloon if your own bank hits you with transaction and network access fees. These are highest for those who withdraw money from a savings account, or who pay for each transaction.

To eliminate or minimize these fees, most clients buy a monthly service package, according to the Canadian Bankers Association. Monthly chequing account fees range from $4 to $35 depending on services covered. Many waive fees if the client keeps a minimum balance. But convenience fees are a drop in the ocean of bank revenues and profits.

Duff Conacher, chairperson of the Canadian Community Reinvestment Coalition, thinks Ottawa should look at more than convenience fees.

"If the federal Conservatives are actually concerned about protecting bank customers from gouging, they must require banks to undergo an independent audit of all bank fee charges ... and require fees to be decreased wherever the audit finds excessive profit."

Collectively, the Big Five Canadian banks – excluding National Bank of Canada – generated about $1,395 per capita in total revenue from individual Canadians and businesses during fiscal 2006. The five reported $10.7 billion in profit on their $45.8 billion in Canadian revenues, and $18.2 billion on $66 billion in global revenues in fiscal 2006. Their rate of profitability ranked them among the upper third of banks globally.

So how do banks make all their money?

Aside from convenience fees, the range of fees charged for accounts and payment services added up to about $4.4 billion for the Big Five, or 6.7 per cent of their worldwide revenue.

About a third of their global revenue came from the spread between the interest they charge on loans and pay on deposits or other sources of funds.

Canadian banks had the third- lowest average interest spread of 14 developed countries between 1997 and 2006, according to a World Economic Forum global competitiveness report.

Still, the pittance many Canadian banks pay on most chequing accounts is an irritant to many consumers.

Branchless banks that pay decent interest, such as ING Direct, have spurred the big banks to pay higher interest on savings accounts, notes Jason Nightingale, fund manager for an Altamira mutual fund that specializes in global financial service companies. Meanwhile, a low default rate on individual and corporate loans has helped boost bank profits.

The investment business and the lucrative associated fees have been a growing focus for banks. Mutual funds, for example, are an attractive, low-risk business that produce fee income no matter how funds perform.

Canada's Big Five banks now manage about $232 billion of mutual fund assets, of which more than 2 per cent goes to fees and expenses. The share of those revenues that banks reported was $3.2 billion in 2006.

Fees and spreads tied to trading also provide a major source of revenue. While $5 and $10 stock trades are commonplace in the U.S., Canada's bank-owned discount brokerages typically charge at least $25 to trade a limited number of shares. Their full-service brokerages charge more. Healthy commissions are built into the price of bonds and foreign currencies.

On credit cards, banks generate most revenue from interest charges, which ranged up to 13 per cent on "low-rate" cards with annual fees up to $26, and up to 19.9 per cent on standard cards with no annual fee. The big five banks also collected $1.83 billion in fees from consumers and retailers in 2006. Their cards did, however, rank among the cheapest in a comparison of over-all costs done for the British Bankers Association.

Insurance has been a highly profitable business sector in recent years, and a growing source of revenue for banks. Gross revenues were $6 billion for the Big Five banks in their latest fiscal year, up 25 per cent from 2004.

While critics have faulted our banks for charges on accounts and credit cards, the typical cost of a current account and two credit cards was $123 in 2005.

That's slightly lower than average costs of a typical mix of services in 19 different countries, according to France-based consulting firm Capgemini.

Statistics Canada estimated household expenditure on bank account fees was $127 per household in 2005. One study for British banks found the cost of our personal loans and current accounts was higher than average, while returns on savings accounts were lower.

Even so, it's hard for Canadians to judge the fairness of convenience fees and other charges. For competitive reasons, banks simply don't disclose what it costs them to buy and operate 15,800 instant teller machines, or deliver other services. They merely point out machines require on-going service, and are outdated in five to seven years.

"Banks use pricing to persuade their clients to select certain products and services rather than others," Capgemini has reported. They have, for example, tried to discourage use of cheques and human cashiers.

Canadian Imperial Bank of Commerce and TD Canada Trust are about to raise some fees by far more than the rate of inflation.

Gordon Nixon, chief executive of the Royal Bank of Canada, warns fee regulation "ultimately will mean less service and higher costs."

And Nightingale said regulators in the U.K. and Australia tried to drive down some fees, only to see banks raise others.
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