Bank Fees: A Way for Banks To Get Richer?
How can “fintechs” provide competitive financial services for free… or almost free?
Who hasn’t protested against the fees charged by their bank, including ones for simple transactions? Recent studies — such as the FCAC’s survey on account fees in Canada — demonstrate the relative stability of bank charges in the last decade. In a world where almost everything is automated and computerized, one would expect a decline in fees. So do banks continue to charge for services that marginally cost them nothing? Are they making money on their clients’ account without adding any real value? The advent of financial technology startups — fintechs — cutting prices on competing banking products and services (payment systems, personal cash management, international operations, etc.) appears to confirm this perception.
Traditional bank fees
This may be partially correct. However, the reality is more complex.
Traditional banks charge their customers expensive tariffs as they face high operating costs, namely for human and IT resources. While most major national and international banks undertake massive programs to reduce costs, their effectiveness (as measured by the operating ratio) needs improvement. The culprits include the cost of oversized human organizations, the networks of brick and mortar agencies that must adapt to new customer needs, and the often cumbersome and not-so-scalable IT systems.
Meanwhile, the regulations governing banking activity have toughened significantly in recent years, including stricter requirements for capital. Banks are engaged in profit race to increase their capital so as to cope with possible financial crises. Costs representing about 1/3 of Canadian banks’ income (the balance comes from interest margins — the difference between the borrowing rate and the credit rate), understandably, banks want to preserve this source of profit.
Fintechs on the other hand, compete with traditional banks on services initially reserved for banks through openings in financial regulation (e.g. participatory financing or payments) and technological advances (e.g. block chain or artificial intelligence).
Fintechs can offer their services at very low rates for 2 reasons.
- The agility due to their smaller size allows them to allocate their spending more efficiently than large structures weighed down by their size.
- The startup development model — based on shareholders financing their growing years — allows for rapidly gaining market shares and ensuring future profitability.
What about the future?
The banking model is not dead. Quite the contrary. Traditional banks are reacting. They quickly adopt fintechs’ developments and new models to offer more and more digital products at reduced prices. However, obsolete organizations and internal processes hinder their efforts.
Not only did fintechs introduce technological advances, but also they also endorse a culture of transparency and higher visibility of services and prices.
This is impak Finance’s driving principle. We combine the best of both worlds: bank and fintech. By creating a new fully digital bank, we harness the best of current technology, without the inertia of the past. Our customers don’t bear the cost of our developments, and we charge a fair price for our services. This is the absolute condition for creating a competitive bank, a bank that echoes our customers’ values.
By Philippe Gablain and Jean Oulhen
