ECONOMIC ANALYSIS OF
NEWS HEADLINE
No Such Thing as a Free Bank (Atzler&Drost, 2017)
ECON7110
SEMESTER 1, 2017
(Word Counts 1989)
Fabian Ailin Varasteh
Student-ID: 44739818
[DATE]
[COMPANY NAME]
[Company address]
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Contents
1 Summary ............................................................................................................................. 3
2 Background ......................................................................................................................... 4
3 Analysis ............................................................................................................................... 5
3.1 Analysis A ..................................................................................................................... 5
3.1.1 European Banks .................................................................................................... 5
3.1.2 Consumers ............................................................................................................ 5
3.1.3 Bank Account Markets ......................................................................................... 7
3.2 Analysis B ..................................................................................................................... 8
3.2.1 Consumer Support ............................................................................................... 8
3.2.2 Traditional Banking Sector ................................................................................... 8
3.2.3 Other Markets .................................................................................................... 10
4 Recommendation .............................................................................................................. 11
5 Appendix ........................................................................................................................... 12
5.1 Reference ................................................................................................................... 13
5.2 News attachment ...................................................................................................... 14
2
List of Abbreviations
ATM Automated Teller Machine
BL Budget Line, See
CS Consumer Surplus
D Demand
DWL Dead Weight Loss
e equilibrium
ECB European Central Bank
IC Indifference Curve
MRT Marginal Rate of Transformation
P Price
PS Producer Surplus
Q Quantity
S Supply
TC Total Costs
TR Total Revenue
Y Income
π Profit
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1 Summary
x Germanys traditionally free banking culture is set upside down after ECB established
negative interest rates on bank deposits
x Facing lower revenues German banks claim that free checking accounts, online trading
and credit cards cannot be sustained anymore
x In order to compensate losses, the majority of Germanys financial institutions
announced additional fees on common bank accounts, such as costs for ATM services
x Over 10% of around 1400 German saving and cooperative banks already started
charging ATM fees under specific conditions
x Banks recently implemented new fee structures without informing their customers
properly, thus they tend to be hardly comprehensible
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2 Background
With its traditionally free bank accounts at local community banks the banking sector in
Germany differs from other industrial countries. But the luxury of free bank accounts is coming
to an end after eight of Germany’s 10 biggest saving banks incremented fees on retail accounts
(Gutteridge & Pallenberg, 2016). In the last ten years the amount of traditional bank branches
in Germany steadily declined. A quarter of around 44,000 German bank branches has already
been closed. This represents downsizings of around 1000 branches. One main reason is the
development in the online banking sector which makes traditional bank branches
unnecessary. Meanwhile, preserving traditional banks became very costly while competition
among banks has increased. These market conditions already led to market exits of around
400 banks lately (Dowideit, 2016). But financial institutions are now threatened even further
after the ECB introduced negative interest rates on bank deposits. (Atzler & Drost, 2016). Since
2014 banks have to pay additional penalty interest to deposit cash with the ECB (Gutteridge
& Pallenberg, 2016). This currently leads financial institutions to change their operation
structure drastically, since three quarters of their revenue is generated from interest on loans
and other investments. To compensate their losses due to negative interest rates banks
decided to pass their costs onto their clients by implementing a variety of diverse and mostly
non-transparent bank account fees. While fees for bank accounts are typical in other
countries, Germany managed to maintain its free retail bank society until now, because its
competition1 forced prices to the bottom (Atzler & Drost, 2016).
1 The country has the highest bank-per-head ratio among all developed countries.
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3 Analysis
3.1 Analysis A
This section will focus on the parties that are mainly affected by the new market situation in
Europeans banking sector.
3.1.1 European Banks
As a result of ECB’s negative policy rate implementation in June 2014, the profit margin
between banks’ lending and deposit rates reduced significantly (Randow & Kennedy, 2017).
At the present time, almost three years after the implementation of sub-zero rates, the effects
became particularly notable in Germany’s banking sector. The average annual bank profits per
account holder in Germany are €680, whereas the annual profits in France and Britain are
€910 and €1370 accordingly (Atzler & Drost, 2016). The fact that Germany has the highest
banking competition amongst all developed countries whilst offering their bank accounts at
utterly low margins made the countries financial institutions markedly vulnerable (Dowideit,
2016). Now that traditional banks are facing costs for money deposits on their customer’s
savings accounts, the majority of Germany’s banks already announced to implement
additional fee structures, to prevent further losses (Atzler & Drost, 2016).
= R − TC ⇒ ↓ = ↓ − ↑
As shown above the negative policy rate directly affected the European banks, especially the
financial institutions in Germany and triggered downturns in their profits due to costs for
storing money overnight (Randow & Kennedy, 2017). Considering the fact that banks generate
profit with bank services and by reinvesting their customer’s savings, the equation above
illustrates that the downturn in profits can be explained by a decline in TR while the TC2
increased (Pindyck & Rubinfeld, 2013).
3.1.2 Consumers
After banks decided to pass portions of their costs onto their customers in form of bank
account fees, banking clients also became affected. So far the banks have been very creative
with implementing a variety of new fee structures to their checking accounts that differ from
bank to bank (Atzler & Drost, 2017).
Online banks, such as Comdirect Bank are still able to supply free checking accounts. This can
be explained by the fact that online banks use other banks ATM’s and do not run their own
bank branches therefore they minimise costs more efficiently (Atzler & Drost, 2016). However
the majority of the customers have not taken advantage of replacing their branch based bank
accounts despite the availability of less costly online banking accounts.
With this in mind Consumer Associations accuse banks to conceal their new fees without
informing their clientele properly. The occurred obfuscation induces that most of the
customers are not cognizant of the fact that their bank account includes hidden costs.
2 As shown in the appendix in figure 8
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Forthwith this lack of transparency might be the reason that some customers have not
changed their banking behaviour yet (Atzler & Drost, 2017).
Nonetheless the implementation of fees on German bank accounts has an impact on
customer’s budget constraints. The graph below represents a loss in customer’s opportunity
set due to an increase in the price of traditional banking. The slope of the BL (MRT ) increased
accordingly.
Figure 1
Source: self-made graph according to (Pindyck & Rubinfeld, 2013)
Since online and traditional banking are substitutes many customers stayed with their
traditional banking solution, enjoying local counter services. Nowadays, considering that
prices for traditional accounts are rising, consumer recognise online banking as an alternative
to the old fashioned banking system. Nevertheless there are still clients who prefer traditional
banking over online banking and therefore accept higher fees. The two different types of
customers are represented in the graphs below.
Figure 2
Source: self-made graph according to (Pindyck & Rubinfeld, 2013)
The left graph shows customers who prefer traditional banking with a combined consumption
bundle of normal and online bank accounts. However their total utility decreased due to
higher costs of traditional banking. The right graph represents customers that consider both
alternatives as perfect substitutes, hence they choose to spend their total budget only on
online banks. ICT’ represents the utility that these customers would achieve if they only choose
to consume traditional bank accounts, resulting in a lower utility than ICmax.
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3.1.3 Bank Account Markets
The negative interest rates influenced both the traditional banking market as well as the
online banking market.
Given that Germany has a highly competitive banking sector, with an already existing trend of
bank closures the additional burden of higher costs will accelerate bank shutdowns even
further, thus there will be a shift of supply from S1 to S2. At present the expected effect remains
absence since the short-run demand curve is almost perfectly inelastic. The reason for this is
that people tend to take time to change their consumption habits due to higher prices whilst
non-transparent price structures further decelerate the transition process (Pindyck &
Rubinfeld, 2013). However, by the time the first market exits occur there will be a decrease in
common bank supply and demand entrenching a new market equilibrium in e3, changing the
price PT3 for common bank accounts and decreasing the quantity QT.
On the other hand the new market situation paves the way for online banks after customers
start substituting old fashioned bank accounts with online bank accounts. The increase in
demand is shown in the right shift from D1 to D2 and an increase in supply represented in the
movement from S1 to S2. As a result there will be a new market equilibrium in e3 with a change
in PO and an increase in quantity QO.
Figure 3
Source: self-made graph according to (Pindyck & Rubinfeld, 2013)
3 The price and quantity changes shown in the graphs represent expectations that may differ from reality,
depending on the elasticity of the demand and supply curve.
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3.2 Analysis B
This section will analyse possible ways in which the government could intervene through the
policies at their disposal.
3.2.1 Consumer Support
To prevent customers from unorthodox banking fees the government could control banking
products. For instance a price ceiling below the competitive price of traditional bank accounts
might be a potential government operation. The graph below shows the effect of a price
ceiling. With this policy banks would be forced to offer their accounts at price P2 (price of old
market equilibrium eT) below the new market equilibrium price P1. The sufferer of this policy
would be the supplier side with a decrease in PS in the scope of area d+f leading to a lower
quantity supplied (Q2). The goal of supporting the customers will be achieved under the
condition, if area d > c. However the CS level of the old market equilibrium (at P1 and QT) of
area a+b+c+d+f+x+y cannot be achieved with this government regulation. Overall the
outcome of this policy is debatable due to the fact that there will be a DWL of c+f whereas the
envisaged success of recovering the old CS level fails to materialise.
Figure 4
Source: self-made graph according to (Pindyck & Rubinfeld, 2013)
3.2.2 Traditional Banking Sector
In the hope to preserve the employment rate the German government might also consider to
support the stricken banking sector. The government can approach this goal on two different
ways.
The first option could be to weaken the online banking market in order to prevent consumers
to substitute traditional bank accounts. This goal could be achieved by imposing a tax on
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banking accounts that would shift the supply curve upwards causing the price customers pay
to rise which results in a decline of CS. Accordingly the graph below shows a fall in prices banks
receive that will lead to a loss of PS. The table indicates the changes due to a tax introduction
on online banking accounts. As a result consumers might stay with their traditional banking
accounts due to higher online banking prices. However the tax will provide the government
with new revenue but creates a DWL illustrated in c+f.
Figure 5
Source: self-made graph according to (Pindyck & Rubinfeld, 2013)
The second strategy would be to support the banking sector directly by subsidising banks as
shown in the graph below. The subsidy needs to compensate exactly the costs of banks that
occurred as a consequence of negative interest rates to maintain the same quantity (Q2) and
price (P1) level that were given in the pre-market equilibrium. The table illustrates that both
producer and consumer are positively affected by a subsidy to the costs of the government.
However, this creates negative side effects in form of a DWL shown in h, since the government
expenditures exceed the positive effects. Furthermore the result remains uncertain because
banks could misuse the subsidies to maximise their profits without decreasing their prices.
With this in mind the subsidies should be strictly regulated to avoid that banks impose them.
Some might think that a price support4 could solve this dilemma under the condition that the
government support banks only after they substantiate their additional costs. But in either
case these policies are dubious since banks have recently used unethical methods to obfuscate
prices on accounts which impedes the success of governmental regulations.
4 The graph with a price support would lead to the same outcome as a subsidy, as shown in figure 10 in the
appendix.
10
Figure 6
Source: self-made graph according to (Pindyck & Rubinfeld, 2013)
3.2.3 Other Markets
All government policies mentioned above intend to sustain the market for traditional bank
accounts. As a result the demand of the substitute5 online banking would be affected, given
that the price gap between these two goods decline, hence an increase in demand stays out.
However there was already an increase in the usage of online banking accounts before the
banking fees were implemented, thus there will be still a growing trend in the demand for
online banking (Dowideit, 2016).
Figure 7
Source: self-made graph according to (Pindyck & Rubinfeld, 2013)
5 positive cross-price elasticity of demand
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4 Recommendation
After considering the potential outcomes of all discussed policies it is reasonable to choose a
policy mix of subsidising the enfeebled banking sector while contemporaneously
implementing a price ceiling for traditional bank accounts. The subsidy endeavours to
maintain the traditional banking sector and thereby limits expected job cuts. The rising DWL
therefore induces a positive externality and furthermore limits the unfairness due to
intransparent fees (Beggs, 2013). At the same time a price ceiling followed by a comprehensive
law that prohibits hidden costs on bank accounts would protect the consumer side. It must
also be noted that the subsidy should not cover the entire loss of the banks to establish a new
quantity as shown in Q2. This will ensure that the natural development in the online banking
sector will be slowed down but not completely suppressed. If the government chooses an
appropriate proportion of both policies, customers will still be engaged to change their habits
whilst the market receives enough time to adapt to the new trend.
Figure 8
Source: self-made graph according to (Pindyck & Rubinfeld, 2013)
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5 Appendix
Figure 9
Source: self-made graph according to (Pindyck & Rubinfeld, 2013)
Figure 10
Source: self-made graph according to (Pindyck & Rubinfeld, 2013)
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5.1 Reference
Atzler, E., & Drost, F. (25. November 2016). global.handelsblatt.com/finance/from-free-to-
fee-650008. Abgerufen am 23. May 2017 von global.handelsblatt.com:
https://global.handelsblatt.com/finance/from-free-to-fee-650008
Atzler, E., & Drost, F. (4. April 2017). No Such Thing as a Free Bank. (Handelsblatt, Produzent)
Abgerufen am 5. May 2017 von global.handelsblatt.com/finance/no-such-thing-as-a-
free-bank-741460: https://global.handelsblatt.com/finance/no-such-thing-as-a-free-
bank-741460
Beggs, J. (10. May 2013). https://www.thoughtco.com/analysis-of-a-subsidy-1147899.
Abgerufen am 24. May 2017 von https://www.thoughtco.com/analysis-of-a-subsidy-
1147899: https://www.thoughtco.com/analysis-of-a-subsidy-1147899
Dowideit, M. (14. April 2016). global.handelsblatt.com/finance/german-bank-branches-
dying-off-494735. (Handelsblatt) Abgerufen am 23. May 2017 von
www.global.handelsblatt.com: https://global.handelsblatt.com/finance/german-
bank-branches-dying-off-494735
Gutteridge, N., & Pallenberg, M. (4. August 2016).
www.express.co.uk/news/world/696407/European-Union-German-bank-customers-
fees-ECB-low-interest-Angela-Merkel-EU-Brussels. Abgerufen am 23. May 2017 von
www.express.co.uk: http://www.express.co.uk/news/world/696407/European-
Union-German-bank-customers-fees-ECB-low-interest-Angela-Merkel-EU-Brussels
Pindyck, R. S., & Rubinfeld, D. L. (2013). Microeconomics (8th Ausg.). Boston: Pearson
Education.
Randow, J., & Kennedy, S. (21. March 2017). www.bloomberg.com/quicktake/negative-
interest-rates. (Bloomberg) Abgerufen am 24. May 2017 von www.bloomberg.com:
https://www.bloomberg.com/quicktake/negative-interest-rates
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5.2 News attachment
No Such Thing as a Free Bank
As low interest rates bite, German banks are seeking revenue wherever they can. Charges are
quietly being added to common types of accounts, and even the most sacrosanct of services,
ATMs, are becoming fee-based.
Elisabeth Atzler Frank Drost 04. April 2017, 16:00
Cash, but at what cost? Source: DPA
Last September, the president of the German Association of Savings Banks (DSGV) made a
solemn promise: “For our customers, withdrawals at our ATMs are free – and that’s how they’re
going to stay.”
Fast forward a few months, and Georg Fahrenschon’s promise is null and void. According to a
report by consumer website Biallo, some 40 of the country’s 400 savings banks – small,
regional retail banks partly owned by local governments – are charging some kind of fee for
ATM withdrawals, although usually only for certain kinds of account.
The same is true at cooperative banks, Germany’s other extensive network of small banks. Here,
Biallo found that more than 150 of the country’s approximately 1,000 co-operative banks
charge for withdrawals under some circumstances.
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It is clear that Germany’s culture of free banking is on its way out, replaced by a battery of fees,
sometimes designed to fly under customers’ radar.
These offers cannot be sustained in the longer term if banks lack revenue sources.
Bafin
Germany's financial regulator
Fees are creeping up across all aspects of banking, with almost all of the country’s ten largest
savings banks announcing increases in 2016. One significant change is that banks are
increasingly charging for individual transactions, especially branch-based ones, which incur
staff costs, and often for online services, too.
In the case of ATM withdrawals, many savings banks allow customers up to five free
transactions a month. But some charge every time one of the machines is used.
Responding to sharp criticism from customers and consumer groups, the DSGV has defended
its new pricing policy. It says that its member banks offer a variety of account models to
customers, allowing them the freedom to choose. As well as flat-rate accounts, many banks
offer deals with low basic fees that then charge on a pay-as-you-go basis for transaction charges.
The latter model can sometimes involve ATM fees, said the association.
The BVR, a federal association that represents Germany’s co-operative banks, also defended
its members’ fee structures, telling Handelsblatt that each had its own pricing policy. “For some
customers, a decision to opt for a low-cost account model, for example with a monthly limit on
free withdrawals, can really be worth it.” Its members have approximately 19,000 ATM
machines.
But Frank-Christian Pauli, the financial officer of the Federation of German Consumer
Organizations, says ATM fees are just the tip of the iceberg. “Right now, we are seeing massive
fee adjustments in a lot of financial institutions,” he said. Fee structuress vary greatly from one
bank to another, and across different account models, meaning things are often unclear, he
added. “There is a lot of confusion, and the burden is borne by customers.”
Andrea Heyer, of the Consumers Association in the state of Saxony, agreed that a lack of
transparency is a problem. “Online price information is hard to find for ordinary consumers,
and sometimes completely lacking,” she said.
But account holders are not completely powerless. Achim Tiffe, a Hamburg-based consumer
lawyer, said that while E.U. guidelines allow banks to charge fees, they also insist on
transparency and fairness. “Particularly on double-charging, it is inevitable that banks will face
lawsuits over this,” he said. He added that customers could refuse any new terms and conditions
imposed.
Banks have a powerful defender, too, however. Bafin, Germany’s Federal Financial
Supervisory Authority, sympathizes with their plight: “Customers may be very fond of no-
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charge checking accounts, online trading, and credit cards. But these offers cannot be sustained
in the longer term if banks lack revenue sources.”
For the banks, increasing fees is a matter of survival. Negative interest rates imposed on
wholesale bank deposits by the European Central Bank have upended traditional business
models. With checking accounts now a money loser for retail banks, they are forced to raise
revenues wherever they can.
Some have already begun imposing negative interest rates on large business customers and
some high-net worth individuals, in effect charging them to keep money with the bank. But for
the moment, negative interest rates on ordinary customers still seems a taboo too far for the
financial industry.
But fee-related changes are still reshaping the industry. Five months ago, Postbank, Germany’s
largest private retail bank and a subsidiary of Deutsche Bank, abolished most free checking
accounts. The bank was among the first to introduce fee-free checking in 1998.
Private banks have a wide variety of fee models. Commerzbank, Germany’s second-largest
bank, and its subsidiary Comdirect still offer a free checking account, but Hypo-Vereinsbank
only does this for customers under 26. Fees range from €2.90 a month to €14.90. Most private
banks still offer their customers free ATM withdrawals.
How long that will remain the case is yet to be seen.
Elisabeth Atzler has been a banking correspondent of Handelsblatt since 2012. Frank Drost is
a Handelsblatt editor in Berlin, covering financial supervision and banks. To contact the
authors: drost@handelsblatt.com, atzler@handelsblatt.com
WHY IT MATTERS
Germans have got used to fee-free banking, but its large number of small local banks can no
longer afford to offer it, leaving them in a tricky situation.
FACTS
Almost all of Germany’s ten largest savings banks announced fee increases in 2016.
More than 10 percent of Germany’s savings and cooperative banks now charge ATM fees
under certain conditions.
Consumer groups have spoken out against the charges, but Germany’s financial regulator is
supportive.