Retail Banking in the Czech Republic

A period when winter passes the baton to spring is a time for the largest domestic banks to publish their financial numbers from the previous year. This year is no different and therefore we know the 2012 results of the BIG 3 banks. The year 2012 was, literally, a breakthrough year – net income from fees and commissions of all the BIG 3 banks (Česká spořitelna – Erste Group; ČSOB – KBC; Komerční banka – Société Generale) declined. It had not happened before.

Česká spořitelna reports a decrease in net income from fees and commissions by 4.95 % in comparison with the previous year. In 2012, ČSOB generated lower income from fees and commissions by 3.83 % (year-to-year) and, last but not least, Komerční banka lowered income from fees and commissions by 3.93 %.

Although these figures from financial reports dropped, shareholders of banks mentioned above do not have to feel grief, as it would seem at first glance. The main goal of joint-stock companies (which banks are) is to increase value for owners (shareholders), and, as we know, value depends on an ability to generate profit. Profits of all BIG 3 banks have grown dramatically!

In 2012, Česká spořitelna increased its net profit by 21.8 % (CZK 16.61 billion). The profit of ČSOB rose by 37 % (15.3 billion CZK). Also shareholders of Komerční banka can feel satisfaction, because the net profit jumped by 47 per cent to CZK 14.2 billion. It is obvious that the explanation used in other sectors (such as construction or industry), i.e. that economic stagnation and general reduction in economic activity (especially consumption) crushes one company after another, does not apply to the the Czech banking sector. Moreover, information about banks going bankrupt or achieving state support (that we read about from foreign countries) sounds like sci-fi in the Czech Republic. Well, the Czech Bank also “touched the hot pot” with a mixture of bad assets and worthless bonds, but (financial) pain has passed away quickly.

How do you explain the above?, one could ask. It’s simple:

Firstly, it shows what economics (I mean the real scientific discipline, not “economics” full of ideological idiocy that politicians and self-appointed experts present to us) explains: Competition really works in favor of consumers, not vice versa. Entries of small banks (“predators”) with on-line base, efficient cost management, attractive price policy, and – last but not least – comprehensive range of high quality, competitive services caused a lot of slogans like “special offers,” “fee cancelled,” “fee and commission holidays for new clients,” “we implemented new, customer-friendly tariff,“ “we offer better product for same/lower price,” etc. to appear last year in marketing communication of Czech banks. Simply put: The market has been set in motion and all customers (not just active ones) are better off.

This brings us to another important point. We can very often hear theoretical ideas (sometimes put in practice as “hard” solution – e.g. Slovakia) that prices in the banking sector should be regulated, fees and other prices should be prohibited by law, simply, that a need to protect clients from banks does exist! Such nonsense!

There is only one thing state or another regulatory body and legislators should do: to apply transparent rules that will make a process of entering market (by trustworthy entities, of course) as simple as possible. This is more than enough. Not just real competition, but even hypothetical competition matters! So if I (as a bank) abused my position to take an advantage over clients and thus generated a huge profit, a competitor with a prospect of profit would enter the market and my position would be compromised. When the rules are transparent, this operates as a simple, natural barrier against both cartels and substandard services.

But we – as clients – have to bear in mind that this pressure starts with us. How? Since we are not indifferent to our money, we monitor the current situation on the market (there is no need to scroll through hundreds of pages of tariffs of individual banks; thanks to comparisons and tips in the media or on specialized websites, it is a piece of cake nowadays) and are able to move to a better bank. As a result, banks with high prices see that the only chance to keep the current level of clients is to make a change – go cheaper, go simpler, go more innovative. Apropos: a movement from one bank to another has never been as easy as today. With the Code of mobility (“Kodex mobility”), one can change a bank (and also transfer all money, transfer standing orders, get a credit/debit card, etc.), only with one signature. One visit in new bank is sufficient for you!

The development leading to the 2012 results shows that even in conditions of increasing competition and pressure to lower prices (fees), banks may prosper very well (profit growths are the best proof) and both their owners and clients are satisfied. This balance is a long-term condition for development in every branch of economy. One Czech proverb says: “One swallow does not make a summer”. Anyway, the first quarter of 2013 shows a pressure on high quality services and responsible prices continue, so we could expect the same, client-friendly development in this year, too.