The Banking Calculator as a Solution of Non-Transparency on the RCBS

MARTINA HEDVICAKOVA, IVAN SOUKAL, JAN NĚMEČEK

Department of Economy The University of Hradec Kralove

Rokitanskeho 62, 500 03 Hradec Kralove 3 CZECH REPUBLIC

martina.hedvicakova@uhk.cz; ivan.soukal@uhk.cz, jan.nemecek@uhk.cz http://www.uhk.cz Abstract: - The paper is focused on the field of retail core banking services market (RCBS) in the Czech Republic. As in other countries in the European Union, RCBS market in Czech Republic is affected by information asymmetry arisen out of non-transparent tariffs, that are often changed and contain hidden fees, even the product-tying problem is present. As a possible solution for product comparison there was in 2010 introduced an expert system The Banking Calculator. Its purpose is to offer independent, individual market overview for free and so to help the consumer to choose the optimal product. Individual means that the Calculator gives the ad-hoc market overview according to the consumer specific usage pattern. There is described structure of questionnaire, where the usage pattern is being determined, using the form of business processes. There are also pointed its advantages and future perspectives of this useful service that was by more than 33 000 consumers so far. Key-Words: - bank, costs, Calculator, account, client, services. 1 Introduction This paper is focused on the retail core banking services market (thereinafter only as RCBS abbreviation) in the Czech Republic. As in other countries in the European Union, RCBS market in Czech Republic is known as non-transparent filed with very high frequency of changes and many hidden fees. Many foreign studies point at this fact.

At first we have to notice in 2005 the White paper of Services Policy 2005-2010 [2] where the sub goal of removing the undue barriers associated with all types of bank accounts and to improve the competition between service providers was declared. The second part of this goal is synergy goal from an article 17. of the Regulation (EC) no. 1/2003 (for this paper purposes there can be shortly said that Commission understands that information asymmetry reduces the sector competition). After the suggested surveys and wide discussion there were compiled several documents, please see [3], [4], [5]. The main findings of mentioned sources will be shortly introduced and commented in the next 2 paragraphs. It was clearly stated that RCBS clients’ decisions are constrained by information asymmetry and high switching costs. Mainly there is shown that there is very difficult product comparison of offers. The main factors can be found when combining the results of mentioned studies –

the complexity of products being sold and the transparency of prices. [1]

2 The Expert System The Calculator There was created The Calculator in the Czech Republic. This service compares costs for clients in individual offered accounts on the basis of their RCBS use and recommends the lowest costs products. Knowledge base of the Calculator contains the tariff data of 12 banks (more that 98% of the RCBS market in the CZ) and their 45 accounts. Client only fills the detailed form concerning the usage of specific services – 52 questions in total (25 questions with attached sub questions and three additional questions). All fills are saved so the data for this study were acquired from 18 000 respondents who used the form of the Calculator in the year of 2010. The main tool for further help to choose the optimal cost account requires the identification of the most important RCBS client profiles. [6], [7], [8], [9]

The application is focused on the calculation of monthly costs of RCBS and other banking services of the client on the basis of the client's use of banking services. Frequencies of monthly use of the services, or amounts utilized, are entered by the client into an electronic form, which is then saved

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on the server. The form is divided into logical chapters. It includes 52 questions in total (25 questions with attached sub questions and three additional questions) in chapters: I. Account II. Statements III. Card services, IV. Electronic banking, V. Payments – direct payments, VI. Payments – standing orders, VII. Payments – authorization for encashment (including SIPO), VIII. Cash utilization, IX. Other services.

Calculator also monitors „if – then“ conditions, when for example clients are exempt from some charges, if the balance on their account is higher than the set limit, or if the turnover on the accounts exceeds the set limit. These conditions are for example in the offers of Raiffeisenbank, GE Money bank, Citibank and others. The Calculator includes data about imposition of charges for the offers of 12 banks, or rather 44 various types of current accounts or the so-called package accounts offered in the Czech Republic.

When all necessary data are entered, the Calculator will computed the costs and arrange bank offers in a transparent manner from the most cost advantageous to the least cost advantageous with regard to the type of use of services entered by the client. Data about frequencies, amounts related to the account turnover and balance and the particular calculated amount of costs are saved on the server. All fills are saved so the database holds more than 20 000 respondent’s answers. From the marketing research point of view there are gathered data:

a) Multivariate – there has been monitored 53 variable concerning RCBS usage, 2 system variables for respondent identification and 45 variables containing the calculated costs for each of monitored RCBS product,

b) Primary – data were gathered directly from the client,

c) Subjective – data came from respondent himself, respectively it is his or hers subjective seem.

Due to specific data gathering process the data analysis outcome cannot be applied on the whole CZ population. Main limits that characterize the population of RCBS Calculator are connection to the Internet and basic IT and banks literacy. Still there can be expected that passive client with desk service preference are presented in the Calculator’s database much less than e.g. internet banking preferred clients. For the adult low-cost banking

where there is presumption of high internet baking preference, mentioned limitations are not that strict, still they must be respected when discussing the field of data relevance. [6], [7], [8], [9] 3 Modeling of the Calculator Questionnaire There was described the expert system The Calculator in last chapter. There is described structure of communication while filling the questionnaire in next chapters for easier understanding.

There are modeling six chapter of questionnaire (IV. Electronic banking, V. Payments – direct payments, VI. Payments – standing orders, VII. Payments – authorization for encashment (including SIPO), VIII. Cash utilization, IX. Other services) for practical show. First three were published in [8].

3.1 Electronic banking Fourth part is focused on electronic banking (see Fig 1). Client decides, if he wants to communicate electronically with the bank. He can choose from internet banking or telebanking (both possibilities are possible only with some banks). [8]

Fig. 1 Electronic banking

3.2 Payments - direct payments In this part of questionnaire clients fill number of incoming payments from other banks and number of incoming payment from own bank. He also needs to enter the way how direct payments are entered (see Fig. 2). a) Direct payments to own/other bank at desk, b) Direct payments to own/other bank by

telebanking,

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c) Direct payments to own/other bank by box, d) Direct payments to own/other bank by Internet.

Fig. 2 Payments - direct payments

3.3 Payments – standing orders In this part of questionnaire clients fill number of standing orders to own bank and to other banks. He also needs to enter the way how standing orders are entered (see Fig. 3). a) Standing orders to own / to other bank at desk, b) Standing orders to own / to other bank by Internet, c) Standing orders to own bank / to other bank by telebanking.

Fig. 3 Payments – standing orders

3.4 Payments – authorization for encashment (including SIPO)

In this part of questionnaire clients fill number of encashment to own bank and to other banks. He also needs to enter the way how encashment are entered (see Fig. 4): a) Encashment to own bank / to other bank at desk, b) Encashment to own bank / to other bank by Internet, c) Encashment to own bank / to other bank by telebanking.

Enter number of direct

debits to own bank

Number of direct debits entered by telephone

Number of direct debits entered in branchNumber of direct debits entered by

Internet-banking

Enter number of direct debits to

unfamiliar banks

Number of direct debits entered by telephone

Number of direct debits entered in branchNumber of direct debits entered by

Internet-banking

Fig. 4 - Payments – authorization for encashment

3.5 Cash operations In this part of questionnaire clients fill number of cash operations, which he uses (see Fig. 5): a) Number of Cash deposit at desk b) Number of Cash withdrawal at desk c) Number of Cash deposit at ATM (this service in not available in all banks, available in for example GE Money Bank, UniCredit Bank and Ernste Bank). d) Number of cash deposits of excessive amount (number of deposits, excessive amount, and average excessive amount).

Enter number

of cash deposits

Number of cash deposits

Enter number of desh

deposits of excessive

amount

Enter number of cash

deposits by ATM machine

Not available in all banks

Number of deposits

Enter number of cash

withdrawal at a branch

Number of cash withdrawal at a branch

Number of cash deposit of excessive amount

Average excessive amount

Fig. 5 - Cash utilization

3.6 Other services Last part of questionnaire is focused on specific operations which most of clients do never use. But when these operations are used, they are charged very high. These operations are as follows (see fig 6 - Other services): a) Cash back, b) Receiving of coins, c) Exchange of bank notes, d) Not specified services.

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Enter number of Cash back

Not available in all banks

Number of withdrawal by cash back

Enter receiveing of

coins

Number of receiving of coinsNumber of coins per one receiving of coins

Average value of deposit coins

Enter exchanges of

banknotes

Number of exchanges of banknotesNumber of banknotes per one exchangeAverage value of banknotes exchange

Enter not listed

demanded services

Not listed demanded services

Enter name of your bank Bank name

Enter type of your account Type of account

Fig. 6 - Other services

Clients need to fill in the questionnaire also the name of their own bank and the type of their account, which they are actually using. These questions have strong impact on calculating of their monthly cost of their potential banking account.

After filling all the questions, the Calculator offer clients 5 accounts (according entered specifications) with lowest monthly cost. These records are compared with entered values.

4 Client index On the basis of collected monthly data from the above described Calculator the client index is computed, reflecting the amount of average monthly account maintenance costs of all 21 banks with 45 offered accounts monitored by the Calculator.

The benefit of the Calculator is a detailed analysis of the client behaviour. It captures respondent´s individual retail banking services usage. The amount of average monthly costs does not depend only on the selected bank, but especially on the frequency and quantity of individual services usage. The amount of bank charges is then dependent on the behavior of the client. For this reason, an active client can pay the bank charges of hundreds of crowns even in low-cost accounts or vice versa a passive client with exclusive account does not exceed this limit.

There will be presented computation now. The AC per month of hth account are:

∑∑= =

=k

h

n

ihi

hh

h

cn

AC1 1

1

Equation (1) is: AC: average costs chi: costs of the ith client using hth account per month. h: ordinal number of account, i: ordinal number of client, k: sum of the monitored accounts nh: sum of the clients using hth account

Client index is weighed sum of AChs where the weights are derived from shares of individual banks on the client population. There are two approaches. The first one uses shares from annual reports and bank’s web pages. The second one is based on shares from the Calculator, respectively on shares of each account on the market. There has been chosen the second one because there isn’t described whole population for which the first one should be used. The client index or it can be said the average costs of an average client are then:

∑=

⋅=

=

k

hhh

hh

ACwCI

nnw

1 Equation (2) is: AC: average costs CI: client index h: ordinal number of account, k: sum of the monitored accounts n: sum of clients (respondents) nh: sum of the clients using hth account wh: weight (share) of hth account

CI based on the data from almost 18 000 respondents gathered during January to September 2011 is 6,83 € per month (168,70 CZK per month) so 81,9 € per year converted by actual exchange rate czech crowns – euro (thereinafter only as CZK and as EUR or €).

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Client index

6,966,92

6,846,926,96

7,04

6,68

6,566,6

6,36,46,56,66,76,86,9

77,1

Janu

ary

Februa

ryMarc

hApri

lMay

June Ju

ly

Augus

t

Septem

ber

Month

Cost

s in

€

Fig. 7 - Client index

Source: data [9], own research The processed data shows that over the last nine

months were no major fluctuations in size of the client index (see Fig. 7). The highest increase in average monthly costs was in April 2011, when the scale of charges of 2 large banks in the CR has changed (Commercial Bank and Raiffenseinbank) and the Postal Savings Bank has started charging its free personal account Era. The difference is within the statistical error margin.

Based on data obtained from the Calculator, the average costs of individual bank accounts are also calculated. Table 1 show that the lowest average account maintenance costs have mBank with mKONTO and FIO with Basic account. But with these results we have to consider the fact that these low-budget accounts offer limited services. For example mBank does not offer cash transactions or foreign payments. This disadvantages in the overall evaluation the VIP accounts, which have indeed high monthly fees, but provide superior services.

From Table 1 can be further seen that only two bank accounts came under the hundred crown limit. Neither the clients of Postal Savings Bank, which builds its image on free account maintenance and from April 2011 on minimum account maintenance costs, got below this limit. But these accounts steadily occupy the third to fifth position among accounts with client´s lowest average monthly costs. The ČSOB Exclusive account and Raiffeisenbank eKonto Premium have placed themselves with a similar amount of average monthly costs. But the low average costs of these two accounts are achieved only under conditions of minimum balance or revenue on the client's account. Table 1 includes only accounts on the first 10 places.

Table 1 - Client´s average costs on individual accounts from January to September 2011

Source: data [9], own research 5 Conclusion In the Czech Republic are one of the highest bank account fees in Europe. The banks make use of the practices on the given banking market and the conservativeness of citizens of the Czech Republic who are not willing to flexibly adjust to market conditions.

For the reasons of clarifying charges at individual institutions, a number of projects is being raised, such as bank charges Calculator, which constantly monitors the level of bank charges and aims to select the most appropriate accounts according to specified criteria at the lowest monthly account maintenance costs.

The Calculator is very useful tool for choosing the most suitable banking account according the customer needs. Calculator also offers an information service for the customer (each month the customer is informed about actual development of banking costs on the market) so the customer can react very easily on the development on the banking

Rank Account Average

costs in CZK

Average costs in

€

1 mBank mKONTO 9 0,36

2 FIO Basic 98 3,92

3 ČSOB Exclusive account 102 4,08

4 PS Personal account Free 105 4,20

5 PS Personal account ERA 107 4,28

6 Raiffeisenbank eKonto Premium (min. revenue of 25 thousand CZK)

107 4,28

7 ČSOB account 146 5,84

8 Česká spořitelna (Czech Savings Bank) 162 6,48

9 Raiffeisenbank eKonto Extra (min. revenue of 20 thousand CZK )

169 6,76

10 KB Extra account 170 6,81

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market. This area on the market in the Czech Republic develops very rapidly and local banks adjust banking fees several times per year.

First condition of customer economical optimalization of banking fees is to be properly, clearly and fast informed. When customers have possibility of receiving this kind of information, they can build up a constant pressure on banking market to stabilize so hectic and not predictable situation on the market.

Using the analysis of filtered data gained from the Calculator from January to September 2011, which was over 18,000, the client index has been calculated. The average costs of the bank accounts, which respondents have filled out in the examined period, have been calculated. Subsequently the average bank account maintenance costs in the Czech Republic have been calculated. Based on this index the movements in the price level of banking services can be expressed.

Popularity of this project also refers more than 2.000 filled questionnaires each month. There are also pointed its advantages and future perspectives of this useful service that was by more than 33 000 consumers so far.

5 Acknowledgement and funding This paper is written in the frame of specific research “Adverzní výběr v prostředí retailového bankovnictví”, translated as “Retail banking adverse selection”, project number 2105, funded by Czech Republic Ministry of Education, Youth and Sport. References: [1] I. Soukal, M. Hedvicakova, J. Draessler,

Central register systems: the information asymmetry reduction tool, World Conference on Information Technology, Bahcesehir University & Near East University, 23-26 October 2011, Antalya - Turkey, in press

[2] Commission of the European communities. EU policy paper – Financial Services Policy 2005–2010, [on-line]. 2005. [cit. 26.7.2011]. URL: http://ec.europa.eu/internal_market/finances/policy/index_en.htm#Financial_Services_Policy_2005-2010.

[3] Commission of the European communities. The green Paper on Retail Financial Services in the Single Market. [online]. 2007. [cit. 26.7.2011]. URL: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2007:0226:FIN:EN:PDF.

[4] Commission of the European communities. Study on the Data collection for prices of current accounts provided to consumers. [online]. 2009. [cit. 26.7.2011]. URL: http://ec.europa.eu/consumers/strategy/docs/prices_current_accounts_report_en.pdf.

[5] Commission of the European communities. Sector Inquiry under Article 17 of Regulation (EC) No 1/2003 on retail banking (Final Report). [online]. 2008. [cit. 26.7.2011]. URL: eur-lex.europa.eu/LexUriServ/site/en/com/2007/com2007_0033en01.pdf.

[6] I. Soukal., M. Hedvicakova. Možnosti sledování trendu ve zpoplatnění základních bankovních služeb. Journal of competitivness. 2011, issue 1, p. 131-144.

[7] I. Soukal., M. Hedvicakova. Retail core banking services e-banking client cluster identification. In. Procedia Computer Science Journal. volume 3. [s.l.] : Elsevier, 2010. p. 1205-1210. ISSN: 1877-0509.

[8] M. Hedvicakova, I. Soukal, Retail core banking services costs optimization, World Conference on Information Technology, Bahcesehir University & Near East University, 23-26 October 2011, Antalya - Turkey, in press

[9] The Calculator [on-line], [cit 26.7.2011]. URL: http://www.bankovnipoplatky.com/kalkulator.html

[10] J. Němeček. CRM a výsledky hospodaření vybraných firem. Journal of competitiveness. 2011, issue 1, p. 75-81.

[11] M. Hedvicakova, I. Soukal. Expert System as the Tool for Information Asymmetry Reduction on RCBS Market in EU, International Joint Conferences on Computer, Information, and Systems Sciences, and Engineering, SCSS 10, 2010, in press

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