In the week that Allied Irish Banks announced record profits of €1.4 billion, Conor Lally asks if Irish banks are coining it at the expense of the consumer
A woman walks into a bank in Dublin after living overseas for a number of years. She and her husband have had an account in the branch since their college days, 30 years before.
While they have been abroad, small amounts of cash have flowed in and out of the account on a regular basis. She tells the bank she is back in Ireland for good and wants a small loan to help get restarted. They don't remember her. After a long struggle and various assurances from the couple, the bank agrees to lend her the money.
But the point has been made. In the eyes of the institution she is nobody. After 30 years she is invisible.
The collective memory of yesteryear within a local branch is no more. Back then, customers knew their bank manager. He watched over his clients as they struggled through college or their early working years before finding their financial feet and (hopefully) moving on to a life lived in the black.
These days, account holders are encouraged to do their banking online, over the phone, or via on-street ATMs. In short, to do their business in any fashion which does not require contact with a staff member.
This week the Republic's biggest bank, AIB, announced profits of almost €1.4 billion for 2002. That's more than €5.3 million per working day, or more than €11,000 a minute. The record sum was delivered against a backdrop of worsening domestic and international economic conditions. It also came after a €643 million fraud at its US subsidiary All First. If that fraud had not occurred, the bank's pre-tax profits would have been €577 million fatter.
According to the Consumers' Association of Ireland, the banking sector in the Republic is characterised by a lack of choice for consumers. The association's chief executive Dermott Jewell says AIB's massive profits are proof that none of the money generated by financial institutions is finding its way back into the pockets of customers.
"It's finding its way into the shareholders' pockets all right, but not ordinary account holders," he says.
And while Irish banks insist their charges and commissions are among the lowest in Europe, many customers are "paying through the nose", Jewell adds.
"The banks will always talk about their overall offering, how much they charge for the so-called average basket of services. But the problem is that many people are outside that average basket. For example, more than half of those who hold a credit card in Ireland do not pay off the minimum amount each month. And when that happens, they are looking at paying interest at a rate of 19 or 20 per cent. In this day and age we would feel that that is simply too high."
Jewell says there are so few major banks in Ireland, none of them feels the need to "woo customers". "There are lots of special offers and the like but in reality the banks simply don't feel the need to offer longer-term lower rates of interests on products in a bid to attract customers. It seems to happen elsewhere, but not here."
The fact that many of the banks have closed branches in rural and urban areas in recent years further demonstrates that any customer service charter is well down the priority list, he argues. He also points out that in the UK many banks do not charge banking fees once a customer's account is in the black.
Here, AIB and Bank of Ireland collect bank charges irrespective of how much money is on deposit in an account. But some customers, such as students and senior citizens, are exempt.
Clearly comfortable in a non-competitive environment, the Irish banks have also displayed an unwillingness to offer customers any choice when it comes to mortgage products. In the UK there are about 120 mortgage lenders offering 4,500 products. In the Republic there are 12 main players offering about 70 products. That means the average British lender offers 37 products while its Irish counterparts offer just six.
In the past, the banks have also been slow to pass on the European Central Bank's interest rate cuts. While many European banks pass on the cuts almost immediately, the Irish institutions have sometimes waited for a number of days before acting, although their own economists have often predicted the cuts long before they happen. However, if the ECB increases rates, the Irish banks are very quick to pass the increases on to the consumer.
In AIB's 48-page annual results published this week there is little mention of its retailing division. The retailing division of any bank is the one which offers services and products to the consumer. It is the beneficiary of everything, from bank charges to credit card interest.
The AIB results simply state fees and commissions payable increased to €138 million from €128 million. The results did not include any breakdown as to how those revenues were raised. The banks are not bound by law to publish such a breakdown, says Emer Lang, a financial analyst with Davy Stockbrokers.
"The banks simply would not want their competitors knowing how much they are earning from particular charges."
She says that compared with banks in the UK and Europe, Irish institutions, such as AIB, are generally more profitable. However, the profitability of banks in the UK has been hit in recent times after a wide-ranging review of the industry forced them to change some of their operating practices.
"There is a similar review going on here by the Competition Authority which will be finished this year and we estimate that may knock a couple of per cent off the profitability of some of the banks here," she says.
A new report compiled by Lang and her colleague Scott Rankin, says the Competition Authority could force Irish banks to pay interest on current accounts and to offer cheaper rates of interest on overdrafts and personal loans.
The Republic's two biggest banks - AIB and Bank of Ireland - control 80 per cent of all current accounts and, despite claims that this is largely a loss-making undertaking, Davy suggests they could earn more than €150 million this year from these accounts.
Davy states that at Bank of Ireland alone, the average balance held in these accounts was €643 million, on which the bank paid just €13 million in interest to customers.
A yet-to-be-published study by the Irish Bankers' Federation claims increases in bank charges in recent years have been far behind inflation. It says charges for transactions such as ATM withdrawal, direct debit and cheque use have risen by just 3 per cent in the last eight years while inflation over the same period was 29.5 per cent.
It also maintains that only 54 per cent of account holders pay any charges. Of those who pay charges the average amount paid per person each year is €50 and overall, bank charges cover only 40 per cent of banks' costs.
"Comparing the cost of a 'shopping basket' of financial products such as a current account, mortgage, personal loan and credit card, Ireland features in the lower (cheaper) section of the European cost league," the report concludes.
But while the banks claim they are as competitive as their European counterparts on charges and commissions, there is no doubt their comfortable position in Irish corporate life has been bolstered by the fact they pay such little tax.
Between January, 2000 and the beginning of this year, corporation tax has come down from 24 per cent to 12.5 per cent.
This compares very favourably with the UK, where banks pay tax at 30 per cent. And with astute tax planning, the Irish institutions have, in the past, been able to push tax paid below 10 per cent - more than four times lower than that being paid by many bank customers on their incomes.