In the past few years, the banks' core business has been commissions, and a string of regulatory directives and restrictions have landed on the banks in this area. Commissions may annoy the public, but the banks' main source of income is in interest rate differentials: the low interest rate given on deposits, compared with the high interest rate charged for credit.
The regulator has barely touched this issue, and we are now seeing the first major effort to increase competition. Concentrating all of a customer's data, especially his credit rating, will help him shop between the banks and choose the best offer, just like when taking a mortgage.
But our familiarity with banks leads us to doubt that a price war will break out. The small banks may become more aggressive with their offers, but the disadvantage of smallness will make it hard for them to change the market share map. So where is the change to be found? At the investment institutions.
The institutions, which manage the public's pensions and savings, currently sit on a mountain of cash, which grows every month from the public's deposits. The alternatives are not particularly exciting: low interest rates, nothing meaty in the bond market, and the stock market offers few opportunities. The institutions are hungry for new investment options, such as household credit.
On the other hand, granting retail credit is no easy task at all. The institutions lack the computer, analysis, and underwriting systems to serve hundreds of thousands of households; they do not have enough information on customers to properly price their risk, and, of course, they have no network of branches to serve loan-seeking customers.
Setting up these infrastructures is expensive, and it unclear whether it pays for the institutions to make the investment. This is where Supervisor of Banks David Zaken comes in and saves the institutions at least half the work and investment: easily, and most importantly, gratis: they will receive customers' credit ratings. There will be no need for analysis or sophisticated computer systems, or even branches. Online, it will be possible to check a credit rating and automatically obtain credit at an interest rate that conforms to the credit risk. Simplifying the process could create real competition from the institutions and will not rely on cannibalization, and they will be able to offer low prices.
But the potential for increasing competition and improving prices for households is liable to have dire social consequences arising from the credit rankings. Good customers may receive better offers from the banks and investment institutions, but what about poor customers?
Poor customers who receive a low credit rating from the banks will struggle to switch banks or obtain loans at better terms, because the moment their poor credit rating is disclosed, they are unlikely to get a good offer, or any offer at all. Moreover, the credit rating lays bare the entire history of bounced checks and foreclosures, which will deprive such customers from receiving offers.
On Monday, the NGO Yedid Association for Community Improvement sent a letter on this point to Zaken. "Activating the bank credit ratings is discriminatory and harmful for a large part of the population which is trying with all its might to manage proper economic conduct," said Yedid deputy director for communication and social policy Ran Melamed, and called for the measure to be stopped.
The banks' credit ratings are also liable to block opportunities by the poor to switch banks and obtain better offers, and there is even a chance that the cost of their credit will rise. This is because the banks will seek to recoup the lower interest rates charged from wealthier customers, who threaten to switch banks. The easiest way to compensate for the loss of revenue is to raise the interest rates charged from the poor, who will become captive customers with no good alternatives.
Published by Globes [online], Israel business news - www.globes-online.com - on November 5, 2013
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