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Irish retail banking sector among the most competitive in Europe Back  
Two studies on bank charges and competitiveness were released in May. One was funded by the European Commission’s Consumer Affairs on cross border transaction charges, with media attention focusing on areas where Irish charges were in the high zone. Another was carried out at the beginning of this year by the consultancy, Strategic Solutions, for Bank of Ireland to assess the prices and profit margins for a range of core branch based retail banking services across the EU. Simon Glancy of Strategic Solutions sets out the results.
In the first survey of its kind since the introduction of the Euro in January 1999, a total of 29 leading banks’ prices and profit margins were compared across eight countries consisting of France, Germany, Ireland, Italy, the Netherlands, Portugal, Spain and the UK. These included banks recently in the news such as Deutsche and Dresdner Bank in Germany, BNP Paribas in France and Barclays and NatWest in the UK.

The results (summarised in Figure 1) show that bank fees and charges in other countries, particularly Germany and the UK, are generally higher than Ireland notwithstanding consumers’ recent concerns about the level of charges in this country.

Ireland emerges as the cheapest market for mortgages and credit card annual fees although it remains among the most expensive in Europe for credit card interest rates, standing orders, overdrafts and foreign exchange commissions.

Two areas covered by the report merit special attention in view of recent developments in financial services.

Mortgages: Ireland charged the cheapest average rate in 1999
The report examined average mortgage rates charged by banks in each country, combining the averages of fixed and variable rates. Irish banks charged the lowest average mortgage rate of any of the eight markets in 1999 as Figure 2 indicates. This trend has continued in the first two months of 2000.

The report also examines the underlying profitability of mortgage business across Europe by attempting to value the mortgage margins achieved by lending institutions. This was done by deducting the average annual Interbank lending rate from the average annual mortgage rate in each country. The details are shown in Figure 3.

Since 1997 German banks have achieved the highest margin on mortgage business followed by Dutch and Portuguese banks. This is partly explained by greater regulation and less competition in the local mortgage market, especially Germany. The UK on the other hand has experienced several years of negative results on mortgage business although the combining of fixed and variable rate mortgage business does drag the figure down. Irish banks’ margins have fallen from nearly 2 per cent six years ago to a current level of 1 per cent, the second lowest of the six countries covered.

ATM charges: Irish bank charges are considerably less than those in Germany and the UK
ATM charges have become a recent source of controversy in the UK where a number of leading banks sought substantial increases in the charges levied on customers for using other banks’ ATMs. This has effectively been used as a disloyalty fee and is not just confined to Britain but also occurs in Germany, France and Italy the average charge is even higher per withdrawal.

Compared to the UK and Germany Irish banks compare well, charging a much lower fee although they do apply withdrawal charges to their own ATMs as well as those of other banks, a practice which is not seen elsewhere.

Some of the conclusions that can be drawn from the study are:

• Fees and charges serve a number of purposes: to incentivise customers to use low cost channels, to increasingly penalise and in some cases root out problem customers and to act as inducements in customer recruitment especially in consumer lending.

• Irish banks compare well in fees and charges in most categories, especially mortgage rates. Germany is the most expensive market reflecting the larger branch networks and cost base across the banking sector and the lower level of competition than in the UK or the Netherlands. This leaves domestic banks vulnerable to new entrants aggressively pricing to build up market share.

• Ireland’s higher credit card interest rates could become a focal point of overall public concern about fees and charges policy and there is evidence it is already persuading foreign entrants to carve out a niche in the Irish market. Tesco’s recent entry into the market with an introductory APR of 4.9 per cent for balance transfers followed by a standard APR of 15.9 per cent is a case in point.

• Charges across Europe are likely to fall in response to new entrants and the increased commitment to building up direct banking operations epitomised by recent investments by Barclays, Halifax and Lloyds TSB in the UK and Banco Exterior in Spain.

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