I got a note yesterday from a friend in Turkey who brought to my attention that the Board of Competition fined seven of their banks for working together in a cartel-style operation that was anti-competitive. They called it “a secret gentlemen’s agreement”.
Apparently, the agreement in this case was based upon competitive bidding for corporate client’s contracts.
The idea is that the banks should compete on processing fees, services and contracts for running corporate payroll services as this normally means that the employees of the corporations will open accounts with those banks.
Instead, the banks agreed secretly that they wouldn’t participate in a competitive bidding process but to dish out business on a rota basis.
An agreement not to compete in other words.
But this does not surprise me too much.
After all, banks regularly get fined for agreements not to compete:
French Authority Fines 11 Banks $504 Million in Check Fee Cartel, September 2010
BNP Paribas SA, Groupe Credit Agricole, BPCE SA and eight other banks were fined a total of 384.9 million euros ($504 million) after France’s competition regulator said an electronic check-processing program improperly levied fees on consumers …
RBS fined £28.6m for price collusion, March 2010
The Office of Fair Trading (OFT) has issued a £28.59m fine to Royal Bank of Scotland – a bank 84 per cent owned by the taxpayer – for breaking competition law. The fine was announced yesterday after RBS admitted revealing details of its loan pricing plans for professional services firms, such as lawyers and accountants, to its rival Barclays …
The European Court of Justice (the ECJ) has upheld the European Commission's (the Commission's) decision to fine four Austrian banks EUR 106 million for participating in a cartel.
Visa, MasterCard get Hungary cartel fine, September 2009
Hungary's competition authority fined Visa, MasterCard and the country's top commercial banks on Thursday for illegally fixing the fees they charge each other after bank card transactions.
The list goes on.
Why is this?
Because it can.
Banks are a collegiate in most countries, regulated by laws and licences that structure the industry in such a way that there are typically just three or four major players in each country.
Those three or four major players then carve their turf as they see fit.
Sure, they compete in some areas – branch based business, investment banking brokerage, mergers and acquisitions, capital raising and trade finance – but one area that is fairly uncompetitive is the whole aspect of fees and charges.
This is because most banks know that once you catch the bird with the early worm, then you don’t need to throw many more worms out there to keep the bird on the hook.
That sounds like a Cantonism – "when the seagulls follow the trawler, it is because they think sardines will be thrown into the sea" – and what I mean by this is that banks compete primarily to get new business.
Once the business is on the books, it is unexpected for customers to switch banks because (a) it’s too much trouble, (b) it doesn’t warrant the returns on investment, (c) banks are very similar in operation and service …
… it goes back to my old thing about competition in banking.
There will only be true competition when completely transparent fess, services and charges are compelled on an apples-for-apples comparison basis by law.
It's getting there, but such comparisons are hard.
For example, ask bank representatives to explain Annual Percentage Rates (APR), show how theirs works, and then show how theirs compares in a completely transparent like-for-like manner with their competitor's, and you'll see what I mean.