The ratIonale for banks to cut their fees

The Bank of Thailand's payments report last year did not mention when Thailand's electronics payments volume would match up that of some countries like South Korea, which demonstrated a sharp increase in card payments. But it is clear that it is the central bank's policy to promote more electronic payments, and to do so, pricing distortion must be removed.

In an interview last week, Somchai Jitsuchon, the research director of the Thailand Development Research Institute, said rationalising fees would eradicate the distortion in the system.

Somchai, who spent years researching banking fees and nearly two years serving on the Payment Systems Committee, said some fees are too low and others too high, reflecting the cross-subsidisation in the system.

He cited the money transfer fee as an example of the "too high" list. Thai banks charge three rates - Bt12 for transfers of up to Bt100,000, Bt40 for transfers more than Bt100,000 up to Bt500,000, and Bt100 for transfers of over Bt500,000 up to Bt2 million. The banks agreed to change this on December 15 to a single rate of Bt12 for transfers up to Bt2 million. Ten years ago, foreign banks quoted under Bt10 per transaction. Thai banks' argument then was that foreign banks shouldered no cost in managing the nationwide branch network.

Banks claimed that for every Bt10,000 in cash, the transportation cost is Bt30-Bt40. Sometimes, cash from a net-saving province is shifted to headquarters in Bangkok, before distribution to net-spending provinces. As bank branches expanded to 5,806 last year, this cost increased.

Meanwhile, the fees on cheque and cash transactions are "too low". The issuer is charged only Bt15, but the clearing cost is Bt40-Bt70. Cheques need to be screened by bank branch managers, and physically sent to the Bank of Thailand. Banks also need to transport cash to the branch of the payee's account.

In a society where trust is diminishing, people still rely on cash payments. A buyer of land could withdraw Bt2 million cash from a bank branch to pay for it, rather than pay by cheque. That prompts the bank to stock up on cash for withdrawals, and again it involves the physical transportation of cash. Somchai favours the idea of slapping fees on those who withdraw huge amounts of money, say Bt300,000 per day.

Somchai noted that banks also tend to charge large customers too low a fee. Under the ITMX bulk-payment system, banks offer discounts to large customers who use the direct-credit system - which facilitates transfers from one account to many accounts like in the case of payroll payments. He said that in doing so, banks expect to retain large customers, in the hope that they could offer the customers financial services in the future.

"There are two layers of subsidisation in the system. First, those paying through other means pay more than those paying by cheque or cash. Second, small customers pay more than large customers," Somchai said.

Thailand will need to do research on cash spending behaviour, he added.

The Bank of Thailand's payments report showed that of total pre-authorised transactions worth Bt9.2 trillion, direct credit accounted for 72.5 per cent.

It also showed that cash is the most popular means for bill pay-ment at bank counters, accounting for 93.3 per cent of total transactions against 4.4 per cent by cheques. But in terms of value, cheques accounted for 47.3 per cent of the total, compared to 31.7 per cent by cash. Meanwhile, 123.2 million cheques were in circulation last year, down 4.6 per cent on year. Their value was Bt56.1 trillion, down 9.4 per cent.

Bill payments at counters also produced 84.8 million transactions in the year, with a value of Bt5.2 trillion. Payment through direct debit - through which consumers pay bills to a particular service provider - amounted to 63.2 million transactions or Bt1.49 trillion.

Credit-card spending totalled Bt937.1 billion, compared to Bt921.1 billion in the previous year. Now 21 million ATM cards, 30.7 million debit cards and 13.5 million credit cards are in circulation. Debit cards generated 724.6 million transactions in 2009, of which 80.9 per cent was for cash withdrawals. ATM transactions totalled 516.3 million, from 531.8 million.

In the Asia-Pacific, card transactions - credit, debit, charge and other payment cards - surged 158 per cent to US$1.8 trillion from 2004 to 2009, approaching nearly a quarter of the global card volume, says Euromonitor, a research firm. In 2006, although South Korea ranked 34th in per-capita income among countries in 2005, it ranked fifth in per capita credit-card spending, according to the Bank of Korea. Nearly half of the 454 trillion won, or $491 billion, in private consumption in South Korea was settled by credit cards.

This was thanks in part to a government campaign to fight corruption in the late 1990s. The government encouraged consumers to use credit cards and threatened tax audits of enterprises that refused to accept them as part of its effort to fight the all-too-free flow of cash in the underground economy. It even gives income-tax rebates to people who report their annual expenditures using credit cards.

Aside from many measures being planned, Thailand is developing the local switching system to facilitate more card payments, while the central bank is handling distortion when it involves fees for account maintenance, bounced cheques, loan arrangement fees and credit card annual fees.

"Pricing or fees will be more competitive in the future. Competition was low in the past as consumers rarely moved their savings from one bank to another and banks thus fixed fees at similar rates. However, some banks have set a different rate. Some waive fees for withdrawals with other banks' ATM cards. Some charge a single rate for money transfers. Competition will rise mainly from small and medium-sized players that want to draw customers. This will offer consumers greater benefits and greater choices," the central bank said in its report.