By George Christou
The increase in bank charges has become a big public issue in the last few weeks, the political parties, consumers associations and interest groups mounting a concerted attack against the decision, which they all attributed to the greed, arrogance and ruthlessness of the banks.
Deputies stepped up their rhetoric and held House committee meetings to discuss the matter while parties called on the government to step in and stop the banks increasing charges for the benefit of the people. It was left to the finance minister to explain that neither the government nor the central bank had the authority to interfere and tell the banks what they should charge.
Nobody attempted explaining the reasons for the higher charges as it was assumed the banks were motivated by greed. According to the European Banking Authority (EBA), Cyprus banks have the second highest cost to income ratio among the 27 EU member-states, only Malta being worse off. Cost to income currently stands at 75 per cent which is 12 per cent higher than the average of European countries. For the banks, staff costs are in the region of 50 per cent of total expenses which is extremely high when compared to banks in other countries.
As long as costs are not reduced, bearing in mind that there are no sustainable means for drastically increasing revenue in a small market like Cyprus, the high cost to income ratio will remain a problem. Whereas the prospect of revenue increases are limited, labour costs are constantly rising, as a result of the collective agreements that ensure substantial, across the board pay rises every year. These agreements, which provide pay-scale increments plus a horizontal annual pay rise ensure the steady increase of the payroll.
This is an antiquated and ineffective reward model, as it does not reward performance which is the practice in all efficiently-run businesses. Cyprus’ banks, like the public service, give big pay rises regardless of an employee’s performance, whereas the rational method would be a small annual pay rise for all employees and additional increases for those that have performed well. The current regime does not offer any motivation to workers to improve their work performance as they would not be rewarded for it. They would get the same rise as an under-performing colleague.
The advances of technology and the advent of internet banking are already bringing about major changes to the way banks do business. There is no longer a need for the big number of branches and the same numbers of workers. Many of the intermediary stages for the completion of a transaction, for which an employee was needed, have been automated making many positions redundant.
Banks are in a position to offer a range of products at a lower cost than the traditional bank branch, but staff numbers and high costs do not permit this for now. The way forward is job cuts, but the so-called ‘voluntary retirement’ also has a very high cost. Voluntary retirement schemes in the banking sector of Cyprus offer extravagant compensation that could reach 180,000 to 200,000 euro (amounts that are non-taxable). No other sector of the economy offers such ludicrously high amounts of compensation. These amounts are imposed by the bank workers’ union, with the support of the government, which is terrified of the prospect of industrial action at banks.
In the end, banks have to remain profitable to survive and in an age of extremely low interest rates, costly regulatory frameworks and increased competition from Fintech companies with much lower overheads. The banks are not becoming more competitive by increasing charges, but given the high costs they operate under, it is the only way for them to achieve a level of profitability that will allow them to stay in business.