Banking Fees on the Front Page

Why are banking fees making headline news? Ask the banks and they'll sputter that it's cheap populism. Nowhere in the west or the modern world do the papers, abetted by vote-conscious parliamentarians, meddle in banking fees. They are part of the Free Market and banks are just a business making a profit, at the end of the day.

So don't ask the banks. Instead, have them read the main story of the London Times last Thursday. The entire left of the front page was devoted to the story: 'New fees signal an end to free banking'. The article goes on to relate that 'a leading bank',  HSBC's First Direct, is the first to charge a monthly fee on maintaining a current account. How much? Ten pounds.

The Times figures that other banks will follow suit, and consumer organizations explain that the fees will hurt mainly low-income retirees and single moms, because the terms for exemption do not include poverty, but do include depositing 1,500 pounds a month, or keeping an average balance of 1,500 pounds.

The move prodded a whole bunch of British politicians to scream against the "banking tax on the poor". The British trustbuster is looking into whether caps should be clapped on the fees, first and foremost on overdrafts.

And that, ladies and gentlemen, is in England, the financial capital of the world and one of the most competitive financial markets there is. England also has a large population of regulators and customers who evidently think the government should intervene in banking fees.

Pot shots at Microsoft

It is not only a question of banks. The Guardian revealed the other day that the competition commissioner at the European common market gave Microsoft nine days to give the competition all the information needed for their systems to inter-operate with Vista, the new Microsoft operating system.

Over in Israel, our antitrust commissioner, Ronit Kan, should note the zeal of her European Commission counterpart Neelie Kroes.  Microsoft has been dragging its feet on handing over the information for months. It was supposed to have complied by July 19, 2006, but didn't.

The U.S. software gargantuan has claimed that it did hand over 90% of the information. But European competition commissioner Kroes felt that 90% just wasn't enough, according to the Guardian, and ordered Microsoft to hand over 100% within nine days. Each day of tardiness would cost the giant a $4 million fine, she ruled.

Four million dollars a day? Our readers from the Israeli scene must be holding their ribs by now. Israel's monopolists and oligopolists regularly soft-soap the regulators every time the latter try to meddle in their pet markets and institute competitive measures. In credit cards, for instance, the banks kept the trustbuster on ice for five years and more, making millions upon millions in clearing fees meanwhile.

The credit card companies only blinked and signed an agreement with the regulator only after the accountant-general at the treasury, Yaron Zelekha, threatened a unilateral reform through legislation. The antitrust commissioner admits that the resultant arrangement is a lousy one and says the decent solution will evidently involve the accountant-general advancing some sort of legislation.

Come the revolution

The Bachar commission forced the banks to sell their provident and mutual funds, and revolutionized Israel's financial markets, and faster than expected. The mutual funds that had been run quite badly by the banks are hemorrhaging assets as the public flees. Mutual funds that had done better flourishing, and the sector of ETFs, which is characterized by low fees, has grown overnight from zero to NIS 10 billion.

For the first time in its history, Israel's capital market is becoming results-oriented, as opposed to relying on the captive clients of the banks.

The Bachar panel's biggest achievement has been to prove that determined regulators can push through reform over the opposition of powerful forces with enormous clout in government and the media.

It is time to continue the reform, to introduce competition into the rest of the banking system: current accounts, retail banking, and deposits.

There are many possible solutions, strategic and conceptual, about how to make these competitive. Sever the credit card companies from the banks, that's one. Encourage the establishment of virtual banks, is another, and yet a third is - regulate bank fees. Like bread and milk.

Don't expect great initiatives from the banks themselves: they are past masters at the art of the hidden fee and fighting reform, but very bad at making their systems more efficient and better. Elsewhere in the world the banks fight bloodily over the greatest students graduating from universities: here a third of the bank workers are unsuited to their jobs, yet their wage rises every year. Only their oligopolistic structure enables Israel's banks to stay profitable despite their manpower bloat.

Israel's banking system has a trillion shekels under management, and it does require close supervision by the regulators.  The first who should sound that cry is Stanley Fischer, the governor of the Bank of Israel, and the departing Supervisor of Banks, Yoav Lehman. But these two have lost much of their credibility in the capital market, after the latter learned of the extraordinarily bloated employment terms at the Bank of Israel. Israel's customers are waiting for the next set of regulators to come along, pick up the gauntlet, and fight the good fight on their behalf.