This post is written by Sanjay Behuria, Independent Strategy Coach and Consultant.
In Part 1, we discussed how alternate delivery channels (ADC) are currently being priced. What other services do FIs provide that they can charge for?
- Statement of account – They normally provide a fixed number of free statements as per contract, if the customer wants more than that they have to pay for it. Any postage and incidental charge incurred is also charged to the customer.
- Prepaid (pay on demand services) – Any remittance is pre-paid whether they are bank draft, banker’s check, money transfer and wire transfer, checks for collection or pressing a button transfer. Since these funds are not deposits and are not a part of financial intermediation, the banks can charge service charges and incidental expenses for these. In the electronic age a cash transaction is possible away from the parent branch and fees can be charged for this – as this is not mandatory for the FI and they have incurred additional establishment costs as a convenience to the client. However, if an Internet transfer within the same network is not chargeable, a cell phone transfer must receive the same status.
- ATM and Internet banking charges – these are not chargeable services as the banks put them up for their own convenience – though camouflaged as customer convenience. FIs save on expensive floor space and human resources (tellers) when clients transact away from branch premises. Clients actually do the work of the employee and not get paid for it!
- Any transfers that require an intermediation of a payment network will incur fees as banks have to pay this fee to be a member of the network or are charged on pay-per-use basis.
- Providing service outside official premises (at door) is chargeable as this is an additional convenience for the customer – but customer must have a choice to transact in the branch for free or away from the branch for a fee.
What services can FIs not charge for?
- Customer registration/opening of account – This is done for the purpose of intermediation and cannot be charged. The customer has a right to decline. It is a part of the bank’s process – the customer will be pretty happy to have an account without filling in an application form or getting a loan without it being processed. This is like charging a customer a fee for entering the super market and an exit fee for having entered the super market and not purchased an item. The entire benefit of customer registration accrues to the FI – the customer account is the very reason for its existence, and yet the client pays for it! Any incidental expenses like stamp duty, legal charges and opinions or any other expense which is to be paid out by the FI to an external agency may be charged to the customer. Definitely not for printing cost of the form in which customer data is captured. This expense is part of the operations cost of the FI and already captured in its interest spread.
- Cash deposit – A cash deposit when made into an account whether deposit or loan is a part of financial intermediation – it is the basic business of a bank and cannot be declined or charged. The bank has a right to pay differential rates of interest for size and volume of deposits depending on how the funds can be utilized. So instead of charging a fee on deposit, they may reduce the interest paid or even have threshold levels for paying any interest – for example, interest may be paid only if the money stays for 30 days or more. Deposits can be hybrid of a current and savings account or notice deposit to be able to make such flexible interest payable arrangements.
- Electronic deposit – Similarly for an electronic deposit, if the bank pays any fees to the payment or electronic network, such fees maybe charged to the customer. There cannot be a fee for the deposit transaction itself. Interest may be paid as per cash deposit to take care of non-utilization of the demand liabilities.
- Cash withdrawal – a cash withdrawal is customer’s money back to them and no customer likes to receive less money than what their statement shows. This is probably the biggest drag for populating transactions at ADCs and what I call picking up the stick at the wrong end. Charging customers for returning their own money, which the bank used for its intermediation purposes to earn revenues is like stealing from the customers pocket. This could be the one big reason why transactions are not picking up at the ADC. What can be argued is that the charge is for the door delivery of cash outside the branch premises. Again fair comment – but here the customer must have a choice to pay for the door delivery or draw for free from the parent branch or an ATM.
Then why should an FI have ADCs?
First, the government will beat them with the right end of the stick. Apart from that, it is a part of their business to have accounts and build their portfolio. Smallness of accounts has nothing to do with the business side of assets and liabilities. Banks have high cost employees in the areas of treasury, liabilities and assets to take care of rationalized interest pricing issues to work towards making ADCs profitable. If the solution is to simply transfer the cost to the client, then there is no reason to have specialists – the MIS can do that. The banks have to take long term views similar to when they open a new branch. Most bank branches do not become profitable until after 3 years and there are many which continue to be in losses for ever – sometimes internal transfer pricing mechanism is used to camouflage this – for which the engineer that does the re-engineering ends up with a fat salary for juggling the numbers through complex mathematical exercises. Do they charge loss making branch customers for transactions?
The main reason FIs are looking to charge customer’s fees for transactions through ADC is because they have to make an immediate payment to the agent network for providing this service. In their internal accounting and transfer pricing, they do not know how to reflect this. Accounting and financial policies of banks do not mandate a transaction related expense outflow unless it is compensated by a matching inflow from somewhere. This is because they have two independent heads of income – interest and fee. The mismatch working through ADCs is that they are making a fee related expense for an interest related income. To obviate this glaring discrepancy in their financials they are insisting on matching fee expenses with fee income – and the ‘poor’ client is paying for this. Statistics worldwide has proven that an agent makes between $100-$200 per month and an aggregator makes another $100 per agent as its facilitator. Against this the bank saves on infrastructure and employee cost. Most bank employees – the lowest cadre – makes about $500 per month. How will the books of the bank look if they allocated salary of one staff to the aggregator per agent – and accounted the fees as salary instead of commission? If this was to be accepted, the banks will probably stop charging fees for transactions – because they will not know where to put a fee income against which there is no fee expense – probably in sundry deposits and earn the wrath of the auditors.
In conclusion, fees for ADCs need not be charged to customers, just because the Central Bank mandates it, or that survey results show that customers are willing to pay for it. Fees can be only charged when it is justifiable, equitable, and transparent with full disclosure. FIs whose reason for existence is financial intermediation, can only make revenues through judicious use of their assets and liabilities. Fee income is mandated for providing related services which does not result in intermediation. The same principle should apply to transactions through ADCs. It is hoped that such a change will lead to increase in volumes and transactions through ADCs and make branchless banking viable, otherwise this has the risk of being just a statistical exercise to meet Millennium Development Goals.