Taking Stock / How to crush their power
"Power at last" is the cover story of The Economist this week. Power to the consumer, it means, which it graphically represents by hands brandishing computer mice. In the opinion of the weekly's editors, Internet is finally making good on its promise to give the consumer power against the service and product suppliers: the power of knowledge, the power to analyze, the power to choose and bargain, the power to affect prices.
Israel's consumer also feels the Internet revolution in the form of masses of free information, the ability to compare prices at the click of a mouse, and the ability to buy some products and services for lower than ever prices.
But in the very area that Internet should engender the greatest revolution, the consumer remains powerless. Israel's banks remain largely untouched and unrevolutionized.
That is sad, given that the banks' products are entirely virtual by nature. You don't carry anything away in a prettily wrapped box, you can't touch or store deposits, investments, loans, securities, payments and the like. At the end of the day, they're all files in a computer.
Internet did bring more information to the banks' clients, about interest rates and terms, about fees and commissions. The customers can surf, click and compare, but ultimately, there's not much they can do with that information. Interest on their overdrafts remains high, interest on deposits and money in checking accounts remains low, and fees on banking transactions remain exorbitant. The banks' financial statements show that Internet or not, their financial spreads widened.
Well, bank customers may be consoling themselves, the Bachar reform is coming along; it will separate the banks from the provident and mutual funds, and enhance competition between the banks.
Not quite: the Bachar reform will decrease the banks' supremacy in the capital market, allowing more entities to compete with the big banking juggernauts. But in basic banking activities, such as loans to households, deposits, credit cards and payments, don't expect change in the foreseeable future.
The only quick solution would have to come from another direction entirely, a lot less revolutionary than the Bachar reform. It would have to break the banks' stranglehold, crushing their spreads and commissions on basic banking actions. That solution would be direct banking, and not the type Bank Leumi has begun to offer through a subsidiary, which charges much the same rates as the parent bank.
It would have to be a totally independent bank that connects with its customers solely via Internet and the phone, a bank without the encumbrance of branches and a bloated headquarters, a bank with no inflated mechanism that it needs to feed.
Today Israel's banks do offer service via the Internet, but the prices of these services do not reflect the advantage of the venue.
Worse, if anything, advanced services such as Internet and call centers have only inflated the banks' operating costs, because they added onto its branches and manpower.
A direct banking enterprise wouldn't have a workers committee. It wouldn't have hundreds of employees who do basically nothing. It wouldn't be encumbered with obsolete, giant computer systems and a huge management mechanism. In other words, it wouldn't have all those mechanisms gorging at the trough.
A direct bank could wedge itself in the chasm between creditory and debitory interest, offering cheaper credit and higher interest on accounts in credit. A direct bank could offer practically zero fees on trading in securities, and in maintenance fees, and also distribute units in mutual funds, provident funds and other financial instruments, for lower commissions.
Elsewhere in the world, where they exist, direct banks received bad PR mainly because they launched during the Internet bubble, burned up billions of dollars, and posted heavy losses. But with the dust from the crash clearing, it turns out that direct banks do have attractive business models, they grow fast, and they offer real value to their customers.
The Bachar reform won't be complete without encouraging the establishment of direct banking in Israel and encouraging the establishment of IRAs - personal pension and savings accounts. Separating the banks from the capital market would create the conditions for the establishment of financial institutions beyond their sphere, and an Internet-based direct bank would be exactly the creature needed to take on the banks and compete with them in basic banking services.
Both reforms would require creativity and an open mind at the Bank of Israel and Finance Ministry. They might not get loud headlines about reforms, but their contribution could be vast.
Maybe the thing to do is raise the issue for public debate, then sit back and watch the big banks leap up at warp speed to trash the idea, delegitimize it and crush it like a bug. That should prove exactly how competitive direct banking could be.