Zimpapers Logo

Martin Tarusenga
The Business Herald article of Thursday 3rd December 2015 calling for public disclosure on loan interest rates charged by banks generated significant public interest, with members of the public calling for a highlight of other questionable bank practices.

The charges made by banks on bank accounts raised the most questions. Information submitted by members of pensioner organisations as highlighted in this article, show that banks apply different charge structures depending on the type of account.

Referring to the loan contracts of $17 000 and $6 000 issued by bank A and bank B respectively, discussed in this article, bank A levied a total charge of $155 or just under 1 percent of the $17 000 loan amount issued by the bank, while bank B charged $375,77 or 6,6 percent of the $5 700 loan advance to its borrower.

Put in other words, bank B, the more expensive of the two banks, charged its borrower more than 2 times the charges levied by bank A, for issuing a loan 3 times smaller! But this is probably only about charges on loan accounts.

Another startled member of the pensioner organisation came through with her bank statements, one set of statements being for her personal account, and the other set, being for the small business that she runs.

For the $11 157,50 that she deposited in, and withdrew from her personal account on a monthly basis from January 2015, to November 2015, at an in and out rate of about a $1 000 per month, her bank levied $171,06 or ,5 percent in charges — an average charge of $16 per month.

The various charges levied by this bank, shown in brackets, are referred to as service fees ($12,30); maintenance fee FCAS ($69,50); ATM cash withdrawal at null ($36,00); Government tax at nul; card fee ($7,47); POS TXN LOCALFEE-OTH AT ZIMSWITCH; POS FEE; ZIMSWITCH POS FEE AT ZIMSWITCH; FCA cash withdrawal fee ($14,76); statement request — other; visa gold card — initial use ($25,00); POS international charge; ATM tax at bull; ATM tax at ZimSwitch.

On the other hand for the $920 deposited in and out of her small enterprise account, for the same period, her bank levied $352,43 or 38,31 percent in charges.

The charges levied consisted of maintenance fee ($302,23); FCA cash withdrawal fee ($40,00); service fee ($8,00); statement requests ($2,00); Government tax ($0,15); and ATM tax ($0,05).

In typical banking practice, commonly known categories of bank charges such as typified above arise from services provided by banks.

The services fall in the common broad categories including making and receiving payments; providing and granting credit, and; maintaining and administrating transaction accounts; providing foreign exchange.

In startling circumstances like this where banks have apparently become creative in charging for services, and are not transparent with their pricing structures, it is pertinent for the public to be aware of bank pricing strategies and their expected conduct to the banking public in terms of the law.

Bank pricing approaches are primarily dependent on client relationships and the nature of the transaction, thus being arrived at by profiling customers into different segments.

For instance the large corporate segment comprising of the bulk and large value transactions, characterised by multiple service relationships, would form a segment.

The pricing approach for the latter would typically be transaction based, dependent on the size of transactions and on the banks’ relationship with the corporate.

The brokers, small and medium enterprises (SMEs), the retail segment and similar such clients would form the other extreme end of the large corporate segment — typically, being the high volumes and low value segment.

Considering the vulnerability of this segment to institutional power, banks typically publish the tariffs applicable to the latter segment, in an easily digestible disclosure format.

The conduct of banks to the banking public in terms of the intervening laws, derives from the macroeconomic need to protect especially the vulnerable banking public, the need to maintain confidence in the banking system, and the need to prevent what is referred to as market failures.

In the financial markets, market failures mainly take the form of uneven information or price opacity, power imbalances between incumbents and hence imperfect competition — where imperfect competition leads to expensive exploitative bank services.

According to a Report on the Review of Regulation on Bank Charges in Ireland, lack of full information about the customer by a bank on the one hand, leading to sub-optimal decisions regarding treatment of the customer, and lack of full information about the price for a service required by a customer on the other hand, are instances of uneven information.

In the circumstances, consumer protection measures may (a) place controls around the unilateral increase by a bank on the interest rates, fees and other charges that it charges customers, and (b) simultaneously require the bank to disclose and declare to their customer that they are compliant to controls stipulated by the central bank.

With regard to the controls, banks, may be required to make a submission, for approval, to the central bank if they wish to introduce any new charges or increase any existing charges in respect of services, as highlighted earlier. In so providing for such controls, the role of the central bank would be to ensure the right balance is struck between costs recovery by banks for providing invaluable services and; appropriateness of charges imposed on personal and small business account holders.

Disclosure and declaration would entail notification of any proposed changes to charges say, three months in advance.

Banks may for instance be required to publish charges at the level to be imposed on notices, leaflets, promotional material or by running an advert in at least one national newspaper.

Some regulations require that payment service providers for instance a) provide information on all charges payable by the user to the provider, (b) that there is prior agreement between the payment service user and the payment service provider, before any charges can be levied and (c) that these charges shall be appropriate and in line with the payment service provider’s actual costs.

Competition among banks will often be enhanced through provisions aimed at removing customer inertia and lack of information.

Customer inertia refers to circumstances when consumers are locked in to their existing bank and, when it is not easy for them to switch their accounts or for new banks to offer services.

A low degree of current account switching may for instance be an indicator of customer inertia. Customer inertia and lack of information is typically minimised by implementing several measures including easy switching of current accounts via switching codes; providing current account interest rate information; introduction of transferable direct debit; requiring the free provision of twelve months current accounts records; among others.

With regard to the latter provisions, consumer pressure groups in other jurisdictions for instance maintain comparison websites, setting out details of fees and charges, while some central banks have codes of conduct on the operation of measures set to curtail inertia and lack of information.

It is advisable for the banking public to demand full disclosure of bank charges levied to their accounts and to approach more knowledgeable consumer groups for clarification if incumbent banks are opaque about the charges.

In turn, it is incumbent upon the RBZ to curb exploitative bank charges by requiring public disclosure of charges that banks levy on accounts that they issue to the banking public.

Opinions expressed herein are those of the author and do not represent those of the organisations that the author represent

• Martin Tarusenga is General Manager of Zimbabwe Pensions & Insurance Rights, email, [email protected] telephone; +263 (0)4 797020; Mobile; +263 (0)772 889 716