financial services sector inquiry interim report – retail
TRANSCRIPT
Case No: 58717 Event No: 450510
FINANCIAL SERVICES SECTOR INQUIRY
INTERIM REPORT – RETAIL BANKING
21 NOVEMBER 2007
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Rue Belliard 35, B-1040 Brussels, tel: (+32)(0)2 286 18 11, fax: (+32)(0)2 286 18 00, www.eftasurv.int
Page 2 1 Introduction .................................................................................................................. 4
1.1 Purpose and legal basis of the sector inquiry ....................................................... 4 1.2 Defining retail banking activity............................................................................ 4 1.3 Retail banking products and services ................................................................... 5 1.4 Methodology of the sector inquiry ....................................................................... 6
2 Market features............................................................................................................. 8 2.1 General characteristics of retail banking markets ................................................ 8
2.1.1 Supply side ................................................................................................... 8 2.1.2 Demand-side characteristics of retail banking markets................................ 9
2.2 Differing distribution models for retail banking products.................................. 10 2.3 Regulation of retail banking ............................................................................... 10
3 Regulatory framework for retail banking ................................................................... 11 3.1 The framework for banking supervision and competition issues....................... 11 3.2 Competition policy framework for retail banking in the EEA........................... 13 3.3 Non-supervisory aspects of retail banking regulation and competition ............. 14 3.4 Direct state intervention in the retail banking sector.......................................... 15
3.4.1 Abolition of unlimited state guarantees in favour of public banks ............ 16 3.4.2 Equal tax treatment..................................................................................... 16 3.4.3 Compensation for providing services of general economic interest .......... 17
3.5 Conclusions ........................................................................................................ 17 4 Market structures and concentration .......................................................................... 18
4.1 Market definition................................................................................................ 18 4.2 Scope of the analysis, data and limitations......................................................... 18 4.3 Concentration at the national level ..................................................................... 19 4.4 Concentration at the regional level..................................................................... 21 4.5 Conclusions ........................................................................................................ 21
5 Financial performance of retail banks ........................................................................ 22 5.1 Long-term trends in the profitability of the EU banking sector ......................... 22 5.2 Market data on retail banks’ financial performance........................................... 22 5.3 Gross income from retail banking activity ......................................................... 23 5.4 Comparison of EFTA retail banks’ profitability and costs ................................ 25 5.5 Conclusions ........................................................................................................ 26
6 Selected comparisons of prices and account use........................................................ 27 6.1 Introduction ........................................................................................................ 27 6.2 The use of current accounts to make payments.................................................. 27 6.3 Banks’ income: account management fees and fees for selected payments transactions ..................................................................................................................... 30 6.4 Conclusions ........................................................................................................ 31
7 Customer mobility and choice.................................................................................... 32 7.1 Factors reducing customer mobility in retail banking........................................ 32 7.2 Analysis of customer mobility in retail banking across the EEA....................... 33
7.2.1 Customer mobility in the retail banking industry across the EEA ............. 33 7.2.2 Customer churn .......................................................................................... 33 7.2.3 Longevity of the banking relationship........................................................ 34 7.2.4 The extent of cross-selling in retail banking .............................................. 36 7.2.5 The extent of banks’ practice of tying products ......................................... 38
7.3 Possible measures to reduce obstacles to customer mobility and strengthen competition..................................................................................................................... 39
7.3.1 Administrative burden................................................................................ 39 7.3.2 Information asymmetry and low price transparency .................................. 40 7.3.3 Cross-selling and tying of banking products .............................................. 40 7.3.4 Closing charges .......................................................................................... 41
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7.4 Conclusions ........................................................................................................ 41 8 Retail payments – Clearing arrangement and interchange fees.................................. 42
8.1 Cashless payment transactions in the EEA ........................................................ 42 8.2 The Authority’s inquiry into clearing infrastructures......................................... 42
8.2.1 Overview of the surveyed infrastructures................................................... 42 8.2.2 Type and volume of transactions treated by the infrastructures surveyed . 43 8.2.3 Operating costs of the infrastructure .......................................................... 43 8.2.4 Management of clearing infrastructures..................................................... 43 8.2.5 Classes of memberships ............................................................................. 44 8.2.6 Eligibility for direct membership ............................................................... 44 8.2.7 Decision-making bodies ............................................................................. 45 8.2.8 Fees charged to users of clearing infrastructures ....................................... 45 8.2.9 Economies of scale due to fee structure ..................................................... 46
8.3 Multilaterally agreed interbank fees................................................................... 46 8.4 Competition analysis .......................................................................................... 46 8.5 Conclusions ........................................................................................................ 47
9 Formal industry cooperation....................................................................................... 48 9.1 Ownership and management of payment systems.............................................. 48 9.2 Data sharing through credit registers.................................................................. 48
9.2.1 Differences in credit registers in EFTA States ........................................... 49 9.3 Commercial joint ventures ................................................................................. 50 9.4 Conclusions ........................................................................................................ 51
10 Conclusions and issues for consultations ............................................................... 52 10.1 Factual findings .................................................................................................. 52
10.1.1 Market structure.......................................................................................... 52 10.1.2 Financial performance of retail banks ........................................................ 52 10.1.3 Customer choice and mobility.................................................................... 52 10.1.4 Comparisons of pricing and customers’ use of bank accounts................... 53
10.2 Potential entry barriers ....................................................................................... 53 10.2.1 Payment systems ........................................................................................ 53 10.2.2 Industry co-operation.................................................................................. 53 10.2.3 Factors which may reduce customer mobility............................................ 54
10.3 Next steps ........................................................................................................... 54 Glossary.............................................................................................................................. 55 Bibliography ....................................................................................................................... 56 Appendix I .......................................................................................................................... 57
Page 4 1 Introduction 1.1 Purpose and legal basis of the sector inquiry Well functioning, integrated and competitive financial markets are essential for the efficient and dynamic development of the European Economic Area. Despite measures taken to promote the integration of financial markets within the EEA, retail financial markets in particular have continued to show lack of integration. Furthermore, indicators such as market fragmentation and entry barriers as well as a limited choice for retail banking customers may suggest that competition may be restricted or distorted within the EEA, in particular with respect to the provision of retail banking products and services to consumers as well as small- and medium-sized enterprises. For this reason, on 22 June 2005, the EFTA Surveillance Authority (the “Authority”) launched a sector inquiry (the “Sector Inquiry”) into competition in the retail banking markets of the EFTA States. The EFTA States are Norway, Iceland and Liechtenstein.1 According to Article 17 of Chapter II of Protocol 4 to the Agreement between the EFTA States on the establishment of a surveillance authority and a court of Justice (the “Surveillance and Court Agreement”), the Authority may decide to conduct an inquiry into a particular sector of the economy or into particular types of agreements across various sectors, where the trend of trade between the Contracting Parties to the EEA Agreement, the rigidity of prices or other circumstances, suggest that competition may be restricted or distorted within the territory covered by the EEA Agreement. The Sector Inquiry has been carried out in co-operation with the European Commission (“the Commission”) which launched a sector inquiry into the retail banking sector in the EU25 on 13 June 2005. On 17 July 2006, the Commission published an interim report on the results concerning current accounts and related services.2 After a period of consultation, the Commission published a final report on 31 January 2007.3
1.2 Defining retail banking activity Retail banking activity is commonly understood to comprise: • banking services for consumers (individuals/private households) and • banking services for small- and medium-sized enterprises (SMEs). The delineation of each of these two segments, however, is not standardised by, for instance, a nomenclature for central banks’ statistics or other official databases. The inclusion or exclusion of customer categories from these segments depends, to a large
1 Norway, Iceland and Liechtenstein are the EFTA States that are signatories to the EEA Agreement. Whilst Switzerland is a member of the European Free Trade Association, it is not a signatory to the EEA Agreement. 2 The public version of the interim report (hereinafter referred to as the “Commission’s interim report” is available at: http://ec.europa.eu/comm/competition/antitrust/others/sector_inquiries/financial_services/interim_report_2.pdf 3 Hereinafter referred to as the “Commission’s report”. Available at: http://ec.europa.eu/comm/competition/antitrust/others/sector_inquiries/financial_services/sec_2007_106.pdf
Page 5 extent, on cultural habits, market developments or the individual business strategies of banks. In some countries or specialised banks, for example, services for wealthy individuals and households fall under the so-called segment of private banking. Moreover, whether a certain size category of SMEs belongs to the segment of retail banking or the segment of corporate banking varies from bank to bank.4 In order to reduce this complexity, the Authority has used the following definitions for the purposes of the sector inquiry: • personal banking, i.e. banking products and services for consumers including current accounts (and related services such as ATM, direct debit and credit transfers), sight deposits and other savings accounts, credit lines/overdrafts (no limits on individual asset size) and consumer loans; • business banking, i.e. banking services for enterprises up to a maximum turnover of EUR 10 million annually and including services such as current accounts, term loans and credit lines. This report, following industry and literary usage, will also use the term ‘SME banking’ or ‘SME customers’ for this sub-segment. In carrying out the inquiry and, for instance, addressing comprehensive questionnaires to banks in the EFTA States, the Authority has not applied a rigid definition within these general parameters. This approach has allowed for individually flexible definitions, for example by accepting the banks’ own definition of SME business even where they may be narrower in scope. 1.3 Retail banking products and services Within the two segments mentioned above, the Authority has focused on the following main products: • Within the segment of banking services for consumers, three sets of retail banking
products form the core of the sector inquiry: o Current accounts – the bank account which individuals use for most of their household transactions such as receiving wages or paying bills. o Deposit accounts – an account which individuals use for saving. The accounts provide instant (‘sight deposits’) or time-limited (‘time deposits’) access to funds. o Consumer term loans – a loan account operating for a specified time period, which is used to fund personal or household consumption.
In addition to these three sets of products, the sector inquiry has also taken some account of other retail banking products for individuals such as payment cards,5 mortgages and investment funds. • The analysis of banking services for small enterprises (SMEs) focuses on:
o Current accounts – the bank account which SMEs use for the bulk of the payments they make and receive.
o Term loans - a loan account operating for a specified time period, which an SME uses to finance its business expenditure.
4 Commission’s interim report, pp. 13-14. 5 The first phase of the Authority’s inquiry dealt exclusively with payment cards. These are discussed in detail in the Authority’s interim report on card payments, available at: http://www.eftasurv.int/information/reportsdocuments/competitionreports/dbaFile11844.pdf
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o Credit lines – an open-ended facility which incorporates the credit element of a loan – enabling SMEs to draw down finance – and the flexibility of a current account for making and receiving payments.
In addition to these three sets of products, the sector inquiry has also taken some account of other products for SMEs such as leasing (which involves a bank’s paying for part or all of the cost of a capital asset for an SME, and the bank then leases this asset to the SME). Together with the retail banking products specified above, the sector inquiry also analyses payments systems, since they form the core of money transmission services in personal and SME banking, and are significant structures within the retail banking sector as a whole. 1.4 Methodology of the sector inquiry This preliminary report on the market for current accounts and related services analyses a range of issues that influence the level of competition: • regulation of the retail banking sector; • market structures and measures of concentration; • financial performance of retail banks; • customer behaviour and mobility; • the structure of payment systems at European and national level; and • conduct of market players, including price-setting and formal cooperation. The inquiry has examined these issues using a range of tools; most notably a market survey of around 30 retail banks in the three EFTA States. In order to provide a broad perspective on the market, further questionnaires were also sent to bank associations, payment networks, banking regulators and central banks. The Authority has also taken note of relevant work undertaken by national competition authorities and regulators. Finally, the Authority has had on-going co-operation with the Commission in order to maintain a parallel methodology. In particular, the Authority has used the services of the Commission’s Joint Research Centre (JRC) for a number of analyses, thus ensuring a uniformity of approach. The selection of addressees for the Authority’s market survey was aimed at obtaining a representative sample of banks active in retail banking in the three EFTA States. Bearing in mind that all of the three states’ retail banking markets are characterised by a high degree of concentration, questionnaires were sent to all larger market players. Moreover, questionnaires were sent to a number of smaller banks of differing sizes and geographical location. In order to avoid creating an unreasonable administrative burden, questionnaires were not sent to extremely small banks. As regards Liechtenstein, it proved difficult to obtain reliable data on several aspects of the sector inquiry. This is both due to the fact that because of the close integration of the Liechtenstein banking market with that of neighbouring Switzerland, separate statistics are in many cases nonexistent, and furthermore the small overall number of market players meant that in many instances it was impossible to obtain statistically reliable data in the required format. As a consequence, the Authority had to exclude Liechtenstein from its statistical analysis contained in the present report.
Page 7 As regards Iceland and Norway, the Authority estimates the inquiry’s coverage rate, based on the volume of deposits. The national coverage ratios or levels are defined as in-sample deposits of individual consumers plus deposits of non-financial corporations, divided by total non-monetary financial institution deposits. Not all banks provided data on the volume of deposits. In these cases, the data on the deposit volume reported in the bank’s annual report has been used instead.
Table 1: National coverage rates based on deposits, 2004
Customer deposits
coverage level Iceland [80-90%] Norway [>90%]
The Authority considers that the above-described approach has, as regards Iceland and Norway, resulted in a satisfactory coverage and is representative of the retail banking sector in each of these countries.
Page 8 2 Market features 2.1 General characteristics of retail banking markets The supply side of retail banking markets shows common features that are typical for banking markets in general. The main difference between retail banking and other banking fields is the fragmented demand side of the first, comprising individual consumers and small enterprises.6 In the following, the characteristics of the supply and demand sides of the market will thus be discussed separately. 2.1.1 Supply side The markets for retail banking across the EEA do not present a uniform picture regarding concentration of supply. National differences in concentration are still large with, for instance, Germany having one of the less concentrated national banking sectors while concentration ratios in some of the smaller countries in Europe can be quite high. As will be further explained in Chapter 4, the retail banking markets in Iceland and Norway are all characterised by a high degree of concentration with a handful of large banks accounting for the bulk of the market share. Consequently, the market structure in these countries tends to be oligopolistic.
2.1.1.1 Fragmented market infrastructures The retail banking markets in the EEA still tend to be fragmented along national lines. This fragmentation is further entrenched by the fact that essential market infrastructures (payment systems, credit registers) remain country-specific and lack interoperability. Furthermore, legal obstacles to further market integration remain in the form of differing regimes relating to e.g. tax and consumer protection. As regards market infrastructure, firstly, the organisation and management of payment infrastructures varies significantly from country to country. Whereas payment systems are run by central banks on a non-profit basis in some countries, others are operated by joint ventures of banks in various forms. Consequently, access conditions and fee structures differ considerably, and widespread entry barriers remain. Secondly, there are major differences in the market structure and operation of credit registers across the EEA. This fragmentation has consequences for the volume and type of customer data that is available to credit providers and for the ability of credit providers to access registers, especially in other countries.7
In relation to legal infrastructure, tax policies on company earnings, VAT treatment and capital gains vary between EEA States. These varying tax regimes clearly influence the investment decisions of banks (for example, on whether and how to enter new markets) and the consumption, saving and borrowing decisions of retail banking customers. Banking regulation is discussed in more detail in Chapter 3 below. It is worth noting here that while prudential rules have been largely harmonised at European level, significant differences remain in areas such as the ownership structure and the geographic scope of certain banks. Lastly, consumer protection rules for retail banking still vary considerably 6 Commission’s interim report, p. 19. 7 Commission’s report, pp. 13-14.
Page 9 across the EEA, which raises the cost of entering new markets and maintains market fragmentation.8
2.1.1.2 Traditionally high level of co-operation In general, banking markets at national level are characterised by extensive co-operation between (incumbent) banks, notably in infrastructure-related areas such as payment systems, clearing houses, etc. Also of note is the fact that as most retail banks are multi-product firms offering a range of products and services, contacts between banks take place in a multitude of fora. In theory, such multi-market contacts may induce collusion behaviour, as retaliation against deviating firms can take place on multiple markets.9 Whether this is, in fact, the situation on a particular market must be established on a case-by-case basis.
2.1.1.3 Varying degrees of price transparency For some retail banking products, such as deposits or mortgages, prices are relatively easy to compare, as the interest rate is a good proxy for the ‘price’ (though some significant charges or fees may apply to mortgages).10 In other instances, however, consumers may face considerable difficulty in comparing products due to the heterogeneous nature of the services provided by different banks or because of complex pricing structures that make it difficult to ascertain the ‘real’ price of a particular product.11
2.1.1.4 Significant barriers to entry Prudential rules and supervisory regulation can be used to hinder market entry. In addition, some EEA countries restrict takeovers regarding certain types of credit institutions, e.g. savings banks. Market entry barriers may also result from market structures and the conduct of incumbent market players, in particular with respect to co-operation agreements and the functioning of networks such as payments systems or credit bureaus. In the context of networks, natural, regulatory and behavioural barriers can be distinguished. Whereas natural barriers are the result of the ‘inherent’ economies of scale of networks such as payment systems, access to networks may also be rendered difficult by artificial barriers such as regulatory provisions or incumbents’ behaviour. Fee structures that disadvantage smaller banks or newcomers may be the result of both, natural or artificial barriers.12
2.1.2 Demand-side characteristics of retail banking markets The demand-side of retail banking markets is, as would be expected, fragmented. Bank customers are often faced with information asymmetry, i.e. lack of full information about the products and services on offer and hence cannot make meaningful comparisons. Moreover, there are numerous barriers to customer mobility (e.g. tying and bundling of
8 Commission’s report, p. 14. 9 ibid. 10 ibid. 11 Competition in Nordic Retail Banking – report from the Nordic competition authorities (2006), p. 76. The report is accessible at: http://www.samkeppni.is/samkeppni/upload/files/skyrslur/samnorraenar_skyrslur/norraen_skyrsla_um_bankamarkadin_-_competition_in_nordic_retail__banking.pdf 12 Commission’s report, p. 15.
Page 10 products, switching costs such as closure charges, etc.) that result in a certain reluctance to switch suppliers, hence making price competition less efficient.13
Customer churn, i.e. the percentage of customers switching banks in a year, appears to be even lower in Iceland and Norway than the average for the EU25 (see further chapter 7 below), or around 5% per year for private individuals. 2.2 Differing distribution models for retail banking products Although the need for branch networks has decreased somewhat with the advent of phone and internet banking, branches seem to remain an important distribution channel for a number of retail banking products, in particular the more complex ones such as mortgages. In order to provide a full range of retail banking services, a bank thus still needs a branch network to a certain extent. However, there have been reductions in branch density and staffing in Iceland and Norway in recent years, reflecting changing customer habits. It is also of note that some “niche” service providers have entered the market in Iceland and Norway without relying on the establishment or acquisition of a branch network (e.g. banks offering internet-only current accounts). 2.3 Regulation of retail banking Across the EEA, competition authorities are increasingly turning their attention to banking markets. Competition authorities in both Iceland and Norway have dealt with several cases involving retail banking markets over the years.14 It is by now firmly established that EEA competition law applies to the banking sector. One tool of prudential regulation is entry regulation by means of bank license requirements. This is explainable by the rules on own funds adequacy. However, the promotion of stability and the avoidance of a systemic crisis cannot justify all occurring entry restrictions. Such restrictions may also be used by governments to prevent foreign entries or takeovers and thus impede effective competition. Another regulatory issue that also affects market entry concerns specific rules on the ownership and activity of certain types of banks such as savings banks and co-operative banks.15
The Authority scrutinises advantages provided to certain financial institutions by means of State aid control in order to ensure a level playing field for all market participants and to enhance undistorted competition (Articles 61 to 64 EEA). In particular, the Authority ensures that public and private institutions operate under similar conditions by removing unlimited state guarantees or fiscal advantages favouring particular banks and by applying the so-called Market Economy Investor Principle (MEIP).
13 For further analysis of bank customer mobility in the Nordic countries see the 2006 report by the Nordic Council of Ministers, available at: http://www.norden.org/pub/velfaerd/konsument/sk/TN2006507.pdf 14 It will be recalled that Liechtenstein does not have a competition authority. 15 Commission’s interim report, p. 20.
Page 11 3 Regulatory framework for retail banking This chapter deals with some key aspects of the regulatory framework for retail banking in the EEA, and in particular in the EFTA States. The regulatory framework in itself will not be presented in detail. Rather, the focus is on the impact of such regulation. 3.1 The framework for banking supervision and competition issues Public regulation of the banking sector, be it at national or at EEA level, seeks to ensure prudent financial management by banks and to support public confidence in the banking sector through a range of policy tools such as licensing, solvency requirements and deposit protection insurance.16 The legal framework for banking in the EEA is based on the Second Banking Directive (2000/12/EC) which has been incorporated into the EEA Agreement.17 Hence, the mutual recognition principle, the single European passport and principle of home county supervision apply throughout the EEA. These key provisions of the Second Banking Directive make it easier for banks to establish themselves in another EEA State and thus stimulate competition in the banking sector.18
In addition, the EEA framework for retail banking includes the e-money directive,19 which aims at ensuring effective regulations for electronic money institutions, and the financial conglomerates directive, which lays down rules for supplementary supervision of financial conglomerates in order to address the additional risks posed by such financial groups.20 In order to ensure the stability of the international banking sector and to avoid competitive inequality between international banks, the Basel Committee21 has agreed on a credit risk measurement framework with a minimum capital adequacy standard. The original standard was developed in 1988 and Basel II, the revised framework for capital adequacy, was agreed in 2004. In the EU, Basel II has been implemented through the Capital Requirements Directive (comprising Directives 2006/48/EC22 and 2006/49/EC23). The work of incorporating this directive into the EEA Agreement is underway. In Norway and
16 Commission’s interim report p. 29. 17 The directive has been incorporated into Annex IX, Section II, point 14 to the EEA Agreement, through the EEA Joint Committee Decision No 15/2001 (OJ L 117, 26.4.2001, p. 13 and EEA Supplement No 22, 26.4.2001, p.8), and entered into force 1.10.2001. 18 Commission’s interim report p. 30. 19 Directive 2000/46/EC of the European Parliament and of the Council of 18 September 2000 on the taking up, pursuit of and prudential supervision of the business of electronic money institutions (OJ L 275, 27.10.2000, p. 39), incorporated into the EEA Agreement, Annex IX, Section II, point 15 through EEA Joint Committee Decision No 45/2001, with entry into force 1.10.2001. 20 Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 (OJ L 35, 11.2.2003, p. 1), Decision No 104/2004 (OJ No L 376, 23.12.2004, p. 33 and EEA Supplement No 65, 23.12.2004, p. 24), with entry into force 1.8.2005. 21 The Basel Committee on Banking Supervision is a forum for regular cooperation on banking supervisory matters. The member countries are currently Belgium, Canada, France, Japan, Germany, Italy, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom and the United States, see http://www.bis.org/bcbs/?bcsi_scan_01F93803E4462DFD=I9djosYqXRkIBmhCLz7RYRgAAAA83gAB. 22 Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (recast), OJ 30.6.2006, L177/1. 23 Directive 2006/49/Ec of the European Parliament and of the Council of 14 June 2006 on the capital adequacy of investment firms and credit institutions (recast), OJ 30.6.2006, L177/201.
Page 12 Iceland, regulations incorporating the Capital Requirements Directive have already entered into force. Similarly, in Liechtenstein, national legislation incorporating this Directive has been adopted and will take full effect on 1 January 2008. One of the options open to a bank which wishes to operate in another EEA State is to merge with or acquire a significant or controlling interest in a bank established in that EEA State. Cross-border mergers and acquisitions (M&A) is an important means for larger players to enter new markets and quickly acquire sufficient scale in their operations to compete against domestic banks. Foreign entry on balance also tends to enhance consumer welfare. However, significant barriers to cross-border M&A remain, in particular through the current framework for banking supervision.24 The vast majority of M&A deals in European banking have been between domestic banks and cross-border deals in banking have tended to be lower in value than domestic deals.25 Cost-savings will in many cases be higher for a domestic transaction than for a cross-border deal. There has, however, been a tendency towards intra-regional deals in the banking sector in the Nordic countries. Almost all of the largest Nordic banks have also entered the neighbouring countries, in particular through M&A deals.26 In Norway, for instance, there is a very high presence of branches and subsidiaries from Nordic countries compared to branches and subsidiaries from non-Nordic EEA countries or from third countries.
Figure 1: Share of foreign branches and subsidiaries in the Norwegian banking market, % of total banking sector assets, 2004
Source: Report on Nordic Banking structures27
The exception to such entries is Iceland where there are no foreign subsidiaries. Icelandic banks, however, have expanded into the other Nordic countries.28 Some of the reasons for this Nordic trend are relatively low cultural barriers and the need for banks to seek new business opportunities to gain new revenues and exploit scale economies.29 In spite of this
24 Commission’s interim report p. 32. 25 Commission’s interim report p. 33 and WALKNER, C and RAES, J. (2005): Integration and consolidation in EU banking: an unfinished business, European Commission Economic Paper No 226. 26 See Report from the Nordic competition authorities No. 1/2006 , Competition in Nordic Retail Banking, http://www.konkurransetilsynet.no/iKnowBase/Content/407037/06_RETAIL_BANKING.PDF. 27 Report on Nordic Banking structures, Annex table 6. 28 See also Report from the Nordic national banks, Nordic Banking Structures, http://www.sedlabanki.is/lisalib/getfile.aspx?itemid=4146 29 See also Report from the Nordic national banks, Nordic Banking Structures, p 11.
Page 13 trend of integration, the Nordic markets remain relatively concentrated, see further Chapter 4. The European Commission undertook a major survey of barriers to cross-border mergers and acquisitions (M&A) in the financial sector in 2005.30 The major barriers to cross border M&A were found to be economic barriers which reduced economies of scope for new entrants, tax barriers, supervisory requirements and attitudinal barriers.31 The Commission is currently seeking to build a more supportive environment for cross-border M&A in the banking sector.32 Several of these measures will also be relevant for EFTA States through the EEA Agreement. 3.2 Competition policy framework for retail banking in the EEA It is only during the last two to three decades that it has been generally accepted that banks should be subject to a strong antitrust regime. Competition in the banking sector delivers value directly to the banking customers and allocates capital efficiently to firms in order to support a strong and dynamic economy.33 In 2005, the International Competition Network (ICN) made, inter alia, the following three recommendations for the competition policy framework for retail banking which reflects the importance of competition in this sector:
1. There should be no special rules for competition among banks. 2. Competition rules should fully apply to banking. 3. Antitrust law should be enforced by the competition authority rather than by
the banking regulator.34 When the EEA Agreement was signed in 1992, it was already clear that banks would be fully subject to the EEA antitrust rules.35 At that time, there was also a focus on the importance of competition in the banking sector in the national legislation of the EFTA States. In Norway and Iceland, the banking sector has been fully subject to the antitrust rules for some time, and both the Norwegian and Icelandic competition authorities have, in recent years, been active in the banking sector, both through general market surveys36 and individual decisions.
30 See Commission Staff working document, Cross-border consolidation in the EU financial sector, http://ec.europa.eu/internal_market/finances/docs/cross-sector/mergers/cross-border-consolidation_en.pdf. 31 Commission’s interim report p. 34. 32 Commission’s interim report, p. 34-35. 33 Commission’s interim report p. 26. 34 For further information, see: http://www.internationalcompetitionnetwork.org/media/library/conference_4th_bonn_2005/Banking-AnIncreasingRoleForCompetition.pdf. 35 Articles 53 and 54 of the EEA Agreement, shall, in so far as they are identical in substance to the antitrust provisions of the EC Treaty, be interpreted in conformity with the judgments of the European Court of Justice given before the signature of the EEA Agreement, i.e. 1992 (cf. Article 6 EEA). Besides, the Authority and the EFTA Court shall pay due account to the principles laid down by the relevant rulings by the Court of Justice given after 1992 (Article 3 of the Surveillance and Court Agreement). 36 See Report from the Nordic competition authorities No. 1/2006 , Competition in Nordic Retail Banking, http://www.konkurransetilsynet.no/iKnowBase/Content/407037/06_RETAIL_BANKING.PDF, as well as the report from Konkurransetilsynet: “Konkurransesituasjonen i finansmarkedene”, http://www.konkurransetilsynet.no/iKnowBase/Content/395625/03_01_KONKURRANSESITUASJONEN_FINANSMARKEDENE.PDF.
Page 14 Since merger control was introduced in Norway in 1988, the Norwegian Competition Authority has had full oversight of mergers in the banking sector subject to appeal to the Norwegian Ministry of Government Administration and Reform. Likewise, the Icelandic Competition Authority has had full jurisdiction over mergers in the financial sector since the entry into force of merger control provisions in 1993. During this period, there has also been an increased focus on self-regulation within the EU and in several individual EEA States.37 In Norway, the authorities have seldom directly required the banks to act where a need for regulation or a competition concern has been identified. However, the authorities have awaited action by the banks, in certain cases, before deciding whether or not to adopt legislation. As an example, concerns related to switching costs have been raised in Norway and the trade association for bank and insurance is currently drafting switching codes to address this issue. A recent report commissioned by the Norwegian authorities recommends awaiting the banks’ switching code before deciding whether there is a need for public intervention.38 3.3 Non-supervisory aspects of retail banking regulation and competition National authorities may employ a range of policy tools other than supervisory instruments to restrict the activities of banks, for instance pricing regulation, licensing of cross-sectoral activities, geographical restrictions and consumer protection rules. However, the use of many of these other policy tools is not widespread in the EFTA States. Neither Iceland, Liechtenstein nor Norway have any pricing regulation in the retail banking sector in the EFTA States, nor are there any geographical restrictions on the activity of banks. When it comes to regulatory provisions concerning banks’ diversification into other areas of financial services business, all three EFTA States, as of 2003, had restrictions on cross-sectoral activities in force:
Table 2: Restrictions on banks wishing to conduct cross-sectoral activity Securities Insurance Iceland + + Liechtenstein + -- Norway + + Source: World Bank Regulation and Supervision database 200339
++ = Unrestricted: Full range of activities in the given category can be conducted directly in the bank. + = Permitted: Full range of activities permitted, but all or some must be through subsidiaries - = Restricted: Less than a full range of activities can be conducted in the bank or subsidiaries -- = Prohibited: activity cannot be conducted in either the bank or its subsidiaries Liechtenstein is the only EEA State which retains a complete ban on banks carrying out insurance activities although banks may, however, act as agents for insurance companies. Like the majority of the EU Member States, Iceland and Norway require that any
37 Commission’s interim report p. 28. 38 ”Tiltak og ordninger som kan gi reduserte ulemper for kundene ved bytte av bankforbindelse - bankkontonummerportabilitet”, http://www.regjeringen.no/pages/1988381/Rapport_konto.pdf 39 http://go.worldbank.org/SNUSW978P0
Page 15 insurance business must be undertaken through subsidiaries. All three EFTA States require banks to open subsidiaries in order to conduct a full range of securities business. Like in the EU, the existence of widely differing consumer protection regimes throughout the EEA makes foreign bank entry more difficult and thus reduces the overall level of competition.40 The EU proposal for a Consumer Credit Directive, which should be incorporated into the EEA Agreement when adopted, aims to reduce these differences and to achieve a genuine internal market for financial services.
Banking sector regulation and barriers to competition As members of the OECD, Iceland and Norway are also covered by the OECD’s analysis of the volume of bank regulation.* When it comes to the four categories of regulatory barriers to competition in banking identified by the OECD:
- Barriers to domestic entry, specifically licensing requirements. Norway has high barriers on a level with Sweden, which had one of the highest levels of barriers of the EU Member States. Iceland has a slightly lower level of barriers.
- Barriers to activities in other areas of financial services. Iceland and Norway both have the same level of cross-sectoral restrictions as most of the EU Member States covered by the analysis.
- Public ownership, measured by the share of banks’ assets owned by the state. Iceland and Norway**, like most EU Member States report no public ownership in banking.
- Barriers to foreign entry, specifically equity restrictions on foreign entities; screening and approval procedures; and management restrictions. Iceland has the highest level of barriers on line with Poland, which reported the highest level of the EU Member States.
In the composite index of regulatory barriers to banking competition, where one denotes the highest possible barriers and zero denotes no regulatory barriers, Iceland is in line with the EU Member States with the highest barriers (0,4). Norway reports barriers which are in line with the OECD average (0,37). Impact on economic performance As mentioned in the Commission report, the OECD finds that regulation of the banking sector can have a significant impact on output and productivity growth and that the countries with the highest regulatory barriers could raise their economic growth rate by 0,25 to 0,5 per cent annually over several years by reducing their barriers to the OECD average. *OECD (2006) Economic policy reforms: going for growth. ** The Norwegian state does, however, own 34% of the shares of the Norwegian bank DnB Nor ASA.
3.4 Direct state intervention in the retail banking sector Other means of state intervention can also have a negative impact on competition. In line with the general trend in the EU, the use of other means of state intervention in this sector has also been decreasing in the EFTA States. 40 See the Commission’s interim report, p. 37.
Page 16 Some state intervention in the banking sector in the EFTA States, however, still remains. Where such state intervention consists of providing financial advantages to certain financial institutions, the state aid provisions of the EEA Agreement come into play. The EFTA Surveillance Authority has the task of supervising the EFTA States’ award of such financial advantages, and has examined several cases in the financial sector since the entry into force of the EEA Agreement. The Authority has examined these cases with the view to ensure that private and public undertakings operate under similar conditions and that there is no over-compensation for public service obligations. 3.4.1 Abolition of unlimited state guarantees in favour of public banks The EFTA Surveillance Authority, through ensuring that unlimited state guarantees in favour of public banks have been removed, has ensured an equal playing field for public and private banks. In Iceland, the government agreed to abolish the system of unlimited state guarantees in favour of the two public banks in 1998.41 These banks have since been privatised. The Authority accepted the Liechtenstein state guarantee to the publicly owned Liechtensteinische Landesbank after Liechtenstein agreed to make the state guarantee limited in time, to limit the scope of the state guarantee and to require payment of a market premium.42 3.4.2 Equal tax treatment The governments of Iceland and Norway, like most of the EU Member States, have created tax preferences for some retail banking products in order to promote saving. Table 3 below shows the sample size gathered by the survey in this area, using data for 2004. Norway has a moderate share of savings accounts with tax preferences compared to the EU25 average. While savings accounts with tax preferences exist in Iceland, such accounts have a very low share of the savings accounts market. No such tax preferences exist in Liechtenstein.
Table 3: Deposits and savings accounts with tax preferences, 2004
Total deposits and savings accounts
Total accounts with tax preferences
Share of accounts with tax preferences
Iceland 461.849 4.276 0.93% Liechtenstein 25.417 0 0.00% Norway 3.053.071 219.873 7.20% EU25 355.400.000 110.200.000 31,0%
41 EFTA Surveillance Authority Decision of 26 July 2000 on the closure of a complaint concerning alleged state aid to two Icelandic banks. 42 EFTA Surveillance Authority Decision of 15 July 2005 to amend the Authority’s decision of 15 December 2004 to propose appropriate measures to the Principality of Liechtenstein regarding a State guarantee in favour of Liechtensteinische Landesbank.
Page 17 3.4.3 Compensation for providing services of general economic interest The EFTA Surveillance Authority has been faced with several cases concerning provision of general economic interests by financial institutions. In 2000, the Authority closed its examination of the framework conditions for the Norwegian State Housing Bank after concluding that the compensation for the Housing Bank for rendering a service of general public interest, i.e. providing loans to individuals for buildings of houses, was based on costs, which were necessary to perform the service. The Authority is currently investigating the Icelandic Housing Fund, which provides a similar service in Iceland. Also in this case, the Authority aims to ensure that the Icelandic Housing Fund will only receive the appropriate compensation for the services of general economic interest, and that there will be no over-compensation. 3.5 Conclusions Competition in retail banking is important in order to ensure an efficient banking industry and should not be viewed as dangerous to the stability of the banking sector. In the EFTA States which have antitrust regulations, the banking sector is fully subject to competition policy. Foreign bank entry on balance tends to enhance consumer welfare and increase competition. In the Nordic countries there has been a trend of integration in the banking sector unlike the majority of deals in the banking sector in the EEA, which are domestic mergers and acquisitions. Differing regulatory framework in EEA States, in particular as concerns consumer protection, reduce market entry in the retail banking sector. The proposal by the Commission for a full harmonisation of the national consumer protection rules should ensure a more level playing-field across the EEA. According to OECD studies, regulation of the banking sector can have a significant impact on output and productivity growth. If countries with restrictive banking regulation reduced their barriers to the OECD average, this could increase economic growth in these countries. The use of other forms of direct state intervention in retail banking has decreased in the EFTA States in line with the general trend in the EU.
Page 18 4 Market structures and concentration The purpose of this chapter is to compare the differences in banking concentration between Iceland and Norway and with the EU-average. To measure the degree of market concentration, the chief measurement will be concentration ratio. However, such ratios must be handled with care. Firstly, most statistics relating to concentration ratios refer to the banking sector as a whole and do not relate to the retail banking sector as such. Furthermore, it should be recalled that the present inquiry is based on a sample of retail banks in Iceland and Norway and is based on proxies for retail banking activity.43 Consequently, it must be emphasised that concentration ratios dealt with in the present chapter are approximations. 4.1 Market definition Product market definition in the banking sector may raise several issues. It is arguable that in a merger review or antitrust context, product markets should be narrowed down to comprise single banking products or product clusters. The purpose of this inquiry is, however, not to define individual product markets but rather to give a picture of retail banking in the EFTA States, using an approach parallel to that employed by the Commission in its interim report. With respect to the geographic market definition, the inquiry will use national markets as its focal point. However, the Authority is mindful of the possibility that in certain instances, geographic markets may need to be narrowed down to regional level. 4.2 Scope of the analysis, data and limitations Due to the sample approach described in Chapter 1.4, the analysis of markets and concentrations has limitations. As the inquiry does not cover 100% of market volume, no exact calculations are possible. Moreover, due to data limitations the choice of the indicators that can be used for the calculation of the market concentration ratios is limited. According to the Commission’s interim report, deposit volume, gross income on current accounts, gross income on retail banking per bank and number of current accounts are the four indicators that can be used for the calculation of concentration ratios.44 Due to data limitations only the volume of deposits can be used for the calculation of national coverage ratios in the present study. For the calculation of the market concentration ratios, the sample coverage level for Iceland and Norway is calculated first, based on the volume of deposits. The national coverage ratios or levels are defined as in-sample deposits of individual consumers plus deposits of non-financial corporations, divided by total non-monetary financial institution deposits. Not all banks provided data on the volume of deposits. In these cases, the data on the deposit volume reported in the bank’s annual report has been used instead. Table 4 contains a summary of the deposits volume coverage levels of the inquiry.
43 See chapter 1.4. 44 Commission´s interim report, p. 45.
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Table 4: National coverage rates for the gross retail income
customer deposits coverage
level Iceland [80-90%] Norway [>90%]
4.3 Concentration at the national level As in the EU financial services sector there has been a consolidation in the EFTA States. And, in contrast to the financial services sector in the EU, the proportion of cross-border consolidation has been considerable. In many ways, we have seen the creation of a Nordic financial service sector in the recent years. In Liechtenstein, the financial service sector has always been interconnected with the Swiss financial service sector. In this subsection, the market shares of the leading three and five banks (CR3 and CR5 respectively) are calculated in order to examine differences in the market structures of the retail banking industry in Iceland and Norway. We use different methodes to estimate market shares. The methods differ according to the indicator on which market shares are calculated. More specifically, the intra sample shares of CR3 and CR5 retail banks are calculated based on the indicators of gross retail income, gross income on current accounts and number of current accounts. Then, these intra sample shares are extrapolated to total market shares using the coverage ratios based on the volume of deposits (calculated at the beginning of section above). Figure 2 presents the market shares of the leading three and five firms based on the total retail income at country level. It can be seen that for the total retail income we get higher concentrations for Norway and Iceland compared to EU15 and EU25 averages.
Figure 2: Concentration ratios: CR3 and CR5.Year 2004 Intra-sample share (total retail income) extrapolated with deposits
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
Iceland Norway EU25 Average EU15 Average
CR3CR5
Note: The EU15 and EU25 Average data have been obtained from page 48 of the European Commission’s “Interim Report II: Current Accounts and Related Services”. This Figure can be compared with Figure 7 of the European Commission’s Interim Report II.
Page 20
The concentration in Iceland and Norway is close to the most concentrated countries in the EU, like Finland, the Netherlands, Belgium and Sweden. The least concentrated countries, with CR3 at or lower than 50%, are Poland, Ireland, Italy, Latvia, Spain and Germany.45 Figure 3 shows the CR3 and CR5 using the gross income from current accounts for the calculation of intra sample shares, extrapolated using the sample coverage ratio based on deposits. For Norway the results are comparable to the concentration ratios of the total retail income.
Figure 3: Concentration ratios: CR3 and CR5. Year 2004 Intra-sample share (current account income) extrapolation with deposits
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
Iceland Norway EU25 Average EU15 Average
CR3CR5
Note: The EU15 and EU25 Average data have been obtained from page 49 of the European Commission’s “Interim Report II: Current Accounts and Related Services”. This Figure can be compared with Figure 8 of the European Commission’s Interim Report II.
Here again, the concentration in Iceland and Norway is close to the most concentrated countries in the EU, like the Netherlands, Belgium and Lithuania. The least concentrated countries, with CR3 at or lower than 50%, are Spain, Ireland, Italy, Germany and Latvia.46 The third and last measure is based on intra-sample share of the number of customers’ current accounts per bank. It is again extrapolated to market size according to the sample coverage ratio estimated with deposit data.
45 Commission’s interim report, p. 48. 46 Commission´s interim report, p. 49.
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Figure 4: Concentration ratios: CR3 and CR5. Year 2004 Intra-sample share (number current accounts) extrapolation with deposits
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
Iceland Norway EU25 Average EU15 Average
CR3CR5
Note: The EU15 and EU25 Average data have been obtained from page 50 of the European Commission’s “Interim Report II: Current Accounts and Related Services”. This Figure can be compared with Figure 9 of the European Commission’s Interim Report II.
The concentration levels of Iceland and Norway are higher than the EU averages and resemble the levels seen in the most concentrated EU Member States, such as Finland, the Netherlands, Lithuania and Sweden. The least concentrated countries, with CR3 at or lower than 50%, are Poland, Latvia, Ireland, Italy, Spain and Germany. In conclusion, it is fair to say that the financial sectors in Iceland and Norway are among the most concentrated in the EEA. 4.4 Concentration at the regional level The EFTA Surveillance Authority also looked into regional concentration patterns of retail banking. For this purpose, the banks which were included in the inquiry, provided information regarding the regional distribution of the number of current accounts. This documentation was, however, not of a quality which enabled the Authority to make a proper analysis of concentration on a regional level in any of the EFTA States. The Authority has, however, found indications on regional markets that the concentration levels may differ significantly from the national figures. This suggests that local branch networks are important and that national markets may be too large for analysing competition on main retail banking products. 4.5 Conclusions It is only possible to present a rough picture of concentration levels in Iceland and Norway, due to the data and method limitations mentioned in this chapter. However, the results of different measurements all indicate that the retail financial sectors in Iceland and Norway are among the most concentrated in the EEA.
Page 22 5 Financial performance of retail banks This section examines the financial performance of the banking sector in Norway and Iceland. Firstly, we investigate the long term trend in the profitability of the banks using OECD time-series data. Next, we extend our analysis by using market data provided by the banks to present the differences in the financial performance of the retail banking sector in each country. 5.1 Long-term trends in the profitability of the EU banking sector Appendix I present the ratio of pre-tax profits to gross banking income between 1981 and 2003, the share of banks’ operating profits that was paid in tax between 1981 and 2003 and the ratio of pre-tax profits to banks’ assets between 1992 and 2003. The OECD’s data covers only Norway and Iceland and has the same advantages and disadvantages as the analysis of OECD data as mentioned in the Commission’s interim report.47 Table 1 in Appendix I shows the ratio of pre-tax profits to gross banking income48
in Iceland and Norway from 1981 to 2003. In Iceland, there has been a circular trend with negative results in 1984 and 1992. However, the trend has been rising in recent years. In Norway, one can observe negative results around the banking crises in the late ‘80s and early ’90s, but stable positive results in the last ten years. In 2003, the ratio of pre-tax profits to gross banking income in Iceland and Norway was 31 and 26 per cent, respectively, which is in the middle or at the low end of the interval from 20 to 40 per cent found in the EU25.49
Table 2 in Appendix I reports the share of banks’ operating profits that was paid in tax in Iceland and Norway from 1981 to 2003. For both countries, one can see a fluctuation in financial income from year to year, with negative results in Iceland in 1984 and 1992 and in Norway around the banking crises, which can indicate a business cycle in the retail banking market. But other than that, there are no stable results to be seen. Table 3 in Appendix I shows the ratio of pre-tax profits to banks’ assets in Iceland and Norway from 1992 to 2001. In Iceland, there has been a rising trend after 1992, while in Norway there has been a positive but unstable trend after 1992. In 2001 the banks in Iceland and Norway report rates of return on assets of 0.62 and 0.91 per cent. This is within the interval found in EU25 (0.5 to 1.5 per cent). 5.2 Market data on retail banks’ financial performance The Authority has surveyed banks operating in Iceland and Norway with significant retail operations in the respective States. The survey mirrors the survey done by the
47 Commission’s interim report, p. 58. 48 Gross banking income is the sum of banks’ net interest and net non-interest income from all banking activity. 49 See for comparison the Commission’s interim report, p. 59.
Page 23 Commission, asking the banks to provide data to describe their financial performance. All financial data was requested for the years 2001 to 2004.50 Examination of such market data is subject to several caveats, however. Notably, the data is likely to be influenced by one or more of the following factors:
• Methodological limitations on the reliability of profitability data for the retail banking sector. The most obvious question concerns different definitions of ‘retail banking’ across firms and countries. The Authority has attempted to control this by requesting income data across a common list of ‘retail’ products.
• Definitions of income and profitability may differ between banks and countries. However, the Commission has assessed the extent and significance of such differences within the EU25 and found that in practice such definitional differences are limited and do not undermine the validity of the income and profitability data.
• Different models for distribution of retail banking services will imply different cost and pricing structures. Countries where local branch banking is still clearly the dominant model will tend to be more costly, whereas distribution models based on greater use of phone and internet banking should have a lower cost base.
• Banking sector income will be partly determined by income levels across countries and regions. For example, countries where GDP per capita is lower typically spend a larger proportion of income on retail banking services.51
• In some instances, the number of observations in the present inquiry was so low that it was hard to draw conclusions from them.
5.3 Gross income from retail banking activity In this section, banks’ gross retail income by product line is analysed. Table 5 summarizes the gross income share per product line for personal consumers. The table is based on a balanced sample, i.e. here we only use information from banks which provide information from all five product lines. The EFTA average and the EFTA weighted average are also reported. The EFTA average is calculated using the simple average over the banks without taking into account their origin. Moreover, the EFTA weighted average is obtained using the country-level averages weighted by each country’s population.
Table 5: Balanced gross income share per consumer product line, 2004, weighted average
Current
accounts
Deposits and
savings Consumer
loans MortgagesCredit Cards Total
Iceland 37.68% 0.00% 44.91% 13.67% 3.74% 100.00%Norway 5.26% 9.03% 5.49% 75.03% 5.19% 100.00%Average 7.20% 8.49% 7.84% 71.37% 5.10% 100.00%EU15 Average 26.50% 15.94% 17.05% 32.85% 7.66% 100.00%EU25 Average 27.82% 17.16% 17.66% 30.06% 7.25% 100.00%
Note: The EU15 and EU25 Average data has been obtained from Table 16 on page 64 of the European Commission’s “Interim Report II: Current Accounts and Related Services”.
In Norway, mortgages appear as the most significant source of income for retail banks, generating about 75 per cent of total gross income from personal customers. This
50 Commission’s interim report, p. 60. 51 Commission’s interim repost p. 61.
Page 24 corresponds to the findings in the EU25, although the numbers are significantly higher than the average in EU25 (more than 40 percentage points) and higher than the highest observation in any of the EU Member States (about 60 per cent in Portugal). All other sources of income seem less important in Norway than in both EU25 and most EU Member States. In Iceland, current accounts and consumer loans are the main sources of bank retail gross income, while mortgages play a relatively minor part. It should be borne in mind, however, that the Icelandic home loan market has traditionally been dominated by the state-owned Housing Loan Fund, and that commercial banks only made any significant inroads into this market in mid-2004. It is therefore to be expected that the importance of mortgages has risen as a source of income for the Icelandic banks subsequent to the surveyed period. In Table 6, we compare the share of banks’ gross retail income from SME clients for the different product lines in 2004, using balanced data. Due to data problems, only results for Norway are presented.
Table 6: Balanced gross income share by SME product line, 2004, weighted average
SME current account
SME term loans
SME credit lines
SME leasing Total
Norway 17.50% 58.10% 20.28% 4.12% 100.00% EU15 Average 37.79% 40.43% 17.17% 4.61% 100.00% EU25 Average 42.03% 37.82% 15.96% 4.20% 100.00%
Note: The EU15 and EU25 Average data has been obtained from Table 17 on page 66 of the European Commission’s “Interim Report II: Current Accounts and Related Services”.
In Norway, term loans appear to be the most important source of banks’ gross income. This corresponds to the Commission’s findings in Sweden and Finland (as well as Germany and the Netherlands), where significantly more than half of their income was generated from fixed term loans to SMEs. Table 7 shows the average gross retail income per customer by product line in Norway. This value is obtained by dividing the gross income of each of the product lines by its corresponding number of customers.
Table 7: Gross income per customer per consumer product line, €, 2004, weighted average
Current
accounts
Deposits and
savings Consumer
loans Mortgages Credit Cards
Norway 50.3 31.6 766.3 1330.8 119.1EU15 Average 133 69 421 1126 64EU25 Average 119 64 367 1015 65
Note: The EU15 and EU25 Average data has been obtained from Table 19 on page 69 of the European Commission’s “Interim Report II: Current Accounts and Related Services”.
Regarding current accounts and deposits and savings, the reported income per customer in Norway is less than half of the average in EU25 and comparable to EU Member States reporting low income per customer. Regarding consumer loans, the reported income in Norway is more than double the average in EU25 and above the highest reported value in EU25 (705 € in the Netherlands). And as expected, the gross income per customer is higher for mortgages compared to
Page 25 other product lines. The reported income in Norway is more than 30 per cent higher than the average in EU25. Regarding credit cards, the banks in Norway report customer incomes which are almost double the EU25 average and comparable to EU Member States reporting high income per customer. Table 8 shows the gross average income per customer for SME current accounts and term loans in Norway. Table 8: Gross income per customer by SME product line, €, 2004, weighted average
SME current account
SME term loans
Norway 660 6987 EU15 Average 638 2331 EU25 Average 588 2219
Note: The EU15 and EU25 Average data has been obtained from Table 20 of the European Commission’s “Interim Report II: Current Accounts and Related Services”.
In Norway gross average income per SME current account customer is a bit above the EU25 average, while average income per SME term loans customer is more than three times the EU25 average. The average income per SME term loans customer in Norway is also higher than the highest reported value in the EU25 (5.730 € in Greece). 5.4 Comparison of EFTA retail banks’ profitability and costs In this section, we examine the profitability and the costs of retail banks in Iceland and Norway. Moreover, we analyse the relationship between bank size and bank financial performance. Table 9 shows weighted country averages of the ratio of pre-tax profit to banks’ gross retail income from 2001 to 2004. In 2004, compared to previous years, the bank profitability ratio in Norway increased with almost 40 per cent, while in Iceland it dropped by half compared to the results two years earlier.52
Table 9: Profitability ratio, 2001-2004, weighted average 2001 2002 2003 2004 Iceland 23.80% 23.70% 17.70% 12.30% Norway 30.80% 28.20% 28.40% 39.50% Average 30.39% 27.93% 27.76% 37.88% EU15 Average 23.3% 25.1% 28.9% EU25 Average 21.6% 24.5% 28.8%
Note: The EU15 and EU25 Average data has been obtained from Table 16 on page 64 of the European Commission’s “Interim Report II: Current Accounts and Related Services”.
Table 9 shows that profitability ratios in Norway were systematically higher than the EU25 average over the period, while Iceland had a comparable profitability ratio in 2002, but a significantly lower average than the EU25 average in 2003 to 2004.
52 The period of observation used in this section is clearly too short to cover a whole business cycle, and can therefore not be used to draw conclusions about longer-term profitability.
Page 26 Table 10 shows the cost-income ratios, which is the country level weighted average of the ratio of total operating costs as a share of banks’ gross retail income. The figure shows that the value of the ratio over the four-year period stayed relatively stable in Iceland and Norway.
Table 10: Cost income ratio, 2001-2004, weighted average 2001 2002 2003 2004 Iceland 57.20% 54.50% 54.70% 55.20% Norway 59.40% 63.00% 63.10% 56.90% Average 59.27% 62.49% 62.60% 56.80% EU15 Average 64.2% 65.9% 65.8% EU25 Average 65.8% 66.2% 62.6%
Note: The EU15 and EU25 Average data has been obtained from Table 24 on page 75 of the European Commission’s “Interim Report II: Current Accounts and Related Services”.
The cost income ratios in Iceland and Norway are below the EU25 average, and seem to be relatively stable. Table 9 shows a falling profitability ratio for Iceland in 2003 and 2004, while table 10 shows a stable cost income ratio. EFTA Surveillance Authority would invite market participants in Iceland to comment on this controversy. 5.5 Conclusions Using OECD data, the inquiry has examined long-term trends in the profitability of the retail banking sector in Norway and Iceland. Based on operating profits as a share of gross income from all banking activity, banks in Norway and Iceland have become more profitable since the 1980s and early 1990s. In Norway, the breaking point was the banking crises in the early 1990s. The profitability of retail banking in Norway was significantly higher than the EU25 average over the period, while Iceland had a comparable profitability ratio in 2002, but has dropped significantly below EU25 average the subsequent years. In Norway, mortgages appear as the most significant source of income for retail banks, generating about 75 per cent of total gross income from personal customers. The banks report income per customer of 1330.8 € from mortgage activity. In Iceland, mortgages appear to have been less important as a source of income than in Norway during the surveyed period. This may partly be attributed to the fact that the Icelandic banks have only very recently started to offer mortgages to any significant extent. Based on operating costs as a share of total retail income, the inquiry found the cost income ratios in Norway and Iceland to be below the EU25 average.
Page 27 6 Selected comparisons of prices and account use 6.1 Introduction The degree of competition in the retail banking sector can be measured through the price evolution and prices for retail products set by the banks. In this section, account usage as well as the prices set by banks for payment services will be examined. Banks can offer different types of payment instruments simultaneously to their customers. This analysis is useful firstly to describe the general trends in banks’ practices. Secondly, the analysis may help to establish whether banks demonstrate any anticompetitive behaviour that could deter customers from choosing the most convenient and efficient means of payments. Factors such as interchange fees, opaque pricing, price bundling and, in general, cross-subsidisation may in some cases impede the move towards more efficient means of payment. Comparing prices across banks is difficult and could lead to misleading conclusions. For example, banks can opt for charging customers a “package” fee, which includes a number of services, or may decide to charge customers per individual service. There are also less transparent ways to cover cost of payment services, such as different interest rate spreads, float53 and value dating which are practiced differently across EEA states. Because of the inherent difficulties in adjusting for differences in product features, this chapter does not consider another important dimension of banks’ competitive strategy: the supply of products, including the variety of products offered. 6.2 The use of current accounts to make payments The following analysis reviews the use of current accounts to make payments in the EFTA States and presents some initial comparisons of banks’ pricing, based on data from the Authority’s market survey. In the Authority’s questionnaire, banks were asked to indicate the number of payment transactions per current account for a range of services (namely credit transfer (including standing orders), direct debit, and automated teller machine (ATM) withdrawals). POS (Point of sale) transactions were excluded. Banks were also requested to report total income coming from account management fees and fees charged for specific payment transactions. The provided data covers the average number of transactions per current account. No information is available on the number of transactions per customer. An overview of the transactions made per current account in 2004 is given in Figure 5.
53 In Norway, float revenues connected to payment transfers are prohibited by law. See Lov om finansavtaler og finansoppdrag (finansavtaleloven) § 27.
Page 28
Figure 5: Number of selected payment transactions per current account. Simple Average. Year 2004
0
10
20
30
40
50
60
70
Iceland Norway EU25 Average
cheques cashedcredit transferdirect debitATM withdrawals
Note: The EU25 Average data has been obtained from pages 86 and 87 of the European Commission’s “Interim Report II: Current Accounts and Related Services”.
The average number of transactions per current account in Norway and Iceland are around 49 and 16 transactions per year respectively (excluding POS transactions and withdrawal of cash at the counter). This strengthens the findings of the Commission54 that the number of transactions per account varies widely across countries. Both Norway and Iceland are, however, below the average in EU25. This can be explained by different payment habits as well as by differences in pricing. In Norway, ATM withdrawals, direct debits and credit transfers, represent the vast majority of payment transactions per account, while cheques are seldom used any more. In Iceland, ATM withdrawals account for over half of payment transactions per account, with credit transfers and direct debits accounting for the rest. Cheque use is almost nonexistent in Iceland nowadays. The overall number of transactions per account is significantly lower than both in Norway and across the EU25. In order to compare in more detail the relative use of current accounts to make the different transaction types, Figure 6 illustrates the average number of transactions per current account by type of transaction as reported by the sampled banks.
54 See the Commission’s interim report page 86.
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Figure 6: Average number of transactions on consumer current account, 2004
Nr of ATM withdrawals per account. Simple avg. Year 2004.
0
5
10
15
20
25
Iceland Norway
ATM withdrawals EU25 Average
Nr of direct debits per account. Simple avg. Year 2004.
0
2
4
6
8
10
12
14
16
18
20
Iceland Norway
direct debit EU25 Average
Nr of credit transfer per account. Simple
avg. Year 2004.
0
5
10
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20
25
30
35
Iceland Norway
credit transfer EU25 Average
Nr of cheques cashed per account. Simple avg. Year 2004.
0
1
2
3
4
5
6
7
Iceland Norway
cheques cashed EU25 Average
Note: The EU25 Average data has been obtained from pages 86 and 87 of the European Commission’s “Interim Report II: Current Accounts and Related Services”.
In its interim report, the Commission found a large degree of variability between EU Member States as regards the number of transactions per account. The findings for Iceland and Norway further underscore this high variability across the EEA, which reflects different use and pricing of payment instruments in different EEA countries.55 Interestingly, the average annual numbers of transactions per account per transaction type vary even between Norway and Iceland. Also of note is the fact that for most of the transaction types surveyed, both Iceland and Norway are significantly below the EU25 average for number of transactions.
55 Commission´s interim report, p. 87.
Page 30 6.3 Banks’ income: account management fees and fees for selected payments
transactions This section presents estimates of banks’ income earned for account management and for selected payment transactions. Banks apply various pricing formulae for payment services, separately or in combination with other services. These formulae include explicit pricing for a single product, in the form of transaction related fees; fees for a package of products; charges for currency conversion; and other elements. In addition, there are some less visible prices – or costs for customers - including value dating (or ‘float’) practices and cross subsidisation with other products. In this sense Norway poses an interesting example, as float revenues connected to payment transfer are prohibited by law56, and the government promotes a policy of direct charging of payment transaction services57. The promotion of direct pricing is done to promote an effective payment system which gives the customer the opportunity to choose the most effective method of payment transaction at all times. In figure 7, the banks’ income on account management and the fees charged for payment transactions are compared. The results are an indication of the consumers’ costs. For the calculation of the fee charged for payment transactions, a weighted average of a selected group of payment transaction types (excluding ATM and POS transactions) is used, applying the relative importance of each type of transaction at a bank’s level as weight.
Figure 7: Estimated income on current account management fees and on selected payment transactions (Weighted average. Year 2004)
Iceland
Norway EU avg. € 16
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Note: The EU25 Average data has been obtained from pages 86 and 87 of the European Commission’s “Interim Report II: Current Accounts and Related Services”.
56 See Lov om finansavtaler og finansoppdrag (finansavtaleloven) no. 1999-06-25, § 27. 57 See for example ENGE, A and ØWRE, G. (2006): Tilbakeblikk på innføringen av priser i norsk betalingsformidling, available at: http://www.norges-bank.no/upload/import/publikasjoner/penger_og_kreditt/2006-03/enge.pdf
Page 31 As can be observed, the pricing strategies followed by surveyed banks vary considerably across the EFTA States. Also, the pricing strategies in the EFTA States deviate from the EU average. The evidence presented above suggests that a simple analysis on the basis of individual prices for individual payment services could be misleading. In reality, some payment services that banks appear to offer cheaply or at no cost may be charged in a different way, for example through higher account management fees. 6.4 Conclusions The findings concerning average number of transactions in Iceland and Norway further underscore the high degree of variability in payment behaviour across the EEA, which is no doubt influenced by different pricing policies. There is a high variation in prices for payment services across the EFTA and EU States. The large dispersion in prices suggests that greater cross-border competition could bring down prices, particularly in those countries where payments prices are still relatively high.
Page 32 7 Customer mobility and choice The possibility for customers to change banks is essential in order to help realise the benefits of a competitive banking market. Any obstacles that reduce consumers’ ability to switch banks will correspondingly reduce the competitive pressure on banks. In this chapter, the EFTA Surveillance Authority examines customer mobility and choice in the retail banking market. 7.1 Factors reducing customer mobility in retail banking Retail banks typically compete on a range of product characteristics such as price (interest rates and fees), location, brand name (trust), selection and quality of services. When customers consider whether better offers are available in the retail banking market, they weigh all these characteristics in order to decide which bank has the most attractive offer. However, before deciding to switch their business to this bank, the customer also has to decide whether the benefits of such a move outweigh the costs. In doing so, the customer will compare the financial and other benefits of moving with the costs of switching banks.58
Switching costs are costs that existing customers have to incur when they change their suppliers. Following the Commission’s interim report, this inquiry will look closer at five main factors that reduce customer mobility in retail banking:
1. Administrative burden: switching financial service providers is sometimes perceived as a complex administrative operation, requiring time and effort, and may risk disruption to customers’ financial affairs.
2. Information asymmetry and low price transparency: the information provided to retail banking customers for current accounts and other products may be inadequate or complex, making it difficult to compare banks’ prices and products. As the bank with an established relationship with a particular customer will have a better knowledge of the financial history of that customer, and therefore has a better understanding of the credit risk connected to that particular customer, this bank will be in a better position to give more precise pricing than any other bank.
3. Cross-selling and bundling of banking products: Cross-selling is the strategy to sell additional products or services to existing customers. Bundling is selling two or more products together in a package. Cross-selling and bundling may reduce price transparency and deter potential new retail banks from entering the market. Cross-selling and bundling may also constitute an abuse of a dominant position.
4. Customer preferences and choice: Customers may choose to stay with a bank, even if they have a better offer elsewhere, e.g. because of trust etc.
5. Closing charges: For several reasons banks might charge customers for terminating services. These closing charges reduce the mobility of customers.
These five factors are discussed in more detail in the Commission’s interim report.59 In this chapter, some evidence on their contribution to the overall level of switching costs in the retail banking industry will be discussed. High levels of switching costs in the retail 58 Commission’s interim report, p. 91. 59 Commission’s interim report, p. 91-98.
Page 33 banking industry may result in increased bank market power and enable banks to extract extra rent from their customers. High switching costs may also constitute barriers to entry, as they make it harder for new entrants to attract customers and hence discourage new market entry. Finally, high switching costs may discourage product innovation, as customers would be reluctant to switch to new products and services. Low customer mobility need not imply the existence of high switching costs. Survey evidence consistently indicates that the main reason for not switching service providers is that customers are generally satisfied with their current bank. 7.2 Analysis of customer mobility in retail banking across the EEA In this section, the Authority will examine customer mobility in the retail banking industry across the EFTA States, and the extent of cross-selling and tying in retail banking. 7.2.1 Customer mobility in the retail banking industry across the EEA In the following, the mobility for the current account market will be examined. Mobility for consumers and SMEs will be looked at separately. Two main measures for mobility are applied. The first one is referred to as “churn” and tries to capture the number of customers who switch banks within a year. It is calculated as the ratio of the sum of the current accounts opened at the beginning of a year and the current accounts closed in the same year, divided by twice the total number of accounts at the beginning of the year. The second measure captures the length of the existing banking relationships and is called “longevity”. Both measures described above are influenced by two factors other than mobility, the general growth rate of the retail banking market, and natural demographic changes in the population. These demographic changes include, for consumers, the ratio of younger people entering the market and the mortality among older people; and for SMEs, the rate of formation of new firms and the departure of established firms relative to the total stock of SMEs. Based on the results of the inquiry, the churn measure will be controlled for the industry growth rates in each country. However, some remaining differences in demography might still influence country comparison. In the case of longevity, such correction was not possible. 7.2.2 Customer churn Table 11 contains the country-level weighted average of churn per country. For the country averages, the banks’ number of current accounts at the beginning of the period has been used as weight. Also included are the EFTA averages across all banks and the EFTA weighted average using the population as weight for the different country-level averages.
Table 11: Customer mobility (Churn), Weighted average, 2002-2005, Consumers 2002 2003 2004 2005 Average Iceland 5.60% 7.10% 9.50% 13.50% 9.00% Norway 7.10% 8.00% 6.40% 7.60% 7.30% Average 7.01% 7.95% 6.59% 7.95% 7.40% EU15 Average 9.04% 9.18% 8.85% 8.72% 8.91% EU25 Average 9.85% 9.94% 9.30% 9.11% 9.40%
Note: The EU15 and EU25 Average data has been obtained from Table 34 of the European Commission’s “Interim Report II: Current Accounts and Related Services”.
Page 34 As these results are not corrected for the market growth, we will use the growth rate to control for this effect. The growth rate is defined as the difference between the number of accounts at the end and the beginning of the year divided by the number of current accounts at the beginning of the period.
Table 12: Customer growth rate, weighted average, 2002-2005, Consumer 2002 2003 2004 2005 Average
Iceland 1.50% 2.80% 5.10% 3.90% 3.40% Norway 2.90% 1.10% 2.20% 2.20% 2.00% Average 2.82% 1.20% 2.37% 2.30% 2.08%
EU15 Average 2.58% 1.85% 1.41% 2.08% 1.94% EU25 Average 3.40% 2.48% 1.86% 2.42% 2.41%
Note: The EU15 and EU25 Average data have been obtained from Table 35 of the European Commission’s “Interim Report II: Current Accounts and Related Services”.
The values corrected for market growth for consumers and SME are summarized in Table 13.
Table 13: Churn, weighted average, Year 2005, Consumers and SME churn before control growth rate churn after control consumer SME consumer SME consumer SME
Iceland 13.50% 6.60% 3.90% 0.90% 11.55% 6.15% Norway 7.60% 15.10% 2.20% 3.80% 6.50% 13.20%Average 7.95% 14.59% 2.30% 3.63% 6.80% 12.78%
EU15 Average 8.72% 12.91% 2.08% 1.42% 7.55% 12.21%EU25 Average 9.11% 13.49% 2.42% 1.72% 7.78% 12.63%
Note: The EU15 and EU25 Average data has been obtained from Table 36 on page 102 of the European Commission’s “Interim Report II: Current Accounts and Related Services”.
Unlike in most of the EU Member States, correcting the churn for growth rates in Iceland and Norway have a somewhat more visible impact on the churn numbers. In Norway and Iceland, the mobility must be considered as moderate compared to the EU average, especially considering consumer customers in Norway and SME customers in Iceland. In Norway, as in most EU countries, SMEs have higher churn ratios than consumers. This may simply be due to shorter SME lifetimes. However, it may also suggest that SMEs, devote greater resources than consumers to finding the right banking arrangements, and are hence more mobile customers for retail banking services. In Iceland, however, the consumers have a higher churn than SMEs. In addition, the churn measure for SMEs and consumers in Iceland and Norway does not seem to follow a similar pattern, like in the EU countries. 7.2.3 Longevity of the banking relationship As a second measure, the average length of the existing relationships were measured. As a proxy, the Authority used each bank’s reported number of accounts that have been active for a given range of years (e.g. less than one year, between 1 and 5 years, etc.). The weight used to calculate the longevity is the median value of each range. Table 14 and figure 8 illustrate the differences of average customer mobility (longevity) between Iceland and Norway.
Page 35
Table 14: Customer mobility (longevity) Weighted Average, Year 2005 consumer SME Iceland 7.65 4.87Norway 9.94 7.94Average 9.81 7.75EU15 Average 10.40 8.56EU25 Average 9.74 7.93
Note: The EU15 and EU25 Average data has been obtained from Table 37 on page 104 of the European Commission’s “Interim Report II: Current Accounts and Related Services”.
Figure 8: Customer mobility (longevity), Weighted average. Year 2005
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Note: The EU15 and EU25 Average data has been obtained from Table 37 of the European Commission’s “Interim Report II: Current Accounts and Related Services”.
On average, Norwegian consumers maintain their current account with the same bank for around ten years. This mirrors the average the Commission found for the EU Member States, but is less than the other Nordic countries. In Iceland, the average longevity is even shorter. The longevity for SMEs in Iceland is among the shortest in EEA. As in the EU, the average age of current accounts for SMEs is lower than for consumers. On average, Norwegian SMEs maintain their current account with the same bank for around seven years. This is a bit shorter than the average the Commission found for the EU Member States, and significantly shorter than in the other Nordic countries. The longevity for SMEs in Iceland is among the shortest in EEA. Again, this pattern may reflect the shorter lifetimes of SMEs compared to consumers but may also indicate the greater potential for SMEs to overcome the costs of switching banks. Figure 9 below illustrates the distribution of active current accounts in age brackets for the length of the consumer’s relationship. In Iceland and Norway 40% of current account relationships are longer than 10 years old, about the same as in EU25.
Page 36
Figure 9: Age of current accounts, Year 2005, Consumers
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7.2.4 The extent of cross-selling in retail banking This section analyses on a country-level the cross-selling ratios. Cross-selling is measured as the average number of products that customers purchasing a specific product (hook product) are purchasing from the same bank. This measure is calculated in reference to three hook products: current accounts, deposits and mortgages. Table 15 below shows the relative cross-selling ratios for each consumer banking product. The country-level averages are averages of all banks within a country using the number of hook products as weight.
Table 15: Cross-selling ratio, weighted average, Year 2005, Consumers
Hook product: Current
accounts
Hook product: Deposits accounts
Hook product:
MortgagesAll hook products
Iceland 2.65 1.97 4.04 2.29 Norway 2.15 2.22 3.46 2.33 Average 2.18 2.20 3.50 2.33 EU15 Average 2.24 1.86 3.07 2.07 EU25 Average 2.14 1.81 2.97 1.99
Note: The EU15 and EU25 Average data has been obtained from Table 40 on page 106 of the European Commission’s “Interim Report II: Current Accounts and Related Services”.
In Iceland and Norway, the cross-selling ratio is highest for mortgages, indicating that mainly customers who have a mortgage at a specific bank are willing or obligated to purchase other products from the same bank. This is consistent with the Commission’s findings, but this tendency is clearer in Iceland and Norway than in the EU. The Commission offers two possible explanations for this concentration of banking activities with a single supplier: firstly, mortgage customers are likely to be long-term customers and during this relationship they may purchase more services; and secondly, tying by banks (discussed below) may force the customers to purchase a product (e.g. a current
Page 37 account) which they would not otherwise have bought, and which may tie-in the customer further to their relationship with the bank. The evidence indicates that current accounts are by far the most common product consumed jointly with mortgages. Deposit and current accounts have the lowest cross-selling ratios, possibly because these products are not easily tied to other types of accounts, and banks compete more effectively on interest rates, targeting each other’s customers. Figure 10 shows the products that are most likely to be sold to a customer together with a mortgage in Norway and Iceland.
Figure 10: Mortgage cross-selling, Year 2005, Consumers
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Deposit andsavings accountsCurrent accounts
Table 16 provides cross-selling ratios for the SME customers in 2005. In both Norway and Iceland, loans are an important product that SME clients purchase, while current accounts and credit lines are much less important as hook products in Norway than in the EU Member States. In Iceland, both current accounts, loans and credit lines have a higher cross-selling ratio than the average in EU25.
Table 16: Cross-selling ratio. Weighted average, Year 2005, SMEs
Hook product: Current
accounts
Hook product: Loans
Hook product: Credit lines
All hook products
Iceland 2.26 3.03 3.39 2.63 Norway 1.64 2.72 2.05 1.84 Average 1.68 2.74 2.13 1.89 EU15 Average 2.15 2.88 3.12 2.42 EU25 Average 2.02 2.81 3.03 2.27
Note: The EU15 and EU25 Average data has been obtained from Table 42 on page 108 of the European Commission’s “Interim Report II: Current Accounts and Related Services”.
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7.2.5 The extent of banks’ practice of tying products The levels of cross-selling observed above can be due both to the customer initiative to purchase additional products from the same bank, or due to the supplier requiring the customer to buy a package of more than one product. In retail banking, competition is apparently stronger in certain products (mortgage, loans, credit cards) and banks often require a customer who buys one of these products to purchase other, arguably less competitive products. To the extent that this tying is widespread, competition could be harmed. As mentioned before, the level of cross-selling can be due to the choice of the customer. However, it can also be due to the supplier requiring the customer to buy one product in order to purchase another. The Authority asked banks to report data on whether cross- selling is obligated or not. Table 17 shows the percentages of tying for different products. The weighted average is calculated using country-level percentages weighted by the corresponding country population.
Table 17: Tying, percentage of tying, Year 2005. Customers
Mortgages+ current accounts60
Mortgages+ salary into current account61
Mortgage+ life insurance62
Loans+ current accounts63
Loans + salary into current accounts64
Iceland 67% 67% 0% 33% 20%Norway 17% 13% 0% 33% 22%Average 20% 16% 0% 33% 22%EU15 Average 43% 13% 6% 41% 12%EU25 Average 47% 12% 8% 43% 12%
Note: The EU15 and EU25 Average data has been obtained from Table 43 on page 109 of the European Commission’s “Interim Report II: Current Accounts and Related Services”.
In Iceland, tying is rather common between mortgages and current accounts (67%), and mortgages and salary into current account (67%) in the consumer market. This is substantially higher than the average within EU. In Norway, tying appears to be on average with, or lower than, EU15. The exception is loans and salary into current accounts (22%). Table 18 shows the percentages of tying for different products in the SME market. The weighted average is calculated using country-level percentages weighted by the corresponding country population.
60 Percentage of banks requiring mortgages customers to open a current account 61 Percentage of banks requiring mortgages customers to pay their salary into this current account 62 Percentage of banks requiring mortgages customers to take out a life insurance policy through that bank 63 Percentage of banks requiring loan customers to open a current account 64 Percentage of banks requiring loan customers to have their salary paid into this current account
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Table 18: Tying, percentage of tying, Year 2005, SMEs
Loans+ current accounts
Loans + Invoices to current accounts
Iceland 60% 25%Norway 29% 0%Average 30% 1%EU15 Average 51% 10%EU25 Average 58% 13%
Note: The EU25 Average data has been obtained from Table 44 on page 110 of the European Commission’s “Interim Report II: Current Accounts and Related Services”.
In Iceland, tying is rather common between loans and current accounts (60%), and loans and invoices to current accounts (25%). This is rather high compared to EU15. In Norway, tying appears to be lower than in EU25. 7.3 Possible measures to reduce obstacles to customer mobility and
strengthen competition In the present chapter, the EFTA Surveillance Authority has shown that the customer mobility in Norway and Iceland may be lower than one may have hoped for. The concluding section of this chapter looks at possible measures which could help increase customer mobility and thereby strengthen competition. The measures considered here refer to the five main factors that reduce customer mobility identified above:
1. Administrative burden 2. Information asymmetry and low price transparency 3. Cross-selling and tying of banking products 4. Customer preferences and choice 5. Closing charges
7.3.1 Administrative burden Switching bank accounts implies transactional costs, like filling in forms, transferring direct debits and payment orders, informing employers or customers of new bank details, etc. Transition between accounts also creates potential risks since payments could fail to be made or received. This administrative burden might be reduced if switching regulations, which would require banks to use certain procedures and deadlines when transferring a customer’s account details to a new bank, are provided. In addition, switching codes between banks may be delivered through industry self-regulation. In Norway, the Norwegian Financial Services Association (FNH) and the Norwegian Saving Bank Association are in the process of developing a Switching code which will set up a binding set of rules between banks from 1 January 2008. The target of the Switching code is to reduce the administrative burden on customers when switching banks. The code
Page 40 is a result of a working group appointed by the Financial Supervisory Authority of Norway in the summer of 2007.65
In addition to the adoption of switching codes, consideration should also be given to how to raise customer awareness of such switching arrangements, and ensuring that procedures are in place for reviewing the content of the arrangements and handling complaints. The EFTA Surveillance Authority is keen to hear the views of market participants on whether there is a case for considering switching arrangements in retail banking, and whether they have had a beneficial impact thus far. 7.3.2 Information asymmetry and low price transparency Information asymmetries reduce customer mobility in retail banking markets in two ways. Firstly, comparing complex prices across providers may make it difficult for customers to weigh the offer provided by the current bank against others in the market. Secondly, it may be difficult for banks to give the customer an offer which may lead the customer to switch, as the present bank connections have more information about customer specific risks and are therefore, in a better place to price the services requested. Several measures have been put forward to amend the first issue. Providing transparent comparable information ex ante on prices of banking products would enable customers to quickly and easily compare offers between several providers. One example of this is the Norwegian government’s plan for an internet site with information on financial products and prices (finansportalen.no).66 This may also increase consumers’ price awareness in connection with retail banking products. Another possibility could be to require banks to disclose prices and charges applied ex post for particular products. This may increase transparency and consumers’ price awareness.67 To relieve the second issue, i.e. the information asymmetry faced by a bank seeking a new customer, the availability of information from credit registers where banks share customer data may help. In the absence of effective solutions of this type, other solutions in the form of a portable credit record or credit history, may solve the problem.68 The EFTA Surveillance Authority is keen to hear the views of market participants on the appropriate tools to address information asymmetry and price transparency – particularly for consumers – in the retail banking industry. 7.3.3 Cross-selling and tying of banking products Banks still cross-sell widely to customers throughout Iceland, and to some extent in Norway, and customers still have strong incentives to buy more products from their current bank. Tying is also practiced, to a differing degree, in some markets.
65 See http://www.regjeringen.no/upload/FIN/fma/rapport_kontonummerportabilitet.pdf 66See http://forbrukerportalen.no/Artikler/2007/finansportalen_no_beslutningsgrunnlag_for_videre_utvikling 67 This has been done in Belgium, see the Commission’s interim report p. 118. 68 Commission’s interim report, p. 118.
Page 41 The EFTA Surveillance Authority is keen to have the views of stakeholders during the public consultation on the potential competition problems that may arise from product tying. 7.3.4 Closing charges Closing charges for retail banking services raise two separate issues. Firstly, there is a question about whether it is appropriate for banks to levy closing charges on particular products. The second issue raised by closing charges where they are in place is, whether such charges are set at an appropriate level. The Authority has not found any evidence of closing charges in Iceland, but in Norway banks, on average, charge consumers € 3.7 and SMEs € 4.7 for account closure (simple average). The EFTA Surveillance Authority is keen to hear the views of market participants on closing charges and on the practice in EFTA States. 7.4 Conclusions The inquiry has examined five factors that may reduce customer mobility in the retail banking market: administrative burden, information asymmetry and price transparency, cross-selling and bundling of banking products, customer preferences and choice, and closing charges. The analysis of data on customer mobility enables some interesting preliminary findings: - Customer mobility in retail banking appears fairly low and banking relationships are long. Consumers hold their current accounts with the same bank for an average of 9.94 years in Norway and 7.94 years in Iceland. For SMEs the corresponding figures are compared to 7.94 years in Norway and 4.87 years in Iceland. - In both Norway and Iceland, the cross-selling ratio is highest for mortgages, indicating that mainly customers who have a mortgage at a specific bank are willing or obligated to purchase other products from the same bank. - In Iceland, making use of tying is a fairly common practice (between mortgages and current accounts (67%), and mortgages and salary into current account (67%) in the consumer market).
Page 42 8 Retail payments – Clearing arrangement and interchange fees 8.1 Cashless payment transactions in the EEA Having efficient systems for payments is of vital importance to all sectors of the economy. Cashless payment transactions in the EU have shown a clear tendency of growth and amounted to 60.3 billion transactions in 2004.69 Also in Iceland and Norway, the number of cashless payment transactions has shown a clear increase.70
A retail bank payment involves the payer, the payee and their respective banks handling the transactions, but must also include some form of payment arrangement between these two banks. Such payment arrangements can be based on bilateral agreements between banks, or on multilateral arrangements or inter-bank payment systems. Such inter-bank systems often take the form of an automated clearing house or a clearing association.71 At national level, the number of multilateral payment systems tends to be limited, which can at least partly be explained by the network effects found in payment systems. The organisation of such major national payment systems, including the rules concerning access to, and use of, the system, are therefore particularly important and have received increasing attention in recent years. In 2006, the Nordic competition authorities issued their report “Competition in Nordic Retail Banking”, which concluded that terms and access conditions to the Nordic payment system may include elements that could form a barrier to entry into the payment systems and banking markets.72 8.2 The Authority’s inquiry into clearing infrastructures 8.2.1 Overview of the surveyed infrastructures The scope of the analysis is limited to multilateral clearing arrangements with open membership. Infrastructures that clear only payment card transactions are also excluded. Therefore the inquiry does not consider all types of payment infrastructures. A questionnaire, similar in scope to that used by the European Commission, was sent to the operators of clearing infrastructures in the EFTA States where applicable, i.e. Iceland´s Fjölgreiðslumiðlun (FGM) and the Norwegian Interbank Clearing System (NICS). Liechtenstein has neither an own system for payment clearing nor a security settlement system. Therefore, Liechtenstein banks depend on foreign systems. Because of the close relationship to Switzerland, the majority of transactions are carried out via Swiss systems as SIC Swiss Interbank Clearing (payment system) and SIS Sega Intersettle (security settlement). Furthermore, several Liechtenstein banks have contracts with European settlement systems such as Euroclear and Clearstream and other settlement systems internationally. Regarding clearing of payment transactions, many business contacts with 69 Commission’s interim report, p. 121. 70 Report on Nordic Banking structures, Annex table 6. 71 See further the Commission’s interim report pp. 121-122. 71 Report on Nordic Banking structures, Annex table 6. 71 See further the Commission’s interim report pp. 121-122 72 See the report at page 46.
Page 43 European systems exist at present. The most commonly used systems are: ARTIS (Austria), RTGS Plus, ELS and EMZ (Germany) and CHAPS (Great Britain). Liechtenstein subsidiaries of EEA-banks often use the infrastructure of their parent companies.73
8.2.2 Type and volume of transactions treated by the infrastructures surveyed In most EEA countries there is only one open clearing infrastructure for domestic retail payments. Where there is more than one, they are usually not in direct competition but are rather complementary.74 In Norway, NICS is the main clearing infrastructure. In addition, DnB NOR AS acts as the private settlement bank for many smaller banks, taking over the participating bank’s positions in the clearing of retail transactions in NICS.75 Both NICS and DnB NOR AS have a licence from the Norwegian Central Bank. In both systems, the majority (over 50%) of cleared transactions are payment card transactions, and these together with credit transfers account for the bulk of transaction volume. Transactions based on cheques and similar paper-based instruments are negligible in volume. As in most EEA countries, the clearing systems in both Iceland and Norway handle the majority of their country’s domestic credit transfers and direct debits.76
8.2.3 Operating costs of the infrastructure Total operational costs of payment systems are normally related to both the number and type of transactions handled. Paper-based transactions, such as cheques, are more expensive than electronic ones.77 In both Iceland and Norway, there has been a rapid decrease in the use of paper-based transaction instruments in recent years, and as a result the overwhelming majority of transactions are today paperless. In light of this fact, the clearing infrastructures in these countries enjoy a rather favourable operating costs ratio in an EEA context. 8.2.4 Management of clearing infrastructures In many EEA countries, clearing infrastructures were traditionally created on a non-profit basis, often with the involvement of National Central Banks. Ownership of the system by central banks had the explicit objective of fostering financial stability and promoting the soundness of payment and settlement systems. This ownership arrangement has evolved over time and, currently, some systems are moving towards a profit-oriented organisational structure.78 An example of the latter is Iceland’s FGM, which was organised as a for-profit limited liability company upon establishment in 2000. Its shareholders are the three main retail banks, the association of savings banks and the two major payment card acquiring firms, 73 Information provided by the Liechtenstein Financial Market Authority. 74 Commission’s interim report, p. 126. 75 For a further description, see “Annual report on Payment systems 2006” from the Norwegian Central Bank. 76 In this context, credit transfer means a payment order (or sometimes a sequence of payment orders, which is referred to as standing orders) made for the purpose of placing funds at the disposal of the beneficiary. Direct debit means a pre-authorised debit from the payer’s bank account initiated by the payee. 77 Commission’s interim report, p. 128. 78 ibid.
Page 44 as well as the Central Bank of Iceland. On the other hand, Norway’s NICS is a non-profit association jointly controlled by two associations of financial institutions, Finansnæringens Servicekontor and Sparebankforeningens Servicekontor. Both systems, however, can be said to follow the so-called ‘mutual governance’ model, where the clearing infrastructure is jointly controlled by the major users of the system. Both in Iceland and Norway, the day-to-day operation of the clearing system is entrusted to a third party.79 8.2.5 Classes of memberships Banks wishing to make use of a clearing infrastructure have to obtain membership of the organisation that provides the clearing services. Several clearing systems within the EEA choose to distinguish members according to classes of membership. The most common distinction is between direct and indirect participants. Direct members have the exclusive benefit of direct contact with the clearing operator. Indirect members, on the other hand, access the clearing system in general through a bilateral agency agreement with a direct participant and settle their positions in a Real Time Gross Settlement system80 (RTGS) account (typically) held at the National Central Bank by the latter. Normally, the indirect member does not get involved in collective decision-making processes of the system, which exclusively involves direct members.81
A condition for membership of the clearing infrastructure in Iceland is that a participating bank has a settlement account at the Central Bank and participates in that bank’s gross settlement system.82 On the other hand, there is no apparent distinction on the basis of scheme ownership. The applicable rules also envisage the membership of intermediaries, and hence presumably indirect membership for a bank is possible. However, no such indirect members exist at present. NICS has two types of membership depending on whether a bank has a settlement account in the Norwegian Central Bank (“Level 1 bank”), hereinafter referred to as direct members, or settles its transactions on a settlement account held in a level 1 bank (“Level 2 bank”), hereinafter referred to as indirect members. A considerable number of banks have chosen to settle their transactions through another bank. Also in Norway, participating banks must have a settlement account at the Central Bank. 8.2.6 Eligibility for direct membership As elsewhere in the EEA, membership of both the infrastructures surveyed is restricted to institutions holding a banking licence, although in Iceland, securities firms may also become members. In addition, direct members need to have a settlement account with the central bank as outlined above. In Norway, banks wanting to join NICS, whether as a direct or indirect member, have to pay the entry fees for the so-called Access Area 1 in the Norwegian banking industry’s joint payment system infrastructure, which also includes other services, such as for instance, the joint multilateral infrastructure for cheques.83
79 Reiknistofa bankanna (RB) in Iceland and Bankenes Betalingssentral (BBS) in Norway. 80 A real-time gross settlement (RTGS) system is a settlement system in which processing and settlement take place on an order-by-order basis (without netting) in real time (continuously). 81 Commission’s interim report, p. 129. 82 Cf. the Icelandic Central Bank’s Regulation on the operation of clearing systems no. 313/2007, Art. 2. 83 Membership of FNH or Sparebankforeningen is not a requirement to participate in NICS. However, banks which are not members of these organisations will have to pay an additional annual fee to take part in the
Page 45 8.2.7 Decision-making bodies In clearing infrastructures based on mutual-governance models, the capacity to take important decisions e.g. regarding fees and access roles becomes a key issue. In some systems that are run as joint ventures between banks, voting rights may be linked to factors such as transaction volume.84 In Iceland, FGM is operated along the general lines of limited liability companies. Its shareholders elect a 7-member board of directors. Thus, representation in the main decision-making body is based on ownership. In Norway, each of NICS´s parent organisations appoints four members of its board of directors. Representation on the board is thus achieved via membership of either of the parent organisations rather than by factors such as operating volume. For instance, indirect members are also represented on the board of directors. Furthermore, voting rights are not linked to volume or amount of fees paid in neither FGM nor NICS. 8.2.8 Fees charged to users of clearing infrastructures Fees charged to banks for the use of the payment infrastructure could be an important determinant of the overall cost of certain retail financial services. Not only the size of the fees per transaction but also the structure of the fee schedule in the payment systems may imply significant cost differentials depending on individual bank characteristics. Fees charged can generally be divided into two categories: joining fees and clearing fees.85
In addition, it should be noted that it is typically necessary for a payment system member to have an account at a central bank (or make other settlement arrangements) and to participate in a gross settlement system, which may entail both initial and periodic costs. These costs, however, will not be dealt with in the present analysis.
8.2.8.1 Joining fees In Iceland, the joining fee for FGM is €127.000 regardless of the size of the bank. On the other hand, there are no joining fees as such for Norway´s NICS system. However, as mentioned above, in order to have access to NICS, a bank must have paid access fees to the so-called Access Area 1 in the Norwegian banking industry’s joint payment system infrastructure. This fee is linked to the size of the banks in terms of capital liability and ranges from €43.700 to €686.710. The access fee for foreign banks with branch(es) in Norway is €436.997, which corresponds to the maximum fee for the smallest banks.
8.2.8.2 Clearing fees For FGM, an annual fee is applicable. This fee has two tiers of €32,000 or €44,000, depending on volume. In addition, a per-transaction fee of about €0.03, covering both clearing and settlement, applies. joint payment system infrastructure. This fee corresponds to 5 % of the annual membership fee that the bank would have had to pay to the respective organisation. 84 Commission’s interim report, p. 130. 85 Commission’s interim report, p. 131.
Page 46 For NICS, the annual fee is €9,227 for direct members86 and €4.619 for indirect members87. A per-transaction fee ranging from about €0.0056 to €0.0033 applies depending on the volume of transactions. As regards NICS, it is noteworthy that the fee structure features a ceiling which seeks to ensure that very small banks are not burdened with disproportionately high fixed costs. Thus, it is envisaged that the sum total of fixed and per-transaction fees shall not exceed the equivalent of €0.374 per transaction. 8.2.9 Economies of scale due to fee structure It should be noted that both of the systems surveyed have some type of “regressive” fee structure. The fee structure for FGM is partly regressive in nature, as joining fees are independent of volume. It should also be mentioned that FGM is currently reviewing its tariffs in order to accommodate the possibility of offering volume-linked discounts. For NICS, per-transaction fees are marginally lowered with increasing volumes. As a consequence, the cost of membership in both systems is proportionally lower for larger banks that process larger volumes of transactions. 8.3 Multilaterally agreed interbank fees In addition to fees paid to clearing infrastructures, banks may also agree that an inter-bank fee should be paid between the payer’s and the payee’s banks for the conclusion of a payment transaction and/or for the provision of services in relation to a given payment. These interbank fees can be agreed bilaterally or multilaterally between banks.88 No such interbank fees were reported for Norway, while in Iceland, a per-transaction fee is applicable. This fee is multilaterally set between banks, but not decided by the clearing infrastructure as such. The stated purpose of this fee is to act as a compensatory mechanism. The fee is thus similar to interbank fees in many EEA countries, which are typically per-transaction fees intended to incentivize banks to employ more efficient payment instruments or to act as a cost recovery mechanism.89
8.4 Competition analysis Access to payment systems is necessary for any bank considering entering a retail banking market and intending to offer customers core banking services, such as current accounts or payment cards. Given this indispensability, infrastructure arrangements could also act as a barrier to entry to retail banking markets. In the Icelandic FGM system, decisions are taken by a board of directors elected by the system’s owners, while in Norway, the NICS system is ultimately controlled by the national associations of banks and savings banks. In both cases, it appears that crucial decisions, such as tariffs and the admittance of new members, are taken by the incumbent banks. However, neither in Norway nor in Iceland have there been any refusals of a request for membership.
86 I.e. Level 1 banks. 87 I.e. Level 2 banks. 88 Commission’s interim report, p. 133. 89 For further discussion on interbank fees, see Commission´s interim report, pp. 133-135.
Page 47 The Norwegian NICS system features a division between direct and indirect members. A similar distinction is possible in the Icelandic FGM system, although not practical at present. On the one hand, indirect membership may be more attractive for smaller or niche market players than full membership and thus pro-competitive. On the other hand, indirect members rely on a form of “agency” arrangement with a direct member in order to access the system. Such arrangements may entail that business-sensitive information passes through the hands of the “agent”, possibly giving that bank a competitive advantage. As in the EU, the clearing systems in Norway and Iceland require members to be banks. In Iceland, securities firms may also be members. Other direct or indirect network users cannot thus participate directly in the network, nor in the network’s decision making, which might entail that the network will not cover the needs of a significant sector of the users. The fee structure of the clearing systems in Iceland and Norway is partly regressive. However, in Norway, the fee structure also includes elements which should ensure that smaller players can also participate in the network. In Norway, unlike domestic banks which have to pay a joining fee calculated based on the bank’s capital liability, foreign banks have to pay a fixed fee for jointing NICS.90 Inter-bank fees, when multilaterally fixed, create a multilateral transfer between banks, which does not take into account banks’ specificities and the relationship of a bank with its customers.91 The existence of interbank fees may both distort competition between payment methods as well as between banks. In Norway, there is no interbank fee. In Iceland, a per-transaction fee is applicable. 8.5 Conclusions As in the EU, both Iceland and Norway have one national clearing infrastructure and the structure, organisation and costs vary from network to network. Banks operating in different EEA States will have to join and adapt to the various national systems. The corporate governance of the payment systems and the structure of the fee systems may raise barriers to entry for new or small players, although this only seems to apply to a very limited extent in Iceland and Norway.
90 The joining fee refers to the access fee for the so-called Access Area 1 in the Norwegian banking industry’s joint payment system infrastructure. 91 Commission’s interim report, p. 139.
Page 48 9 Formal industry cooperation The banking industry in general and retail banking in particular is characterised by a high level of cooperation between market players. Cooperation frequently occurs with respect to ownership and management of payments systems or credit registers as well as the development of codes of conducts and other forms of self regulation. Usually, cooperation takes place at the level of banking associations, but it can also go wider; for instance, when nationwide payment systems or credit registers require cooperation between specific associations. A large part of the rather extensive co-operative activity in the banking sector can be explained by the industry’s standardisation and compatibility requirements. In order to handle non-cash payments, for instance, banks have to agree on issues such as technology formats or mutual cost compensation.92
The present chapter will examine three common forms of bank co-operation in the fields of payment systems, credit registers, and commercial joint ventures. 9.1 Ownership and management of payment systems As discussed in the previous chapters, payment systems in the EEA are characterised by their heterogeneity in matters such as governance, infrastructure, access etc. Furthermore, national legislation relating to such systems may vary. As a result, payment systems in the EEA tend to be fragmented along national borders. It goes without saying that access to payment systems is crucial for any bank wishing to enter a particular national market. Given that interbank systems, by their nature, handle sensitive information and are frequently jointly owned by incumbent banks, their operation may entail barriers to entry. Such barriers may consist of discriminatory access or fee conditions for newcomers. There is, however, no evidence of this kind of entry barriers in either Iceland or Norway. Furthermore, extensive co-operation between competitors such as the operation of a payment infrastructure may lead the participants to share business information in a way that harms competition. 9.2 Data sharing through credit registers Credit registers operate in almost all EEA States and collect various kinds of financial information on individuals. Members of the registers are able to access this data for commercial purposes such as bank lending, subject to data protection rules. Banks and credit providers require access to good quality credit data in order to overcome information asymmetry when they set prices for new or potential borrowers. Thus credit registers are an important element of retail banking market infrastructure. To ensure strong competition among credit providers in retail banking markets it is vital that credit registers enable open and non-discriminatory access to credit data.93 In particular, an important concern regarding credit bureaus’ tariffs are potential entry barriers in the form of excessive or discriminatory fees. 92 Commission’s report, p. 39. 93 Commission’s report, p. 25.
Page 49 9.2.1 Differences in credit registers in EFTA States In all three EFTA States, banks can access credit information databases in order to obtain information on the creditworthiness of their clients. However, the legal nature and characteristics of these credit registers varies, as is the case elsewhere in the EEA.
9.2.1.1 Ownership and governance structure In Iceland, there are two complementary structures. Firstly, Reiknistofa bankanna (the Icelandic Banks’ Data Centre), which is jointly owned by the Icelandic Central Bank and a consortium of retail banks, provides the so-called FE-Yfirlit (Consumer Overview), which is a credit report containing positive data (i.e. data concerning all financial commitments of a prospective borrower). In addition, Lánstraust hf., a private for-profit company, provides credit reports based on negative data (i.e. data on credit arrears, defaults, bankruptcies and other such information). Lánstraust’s parent, Creditinfo Group, is owned partly by Icelandic banks. In Liechtenstein, no single national credit register seems to exist. Instead, lenders contract individually with Swiss-based private credit registers such as Teledata94 or Deltavista.95
In Norway, there is no single national credit register. However, there are several private for-profit credit reference agencies, in particular Credit Inform, Dun & Bradstreet and Lindorff Decision.
9.2.1.2 Type and quality of data held The nature of information collected by credit registers may vary considerably. Some registers only contain negative data. By contrast, other registers may collect positive data about the totality of the subject’s financial obligations, thus giving a more detailed picture of his/her financial situation and capabilities. It has been argued that access to both types of data is pro-competitive as it enables new loan providers to compete on an even footing with incumbent lenders. Also, better credit assessment should result in more responsible lending and consequently lower rates due to a reduced default rate.96
In Iceland, positive data can be shared between banks with the subject’s consent via the Icelandic Banks’ Data Centre. Negative data, sourced from debt collection agencies and from public sources (e.g. court proceedings), is available from the privately-run credit bureau Lánstraust. Such data is deleted from the bureau’s database once the underlying claim has been settled, or when the data becomes more than four years old. Liechtenstein banks appear to use the services of various Swiss credit bureaus, whose services may vary. In Norway, the credit bureaus offer both negative data (information on debt arrears collected from debt-collecting agencies), as well as a variety of positive data. With regard to information on debt arrears on individuals97, such information can only be used one 94 www.teledata.ch 95 www.deltavista.com 96See further a paper published by Oxera Consultants: Accentuating the positive: Sharing financial data between banks, Oxera, December 2005. 97 Or companies not registered in the Company registry. With regard to registered companies, such information can be used one month after the debt-collecting company has claimed repayment of the debt. In
Page 50 month after the debt-collecting agency has taken legal steps. Information on debt arrears has to be deleted as soon as the claim has been settled. 9.3 Commercial joint ventures As discussed above, joint ventures among banks are commonplace in the operation and ownership of payment systems. Throughout the EEA, clearing systems are predominantly owned either by national banks or by a joint venture among banks.98 The latter form of ownership, i.e. the so-called “mutual governance model” is more common. The clearing systems of both Norway and Iceland99 are set up in this manner, the latter with the participation of the Central Bank of Iceland. Cooperation among banks in the operation of payment systems can bring a range of efficiency benefits in terms of economies of scale and in overcoming often substantial start-up costs. On the other hand, joint ventures in payment networks may also pose certain threats to competition:
• They may enhance the ability to exercise market power by the owners of the network (abuses of dominant position);
• They may lead to collusive actions from participating banks (e.g. in the pricing of services) that allow their members to exercise market power;
• Such networks may act as a barrier for new entrants where access to them is not granted on an equal and non discriminatory basis (e.g. through discriminatory fees for newcomers or exclusive conditions of access to joint networks).
In this context, non-discriminatory and publicly disclosed participation criteria are essential to ensuring the contestability of the market.100
In some EEA countries, savings banks and co-operative banks engage in various forms of co-operation. In particular, such institutions may set up joint enterprises that provide specialised financial services that may subsequently be sold to consumers via the participating banks. Also, development of new products and services may be undertaken jointly. For example, savings banks in Iceland co-operate extensively in areas such as product development and marketing whilst keeping ownership and management of each savings bank separate. The Norwegian savings banks practice similar extensive co-operation through alliances of savings banks. As previously outlined in the Authority’s interim report on card payments, various services in the market for payment card services are provided jointly by banks. In particular, acquiring services are frequently offered collectively in the EFTA States. 101 Although certain economies of scale may be realised via such jointly offered services, they
accordance with the Act of 14 April 2000 no. 31 relating to the processing of personal data, and connected regulations, credit bureaus need a licence in order to provide credit information. The conditions mentioned above follow from the licence conditions set by the Norwegian Data Inspectorate. 98 Commission’s report, p. 148. 99 It will be recalled that Liechtenstein does not have its own clearing and settlement systems, but transactions in Liechtenstein are handled by undertakings in the EEA and in Switzerland. 100 Commission’s interim report, p. 149. 101 See p.26 of the report, available at: http://www.eftasurv.int/information/reportsdocuments/competitionreports/dbaFile11844.pdf
Page 51 may also have a negative effect on customer choice by reducing the number of service providers in the acquiring market. 9.4 Conclusions As is the case elsewhere in the EEA, in the EFTA States banks co-operate actively within several areas of retail banking, through ownership and management of payment systems, data sharing through credit registers, and commercial joint ventures. The level and areas of co-operation vary from country to country. Although significant economic benefits may result from such co-operation, it can also potentially create competition problems, such as for instance, foreclosure of new entrants or it could lead to collusive action. Access to credit databases can be an important source of information for banks and new entrants to minimise credit risks. Depending on how such credit bases operate, in particular concerning the conditions for access, foreclosure problems might arise. It should be noted that the Consumer Credit Directive 93/13/EC, which has been incorporated into the EEA Agreement,102 is currently under revision. In the area of credit registers, the Commission’s most recent proposal aims to guarantee mutual access to existing private and public databases on a non-discriminatory basis.103
102 Decision No 7/94. OJ L 160, 28.6.1994, p. 1, and EEA Supplement to the OJ no. 17, 28.6.1994, p. 1. 103 See http://ec.europa.eu/consumers/cons_int/fina_serv/cons_directive/2ndproposal_en.pdf
Page 52 10 Conclusions and issues for consultations 10.1 Factual findings 10.1.1 Market structure The retail banking markets in the EEA continue to be fragmented along national lines. This fragmentation is further entrenched by the fact that essential market infrastructures (payment systems, credit registers) remain country-specific and lack interoperability. Furthermore, legal obstacles to further market integration remain in the form of differing regimes relating to e.g. tax and consumer protection. As regards market concentration, the inquiry’s findings indicate that Iceland and Norway have highly concentrated retail banking markets and that concentration ratios are among the highest within the EEA. However, the inquiry also found indications that for certain local markets concentration ratios vary considerably from national averages. This could be explained by the importance of local branch networks and could suggest that in some instances analysis of competition conditions would more appropriately be conducted on a regional, rather than national, basis. 10.1.2 Financial performance of retail banks Using OECD data, the inquiry has examined long-term trends in the profitability of Norwegian and Icelandic banks, for all banking activities including retail banking. Based on operating profits as a share of gross income from all banking activity, banks in Norway and Iceland have become more profitable since the 1980s and early 1990s. As regards the profitability of retail banking activity across the EEA, the Authority’s and the Commission’s inquiries demonstrated significant variations at country level. As regards the EFTA States, the profitability of retail banking in Norway was significantly higher than the EU25 average over the surveyed period. Iceland had a profitability ratio in the beginning for the period comparable to the EU25 average, but which subsequently dropped significantly below that average. Norwegian banks derive a far higher share of their income from mortgage lending than the EU25 average. The high income banks have on mortgage and lending in Norway may be interpreted as a lack of competition in Norway. In Iceland, consumer loans seemed to have been the banks’ most important source of income in the surveyed period, although this may have changed subsequently with the Icelandic banks’ increased mortgage lending activities. 10.1.3 Customer choice and mobility Customer mobility in retail banking in the EFTA States appears fairly low and banking relationships are long. Consumers hold their current accounts with the same bank for an average of 9.94 years in Norway and 7.94 years in Iceland, compared to 7.94 years in Norway and 4.87 years in Iceland for SMEs.
Page 53 Both in Iceland and Norway, the level of customer mobility appears to be low, even compared to the rest of the EEA. In 2005, it is estimated that only 4,89% of consumers and 9.10% of SMEs moved their accounts in those two countries. In both Norway and Iceland, cross-selling appears to be widely practiced, especially with regard to mortgages. It appears that mainly customers who have a mortgage at a specific bank are willing or obligated to purchase other products from the same bank. Also, in Iceland, making use of tying (i.e. requiring a customer buying one product to purchase another) seems to be a fairly common practice in relation to various banking products. 10.1.4 Comparisons of pricing and customers’ use of bank accounts The findings of the inquiry, combined with the Commission’s findings for the EU25, show a high degree of variability across the EEA in terms of customers’ bank account use. There is a high variation in prices for payment services across the EFTA and EU States. The large disparity in prices suggests that greater cross-border competition could bring down prices, particularly in those countries where payments prices are still relatively high. 10.2 Potential entry barriers Retail banking markets within the EEA are still extremely fragmented and characterised by a range of entry barriers that need further exploration. Some of these barriers may be explained by ‘natural effects’ resulting from economies of scale, consumption externalities and standardisation requirements with respect to networks such as payment systems. Others are of an artificial nature resulting from specific regulation or conduct of firms and concern, for instance, access to networks or discriminatory fee structures. The main issues in this respect are the following: 10.2.1 Payment systems The markets for payment systems in the EEA are fragmented along national lines. In both Iceland and Norway, the payment infrastructures are run on a mutual governance model involving the systems’ main users. The need to gain access to a separate payment infrastructure in order to offer retail banking in each EEA country may act as an impediment to market entry for certain market players due to factors such as governance or fee structures. No concrete issues in this respect have however surfaced in the Authority’s survey in the EFTA States. 10.2.2 Industry co-operation As elsewhere in the EEA, banks in the EFTA States co-operate actively within several areas of retail banking, through ownership and management of payment systems, data sharing through credit registers, and commercial joint ventures. The level and areas of co-operation vary from country to country. Although significant economic benefits may result from such co-operation, it can also potentially create competition problems, such as for instance, foreclosure of new entrants or collusive action.
Page 54 10.2.3 Factors which may reduce customer mobility Although there are indications that bank customers’ behaviour may be characterised by a certain inertia, there are also reasons to believe that customers across the EEA face certain structural factors that impede mobility.104 Cross-selling and tying, mentioned above, are practices that may reduce competition between banks by reducing customers’ mobility. 10.3 Next steps The publication of this preliminary report opens a consultation period, during which the Authority invites comments from public authorities, the industry, customers and third parties. Comments are requested before 20 December 2007, and may be submitted by email to [email protected] or to the following postal address: Retail Banking Sector Inquiry The EFTA Surveillance Authority Rue Belliard 35 1040 Brussels Belgium Responses received during the consultation period will be taken into account for further analysis of issues discussed in this preliminary report. The EFTA Surveillance Authority will publish a final report, encompassing card payments and retail banking, in the beginning of 2008.
104 Commission’s interim report, p. 153.
Page 55 Glossary Automated teller machine (ATM): point where consumers can use plastic cards for withdrawing money. Cheque: debit instrument in the form of written order from one party (the drawer) to another (the drawee; normally a bank) requiring the drawee to pay a specified sum on demand to the drawer or to a third party specified by the drawer when the instrument is presented to the payer’s bank. Clearing: process of transmitting, reconciling and, in some cases, confirming payment orders between financial institutions prior to settlement, possibly including the netting of instructions and the establishment of final positions for settlement. Credit transfer: payment order (or sometimes a sequence of payment orders, which is referred to as standing orders) made for the purpose of placing funds at the disposal of the beneficiary. Direct Debit: pre-authorised debit on the payer’s bank account initiated by the payee. Payment card: card that allows the cardholder to make payments for goods and services at POS (point of sale) terminals or remotely (mail order, telephone order, internet). It may be one of the following:
• Debit card: a card that allows the cardholder to charge purchases directly and individually to a current account at a deposit-taking institution (serves as an access device to funds stored in bank accounts). It is recognized that debit cards may also be closely linked to other products offered by banks. • Credit card: a card that allows the cardholder to make purchases up to a certain credit amount, which can then be settled in full by the end of a specified period or only in part, with the remaining balance taken as extended credit and being charged interest; credit cards may be linked to a current account at a deposit-taking bank, but also may be linked to an account that has been set up specifically for the use of the credit card. • In this report deferred debit card, which is defined as card that allows the cardholder to make purchases but does not offer extended credit (the full amount of the debt incurred has to be settled by end of a specified period), is treated as a credit card.
Payment card system (or payment card scheme or payment card network): technical and commercial infrastructure set up to serve one or more particular card brands and which provides the organisation, framework and rules necessary for the brand to function. Point of sale (POS): point where consumers can use plastic cards for payment transactions at a merchant outlet (often a payment terminal).
Page 56 Bibliography CARLETTI, E. and HARTMANN, P. (2002): Competition and Stability: What’s Special About Banking? ECB Working Paper No 146 EFTA Surveillance Authority (2007): Financial Services Sector Inquiry – Interim Report Payment Cards ENGE, A and ØWRE, G. (2006): Tilbakeblikk på innføringen av priser i norsk betalingsformidling, Penger og Kreditt Vol 34, no. 3, pp. 156-166 European Commission (2006): Interim Report II - Current Accounts and Related Services European Commission (2007): Report on the Retail Banking Sector Inquiry (Final Report), COM(2007) 33 final European Commission Staff Working Document (2005): Cross-border Consolidation in the EU Financial Sector JUUL, H. (2006): Mobiliteten i den nordiske finansielle sektor, Nordic Council of Ministers TemaNord 2006:507 Konkurransetilsynet (2003): Konkurransesituasjonen i finansmarkedene Kredittilsynet (2007): Tiltak og ordninger som kan gi reduserte ulemper for kundene ved bytte av bankforbindelse – bankkontonummerportabilitet, working group report Nordic Central Banks (2006): Nordic Banking Structures, joint report by the central banks of Denmark, Finland, Iceland, Norway and Sweden Nordic Competition Authorities (2006): Competition in Nordic Retail Banking Norges Bank (2007): Annual Report on Payment Systems 2006 OECD Bank Profitability database Oxera Consultants (2005): Accentuating the Positive: Sharing Financial Data between Banks WALKNER, C and RAES, J. (2005): Integration and Consolidation in EU Banking: An Unfinished Business, European Commission Economic Paper No 226 World Bank (2003): Regulation and supervision database
Appendix I Table 1: Pre-tax profit as share of gross banking income (%) 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Iceland 26 13 21 -2 6 3 12 13 15 9 6 -16 1 7 10 15 19 18 24 20 16 26 31 Norway 20 22 18 16 12 13 3 -5 5 -17 -83 -5 22 30 33 34 32 29 39 42 30 19 26
Table 2: Share of banks’ profits paid in income tax (%) 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Iceland 0 41 54 -67 86 44 50 39 37 23 44 -4 166 39 29 27 25 13 17 28 -6 10 14 Norway 9 7 18 18 20 18 57 -20 39 -6 -1 -33 13 13 12 15 17 17 19 24 17 32 23
Table 3: Banking Profitability measured by rate of (pre-tax) return on assets (%) 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Iceland -1.09 0.10 0.49 0.68 0.91 1.08 0.89 1.19 0.81 0.62 1.23 1.44 Norway -0.20 1.17 1.27 1.43 1.24 1.06 0.90 1.21 1.33 0.91 0.52 0.71
Source: derived from OECD Bank Profitability database
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