Online interbank business upswing

Saturday May 16, 2009
Online interbank business upswing
By DALJIT DHESI

The total value and volume of Internet banking transactions have seen phenomenal growth« PROMOD DASS OF RAM RATINGS SERVICES BHD
THE online interbank business has been gaining popularity over the last few years as more consumers are now turning to the Internet to make payments electronically. With higher volume of online interbank transactions, banks have been enjoying good income from this channel and are upbeat about its growth potential amid the weak economy.

RAM Rating Services Bhd head of financial institutions ratings Promod Dass says that based on Bank Negara’s Financial Stability and Payments Systems Report 2008, the total value and volume of Internet banking transactions have been tracking phenomenal growth.

In 2008, the total value of transactions grew by 50% to RM624bil from RM418bil the previous year. In terms of transaction volume, Internet banking services rose about 35% to 85 million transactions from 63 million in 2007.

He attributes this to increased penetration of Internet services and the convenience of Internet banking with the Government, corporates and retailers offering e-payment channels as an alternative to traditional channels of payment.

Given the growing popularity of online banking transactions, the question begs itself – are the online interbank transaction charges fair to the man on-the-street?

A common form of online interbank transactions is the Interbank Giro (IBG), which is managed by Malaysian Electronic Payment System (1997) Sdn Bhd (MEPS).

Under this system, the charges (under Bank Negara’s guidelines) for the first two transactions from basic accounts are 50 sen each and subsequently, it involves a maximum rate of RM2 per transaction.


For multiple online transactions, the charges ought to be lowered« ROBERT FOO OF MYFP SERVICES SDN BHD
Bank Negara, which oversees the real time gross settlement system, had last year reduced its transaction fee (for payments made by financial institutions on behalf of their customers) using the system by RM1 to RM1.50.

Calls to slash charges

MyFP Services Sdn Bhd financial planner and managing director Robert Foo says that for multiple online transactions, the charges ought to be lowered, especially when one has substantial deposits with banks and they are already gaining from the low cost of deposits.

Jeremy Tan, a licensed financial adviser with Standard Financial Planner Sdn Bhd, concurs.

He says a reasonable rate for multiple transactions performed within the same day and for the current month should be RM1 per transaction per day and for more than five transactions, the rate charge should be lowered to 50 sen per transaction.

Tan, however, feels the current charges for online transactions (not multiple transactions) are reasonable as they save time.

Foo advocates greater competition among banks and the presence of “cartel” regulations to prevent banks from taking advantage of their privileged position in Malaysia.

“As a consumer, I think we should see greater competition among banks so that the cost of services will be lower,” he adds.

Fighting the cause

Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias says any reduction in interbank fees will certainly help to lower transaction costs and promote the usage of Internet banking.

“This is critical as higher usage of Internet banking can greatly benefit the economy by minimising time wastage and promoting higher productivity and efficiency.


»Any reduction in interbank fees will help to lower transaction costs« NOR ZAHIDI ALIAS OF MALAYSIA RATING CORP BHD
“It is noteworthy that the penetration rate for Internet subscribers stands at only 14.3% as of December 2007. Therefore, charging customers too much for online banking transactions will only discourage people from using Internet services,’’ he adds.

From the banks’ point of view, Zahidi says fees charged for interbank transactions will help to offset margin compression experienced by most banks as they increase the amount of non-interest income.

Due to stiff competition, most banks are channelling extra effort to expand their non-interest income. In 2008, statistics reveal that non-interest income as a percentage of operating income had climbed to 17.4%, up from 16.4% in 2004.

National Consumer Complaints Centre chief executive Muhammad Shaani Abdullah, who is also Federation of Malaysian Consumers Associations secretary, says that the interbank charges have not been revised for some time. He suggests that the central bank set a ceiling and reduce interbank charges to justify the costs to consumers.

“Who is actually incurring all the costs? Consumers are being charged for the service. Is it fair to charge low income earners such fees?” he asks.

The Consumers Association of Penang (CAP) president S.M. Mohamed Idris echoes such sentiments, adding that the RM2 charge is not fair. He also points out that the charges should be waived or, at the very least, be “nominal”.

“Banks are always doing this ... encouraging consumers to try out something new for the bank’s benefit and making consumers pay heavily for it. Remember, how consumers were encouraged to use the ATMs (auto teller machines) and when they started using it in large numbers, the banks started charging RM8 per year?’’ remarks Idris.

The bankers’ perspective

His biggest contention is why are the banks imposing a fee when it is ultimately the customer who is doing the work of transferring money instead of the bank staff. He elaborates that electronic banking benefits the banks as they are able to save cost by reducing staff and re-deploying them to sell unit trusts or bancassurance.

The Association of Banks in Malaysia (ABM), in a response to queries on this subject, replies: “The nominal charge of RM2 is reasonable. However, under the basic banking services framework, there is a mechanism for a reduced rate to cater for specific products, bank to bank and small business needs.

“Some member banks do charge lower than RM2 for consumer Giro transactions. The nominal rate was reviewed last month in view of the challenging economic conditions. It is appreciated that there is a continual need to review cost components and to enhance consumer convenience.”

On the rates of online transfers in other countries, Alliance Bank Malaysia Bhd group CEO Datuk Bridget Lai says different countries have different fee schemes for online transfers.

“For example, some banks abroad charge a percentage fee for each completed transaction. This business model is especially prevalent in North American and European financial institutions.

“At present, most financial institutions in Malaysia charges RM1 per online transfer transaction. So do we,’’ Lai notes.

United Overseas Bank (M) Bhd director and CEO Chan Kok Seong says the charges in Malaysia are lower than that of many developed countries and the bank will consider reviewing the rate if there is enough demand to substantiate a lower interbank rate.

The bank needs to factor in the fixed and variable costs of production to maintain an efficient payment system for customers’ convenience, Chan adds.

As far as similar rates in other countries in the region are concerned, ABM says the online interbank transaction rates adopted by member banks in Malaysia are competitive and fair.

Tan says there are countries, for example Singapore, where banks do not charge a fee for local interbank transactions.

Foo adds: “In some countries, electronic banking services are given free of charge, but it depends on the customer segment.

Sometimes a standard yearly fee is charged for all services under certain schemes and not on a transactional basis like the RM2 for IBG.”