By Olatunde Vincent Adeyemi MBA, ACIB.
Anyone who has worked long enough in the Financial Services industry (especially Banks) would most likely have heard some customers’ outbursts, typically captured in the title of this article, more than once. This is usually as a result of some “contentious” charges passed into such customers’ accounts, with or without the customers’ prior knowledge or express consent. This Complaint Theme often dominates banking customers’ complaints as also highlighted in the KPMG Banking Industry Customer Satisfaction Survey for 2017.
Furthermore, this Complaint Theme provides common grounds for some esprit de corps among the Nigerian banking customers regardless of which of the banks they have relationships with. A classic example is also often seen in their comments when banks declare what customers term “excessive” profits at the end of each financial year.
While the aim of this article is not to hold brief for the banks, it has been discovered that this common notion largely derives from a lack of full understanding of the way banks work and their operating environment, especially in a country like Nigeria. Therefore, this article aims to provide a few clarifications on this contentious notion, with a view to enlightening the banking public and ultimately encouraging a change in the narrative around banks & their charges for services rendered.
- Banks are Financial Intermediaries: Apart from Shareholders funds, banks do not own the money they trade with. They principally collect from the surplus economic units and give to the deficit economic units, at a margin. To be able to perform this function, banks must maintain touchpoints either physically (branches) or virtually (digital) and also engage competently skilled manpower to run them. The margins from this financial intermediation must be sufficient to keep the banks afloat.
- Statutory Reserves: Arising from the financial intermediation role of banks, is a statutory requirement for banks to maintain adequate cash & near-cash reserves. This is to ensure that whenever the surplus economic units come for their funds (or part of it), the banks have enough to meet such requests on demand. In order to achieve this, the Central Bank of Nigeria (CBN) majorly uses monetary policy tools such as the Cash Reserve Ratio (CRR) and Liquidity Ratio (LR). Currently in Nigeria, these rates are put at 22.50% and 30% respectively. Simply put, for every N1 of customers’ deposits with banks, they must retain at least 52.50K in cash or near-cash (it is possible for some portions of the LR to be invested in highly liquid monetary tools such as FGN Bonds, T-Bills and Bank Placements) forms, to comply with the provisions of the CBN. Since Cash is also a non-earning asset, this effectively means that banks can only meaningfully trade with the remaining 47.50K of every N1 of customers’ deposits while performing financial intermediation.
- Cost of Funds: Another key driver of banks’ costs is the cost of funds (that is, the cost of attracting deposits). Aside the initial cost of products development and maintenance, interest expense on deposits in Nigeria banks is higher than what obtains in most developed economies. Not surprisingly, the Nigerian banking public appears to have no issue with this at all! However, what is usually missed is that interest rates on deposits are inextricably linked with lending rates. This is because banks will always factor in deposits rates to arrive at their lending rates, which must be sufficient to at least keep them in business. Hence, the clamour for a reduced lending rate regime may not soon materialize. The hope for this is further dampened when one considers the fact that even the Federal Government appears to be in a stiff competition for funds with banks going by the rates on Nigerian Treasury Bills (NTBs) which is currently as high as 18%. The effects of this on the industry are already well-articulated in a previous article by this author – 2017 Budget & Its Implications for the Nigerian Banking Industry. The CBN, in performing its role as the lender of last resort to banks, will also give funds to banks at 14% as depicted by the current Monetary Policy Rate (MPR). The MPR is usually taken as the base rate in an economy.
- Cost of doing Business: This reason is definitely not unique to banks alone but its effects may be more pronounced on banks. Nigerian banks (like other industries in Nigeria) power branch operations predominantly through diesel and also have to provide funding for both armed & unarmed security services to cover their daily activities. This is in addition to heavy outflows on Information Technology security in order to wade-off threats to both customers’ data and funds. Also, they must ensure adequate remuneration of staff members in order to provide disincentive for frauds and other sharp practices. These are aside other statutory costs like insurance premiums, NDIC premiums, Prudential provisions etc. The overall effect of these is to raise the bar on the margins banks must add to their baselines.
Regardless of the tough operating environment Nigerian banks operate in, it is expedient to mention that the regulator (CBN) has ensured that no bank charges arbitrarily for services rendered. Periodically, the CBN releases its Guide to Bank Charges which usually stipulates the maximum amount banks can charge for certain services, with the latest edition released in April 2017 (called Guide to Charges by Banks and Other Financial Institutions in Nigeria 2017). The CBN also monitors banks’ compliance to these guidelines & customers have the right to escalate to the CBN, should any bank charge outside of its stipulations.
However, with all these in place, one area where banks can do better than they currently are is in the communication of applicable charges on their services to customers. Having established the need for banks to charge sufficiently so as to remain profitable, applicable charges and fees must be clearly understood by the customers before they sign-up for such products or services. This will call for effective communication between the banks and their customers to ensure that clauses and conditions attached to products/services usage are explained to the customers in understandable language and forms. Creative communication methods (such as FAQs, graphics etc) must be employed to achieve this as the usual dependence on the “fine prints” has become trite.
Bank’s Marketing and Relationship Officers must also resist the temptation to downplay fees and charges applicable on products/services when pitching for new sales. In reality, most marketers tend to become a bit uncomfortable when discussing fees and charges with customers as a result of the inaccurate but common notion that this may discourage the customers from committing to buy the product. They must remember that no customer buys a product for the sake of it but for the value he/she intends to derive from same. It is better to highlight the benefits the customer stands to derive from the product vis-a-viz the cost of the product. This creates an atmosphere of authenticity with the customer thus engendering trust. With trust comes the prospects of repeat sales and numerous referrals which can certainly open new doors the marketer did not have prior access to.
Notwithstanding the above, it is also possible for the applicable fees and charges of a product to change after the customer has bought the product. In such instances and in line with international best practices, banks must endeavor to communicate these changes to the affected customers using acceptable communication method (which may be customer-specific) before the new price comes into effect. While all customers will not be pleased with the hike (truly speaking, no one likes to pay more), offering information on the circumstances leading to the price review usually elicits some understanding from most customers.
Finally, it is in the interest of the economy and even depositors for Nigerian banks to be profitable. However, the banks must ensure that this is done in an unambiguous and transparent manner worthy of the profession. The immediate benefit of this will be greater confidence of the banking public in the system; thus leading to a higher level of financial inclusion.
Tunde Adeyemi is a versatile Nigerian banker with over a decade experience in the industry. He is also an Associate of the Chartered Institute of Bankers of Nigeria (CIBN). He wrote in from Lagos, Nigeria.