The coronavirus pandemic affected banks all over the world in more than one way. First, the lockdown practices have changed the customers’ behavior: visits to the bank office have become much less frequent. Second, the pandemic has brought about a global economic crisis, which has an impact on the banks, of course. Besides, the financial sector is digitizing at a fast pace and banks have to adopt new technologies in a timely manner if they want to keep up with the changes. In addition to that, competition in the banking sector has grown as neobanks (digital banks) and various payment systems appear one by one, offering financial services at lower rates compared to traditional banks.
Banks used to earn good money on transaction commissions. However, since fast payment systems appeared a few years ago, fewer people have been making bank transfers as using a fast payment system for this purpose is less expensive. This is one of the reasons why the costs of banking services are probably going to grow, as the banks have to compensate for the losses.
Factors affecting the cost of banking services
Both external and internal factors can affect the cost of banking services. The external factors include the following ones:
- The inflation rate;
- The cost of lending resources;
- The phase of the economic development in the country where the bank is located;
- The level of political stability in the country;
- The toughness of competition in the banking sector;
- Exchange rate fluctuations;
- The taxation regime applicable to the bank’s operations;
- The state finance and credit policies;
- Potential customers’ credit rating.
All banks can do about the external factors is adapt to them and add the associated costs to the price tags. The internal factors, however, are within the scope of the bank’s control and this explains why different banks in a certain national state offer banking services at different prices. The internal factors affecting the cost of banking services include the following ones:
- The efficiency of the bank’s risk management system;
- Rational use of the available resources;
- The efficiency of the personnel management system;
- The efficiency of the marketing strategies and tactics.
The pandemic has made it especially clear for the banks that they are unable to control some external forces. However, they can try to adapt to the changing environment and introduce certain measures that will let them survive. One of such measures is selling their services at higher prices. Simple but efficient.
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How banks earn money
Banks are commercial companies whose goal is to make a profit. While other types of commercial companies sell products and services, banks sell money in the form of loans, deposit certificates, credit cards as well as capital transactions and other banking services. Most (though not all) banks also pay interest on the deposits that their customers make. However, they loan money to other customers at higher interest rates thus making a profit.
Banks also earn money by charging fees for some banking services that they provide. These include the following ones, among others:
- Account opening and/ or account management fee. This means that the customer has to make a flat payment when setting up an account and then pay an annual fee to keep the account going. Such fees are avoidable and Q Wealth experts will be happy to advise you on the matter if you apply for a free consultation on choosing a foreign bank account with professional assistance. We will help you select the foreign bank that does not make any unnecessary charges.
- An idling account fee. If you do not use your bank account to make transactions for a long time, you may be charged a fee.
- Overdraft commission. If your account runs out of money, the bank will be happy to lend you some but you will have to pay it back with an interest.
- Commissions for withdrawing money from some kinds of accounts.
- Commissions for transferring money from your account to a different bank. Banks used to make good profits on such commissions before fast payment systems appeared.
- Bank statement issuance fee. Bank statements printed in paper are not so popular now as many bank customers prefer to monitor their accounts via online applications. However, some banks will charge you a fee even for an electronic document.
- Credit/ debit card replacement fee (if you lose your credit card or if it gets stolen you will have to pay a fee to acquire a new one).
- Fees for using ATMs belonging to other banks.
- If your bank account has a maintenance margin and you go below it, you will be charged a fee for that.
We would like to make a special note of the overdraft commissions, as some banks have been able to earn huge profits on those. In particular, banks in the USA used to provide automatic overdraft services. This meant that the client would be able to overdraw the account even if he or she had not asked for this opportunity. The automatic overdraft trick allowed banks to charge high-interest rates on the overdrawn amounts.
In 2010-2011, however, the American consumer protection bureau intervened and new regulations were passed that limited the banks’ opportunities to sell services that had not been asked for. According to Forbes, the overdraft commissions amounted to 37.1 billion dollars in 2009 and they decreased to 31.6 billion dollars in 2011 when the new legislation was passed. It has to be noted, however, that the figure grew to 31.9 billion dollars in 2013.
Fast payment systems
According to the World Bank, more than sixty national states use fast payment systems today. A fast payment system allows transferring money by entering your telephone number or a QR code into a computer or mobile application. The main advantage of such systems for the client is the opportunity to make a money transfer at any time of the day. The most outstanding fast payment systems include the following ones:
- Faster Payment System based in Hong Kong. It was launched in 2018 and it makes p2p and c2b payments possible.
- Faster Payments, Great Britain. The system was launched in 2008 and it offers a Paym service that makes c2c payments free of charge. The client’s telephone number is used for identification.
- Target Instant Payment Settlement (TIPS) is a European fast payment system that has been in operation since 2018. It makes p2p, c2b, b2c, and b2b payments possible.
Previously, you had to have a bank account to make use of a fast payment system. Today, you can register with an online platform by entering your telephone number and this is enough to start making money transfers. Naturally, banks are not happy with such new developments as they are losing money on transaction commissions.
What banks can do to compensate for the losses
Banks can increase the prices for their services. They can lessen the amounts of commission-free monthly transactions. They can shorten the interest-free periods for credit cards, and so on. This is understandable, however, because banks have to earn money just like any other type of commercial company.
What can you do in this situation?
We suggest that you should consider opening an account with a foreign bank or a payment system. Banks in your home country may charge a bit too much for their services in comparison to banks in some foreign countries. When you have a foreign bank account, you can diversify risks, protect your assets, and save on account maintenance costs. We would like to stress that there are healthy alternatives to traditional banks in the modern world. Digital banks and Payment Service Providers (PSPs) offer a range of financial services quite comparable to the one that you can find in a traditional bank. At the same time, their services often come at lower prices. Our experts will be happy to consult you on any issues related to opening an account with a foreign bank or a payment system. Please write to in**@***********rt.com or use our live chat or a messenger to request a consultation. We always reply quickly!
08 February 2022 