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It’s almost impossible to avoid these days: Parents who collect money for Christmas gifts for teachers will ask to be paid through it, while friends who go out to dinner (or more like a coffee or pint to go) perhaps) will seek to divide the costs.
Just like “I’ll Google” once replaced “I’ll search the Internet,” “I’ll revolutionize you” has replaced “I’ll pay you” for many.
Suddenly it seems that the UK-based payment provider is everywhere. Thanks to the best functionality of its payments app, countless payment options including Google and Apple Pay, its (more) cheaper (more) exchange rate, and its nifty payment and savings tools, it has amassed a staggering million Irish customers. .
And he’s not the only newcomer. Fintech start-up N26, which has a German banking license, told this newspaper on Tuesday that it expects to have about 200,000 Ireland-based clients early next year, but ultimately targets a million clients here. And all this for a bank that had only 10,000 Irish clients in 2017.
And there are a host of other fintech players, including UK digital competitor bank Starling, Raisin savings market, and Plum, a smart London-based money management app, all with their eyes on the market. Irish.
You might think that’s enough to scare incumbent banking operators into lowering their fees and offering other incentives in an effort to bring back their wayward herd.
However, the opposite appears to be happening. So what’s going on?
Competition, it is said, is one of the surest routes to keeping prices high and ensuring value for consumers. Despite the arrival of the aforementioned challenging banks, instead of feeling the tight grip of competition, both AIB and the Bank of Ireland are going in the opposite direction and recently announced that they were going to raise their checking account fees.
Starting this week, thousands of clients of both banks will face an increase in bank charges, as they will no longer be able to avoid or reduce fees by keeping a certain amount of money in their checking accounts. Instead, they will face significant increases in their daily banking costs.
The reasons for this are quite obvious: on the one hand, there are few profits in banks that have more money than they need. With the appetite for personal loans moderate and banks being charged to keep money deposited with the European Central Bank, banks do not want customers to keep that much money in their accounts. And they are certainly not going to incentivize them to do so.
As AIB told its clients, “the costs associated with deposits and checking account balances have fundamentally changed” and “it is no longer feasible” to grant a benefit, that is, free fees, for having access to these money.
Second, while banks have begun to charge businesses and wealthier individuals negative rates on deposits, they are reluctant to do so for personal customers. However, one way around this is to earn money in other ways, such as fees.
While there may be reasons why banks have increased their fees, the scale of the increases (some Bank of Ireland customers, for example, will see their fees skyrocket from € 20 a year to € 72) is surprising, especially given the increasingly competitive environment.
Deposit guarantees
The problem, perhaps, is that “competition” is no longer what it used to be. Unlike a full-service player entering the market, as in the days of Danske Bank and Halifax, the new fintechs offer very specialized services.
Revolut, for example, does not have a banking license, or at least it does not have one that covers its Irish-based users, as its Lithuanian banking license does not currently have one. This means that the savings with it are not covered by a deposit guarantee system, which normally covers up to € 100,000.
And, while N26 is more like a conventional checking account in that it is a bank, it offers users a German Iban, and there have been problems using non-Irish Ibans in the Irish market, and some employers or utility providers they cannot set them up in their payment systems. This means that it can be difficult to use one account as your main checking account.
As a result, or at least until now, users of these new providers will typically also have a checking account with one of the major players.
Also, although N26 and Revolut may offer “free” banking services, it is usually a very limited offer. While an account is free, for example with Revolut, you will have to pay € 4.99 to have your card delivered and if you withdraw more than € 200 per month, you will have to pay a 2 percent withdrawal fee. N26’s “free” options have similar limitations, increasingly pushing its premium accounts, which have monthly charges, like Smart, which costs € 4.90 per month / € 58.80 per year.
Account change
The Irish market is also dysfunctional in the sense that, regardless of the number of providers, consumers do not put enough competitive pressure on banks. And the banks know it.
Central Bank data repeatedly shows that Irish consumers are reluctant to switch checking accounts, with only 0.03 percent of account holders switching in the second half of 2018 (most recent figures), a record low.
With this in mind, banks may believe they have little to lose from rising fees and more to gain.
Only if these newcomers start offering more extensive banking services, including personal loans and mortgages, can established banks start to act.
Earlier this year, in a briefing with analysts, BoI CEO Francesca McDonagh was asked how clients choose their mortgage provider.
Your answer? “The vast majority will say that they will go to the bank where they have their checking accounts.”
And, for now at least, that is unlikely to change.
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