Supervisor of Banks David Zaken is targeting the inducements banks offer new customers. Sources inform ''Globes'' that the Bank of Israel is drafting a new directive which will set clear limits on the inducements offered new and current customers.
The Bank of Israel declined to comment on the report.
Although the final draft is not ready, sources say that the Bank of Israel will probably ban the giving of gifts or grants to new customers. Under current rules, a bank may offer gifts of up to NIS 200, but the banks have found a way around this restriction, and some banks offer more valuable gifts. For example, Mizrahi Tefahot Bank (TASE:MZTF) recently offered El Al Israel Airlines Ltd. (TASE: ELAL) tickets to new customers. To comply with the gift cap, the bank gave new customers a grant equal to the price of the ticket, which the customer used to buy it. The Bank of Israel was displeased by the practice, prompting the writing of clear rules for customer benefits.
Mizrahi Tefahot Bank is not the only bank to offer inducements to new customers. Bank Leumi (TASE: LUMI) offers students a NIS 1,300 to open an account, or a double ticket for a day of recreation to newlyweds. First International Bank of Israel (TASE: FTIN) offers grants of NIS 1,000-1,500 to new customers.
In future, such practices will be banned, and banks will only be allowed to offer in-house discounts, such as exemptions on fees or low-cost loans.
The Bank of Israel wants to limit customer inducements because it thinks that they blind customers and make it harder to compare banks. This results in distortions, especially when the benefit is conditional on the customer committing to stay with the bank for a specified period, usually 3-5 years.
The Bank of Israel wants the banks to focus on discounts for banking services, such as the exemption on checking account fees offered by Bank of Jerusalem (TASE: JBNK), or the reverse savings plan offered by Union Bank of Israel (TASE: UNON).
Although the proportion of bank customers who switch banks has increased in recent years, it is still low, at about 7% a year. For the sake of comparison, the churn rate at mobile carriers is 25%. Some banks are unhappy with the Bank of Israel's plans, arguing that they will harm competition and reduce the churn rate.
"When we allow new customers to choose between an exemption on fees and a grant, most chose the grant. Ultimately, this is the main reason why customers switch banks. Increasing the banking benefits alone will only reduce the switching of banks by customers, which is already low," said a source at one bank. He added that the ban will actually benefit the big banks, because it is mostly the smaller banks which offer the benefits.
"The ban on customer inducements is patronizing. They don’t trust the consumer to know how to assess whether the benefit pays," said other banking source.
Some Bank of Israel officials also want to limit benefits given to current bank customers, such as benefits through customer clubs, but the sources doubt that any substantive restrictions will be made at this time, and that the restrictions will only apply to new customers.
Published by Globes [online], Israel business news - www.globes-online.com - on July 21, 2013
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