The Banks Get Away With It

In the beginning of 1996, Bank Leumi's CEO Galia Maor made a dramatic announcement: The bank would be freezing all its commissions for a year, having reached the conclusion that commissions are one of the most problematic issues in the bank's customer relations.

Leumi launched a major campaign at the time, and billboards announcing the consumer-oriented step were all over the place. Jealous of the kudo points its competitor has scored, Bank Hapoalim also froze its commissions. Thus, clients of the two major banks got one year of quiet. After that year, both banks hiked their commissions. No bank has since taken such a step, although commissions, as Maor had put it, "are a barrier in the relationship between the bank and its clients."

Apparently, commissions are not such a big barrier. They are upsetting, annoying and costly, but they do not drive clients to close their accounts with one bank and move to another. Barriers in switching banks are actually much higher, as is the link created between customers' savings plans and their credit limit. These are the true barriers that stop many clients from taking their business to the competition. But there are other barriers, too. Anyone switching banks will soon find that the new bank also has to make a living, and so hikes its commissions every once in a while too, whether in response to a similar move by the competition or as a part of a policy to improve revenues. In reality, the difference between commissions charged by the banks is not big, certainly not big enough to encourage clients to shop around.

The banks have themselves realized that commissions are no barrier and are at best just a nuisance for their clients, and have therefore learned to ignore the feeble public opposition made every once in a while over this matter. After all, the temptation of adding a few agorot to four or five commissions and adding several tens of millions of shekels a year to their revenues overcomes the inconvenience of announcing the hike - even if this gets the CEO's head shot in the paper with a nasty slug. Besides, while the public is buckling under the burden of commissions, analysts actually applaud the sensible business move that increase the bank's earnings.

In most cases, bankers explain that the cost of input or the consumer price index has gone up. But sometimes the reasons are elsewhere.

Last week Bank Leumi and Union Bank of Israel announced a 2-3 percent hike in some of their commissions. Other banks are to follow in their footsteps, except for Israel Discount Bank, which has already stated it does not plan to push up commissiones before 2004. This time, the CPI was not given as an excuse, because this year it has actually gone down.

What, then, is the reasons for hiking commissions at this time?

The self-evident reason is that the profit margin of the banking industry has gone down tremendously, as a result of unwise loans to the business sector and the recession that is hitting commerce, services and households alike. To compensate for the drop in the profit margin, banks have taken several measures. They streamlined - reduced payments to suppliers, pushed up their profit margin on the business sector and of course, hiked commissions and introduced new ones. Some of the banks cut the payroll, whether through dismissals, like Hapoalim, or through voluntary retirement, as happened at Leumi and Discount.

But all this was not enough, certainly not for Leumi and Discount, which in 2002 posted the lowest efficiency ratio in the industry, even though in the recent comparison made by the Bank of Israel, it turned out that their commissions are in fact the highest. These two banks happen to be the only two that are still government owned.

One of the explanations why government corporations are less efficient than private ones is that the private sector is driven by profit and is therefore more efficient, while those who operate government companies are most concerned with perks and power.

This situation is quite comfortable for the executives of the government-owned banks. The shareholders do not breathe down their neck demanding results, and the executives are not forced to clash with their unions. Employees enjoy high salaries, wage hikes and bonuses, and the executives are well compensated regardless of the bank's results. Of course, these banks have made streamlining efforts as well, but the bottom line still indicates that privately-owned banks are more efficient.

What would it take for government-owned banks to become at least as efficient as those in the private sector? The best solution is obviously to privatize them, but this depends not only on the goodwill of the current owners but also on finding suitable buyers. This does not necessarily mean that Leumi and Discount will stay less efficient for the time being. Finance Minister Benjamin Netanyahu has recently led a wage cut in the public sector, which for years was considered untouchable.

Netanyahu believes in privatization and prefers to have Leumi and Discount acquired by investors who will make them more efficient themselves. But he can score points if he supports efforts by the managements of the two banks to cut wages like it was done in the public sector. The accomplishment would be twofold: it would make the banks more attractive for private investors, and save the public from being penalized with exorbitant commissions to banks that maintain costly, inflated payrolls.