Part of a global trend, as exasperated consumers are squealing, but no country has threatened to do what Mexico proposed.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Mexico’s stocks are plummeting, with the S&P/BMV IPC index down 5.8% on Thursday — the worst drop in seven years — and another 2.8% by midday on Friday. The dollar-denominated ETF, iShares MSCI Mexico [EWW], plunged 11% over the past three days and is down 22% since August 8:
What happened? Mexican stocks, which had been caught up in the sell-off in October and the cancellation of the mega-airport and corruption project at the end of October, bounced a little in November, but then took another hit on Thursday when a senior Mexican senator from the president-elect’s party proposed a bill that would ban or curb banks from charging commissions for many services.
Shares in the country’s largest domestic-owned bank, Grupo Financiero Banorte, plunged 19% Thursday and Friday so far, Santander Mexico Inbursa, and Gentera all dropped over 8%.
If the proposed banking initiative gets passed, it will be a hammer blow for Mexican lenders, for whom commissions and fees provide around a third of revenues. That, says Ricardo Monreal, the bill’s sponsor, is precisely the problem: the banks in Mexico earn more in commissions than in almost any other Latin American country. And each year the amount grows. In 2017, the banks earned 8% more from commissions than in 2016.
This is part of a wider global trend. Each year U.S. banks generate record revenues from rising overdraft and ATM fees, as well as higher maintenance charges on accounts. According to one study, Chase, Wells Fargo, and Bank of America made around $6.4 billion last year from ATM and overdraft fees alone, almost $300 million more than in the previous year.
In NIRP paradise Europe, the banks’ dependence on fees is, if anything, even greater. In Spain the six largest banks banks earned 12% more from commissions and fees during the first nine months of 2018 than they did during the same period of 2017. In France, the situation has become so serious that the Bank of France has launched an enquiry into abusive bank fees.
The EU is also taking matters into its own hands, having recently passed a law that forces the region’s lenders to be more transparent about the fees they charge their customers. From 2019, all banks customers will receive – at least once a year and free of charge – a ‘Statement of Fees’ outlining all the extra commissions they were charged on basic banking services. This should help customers more easily compare each bank’s fee gouging practices.
But no government has dared go quite so far to tackle this fee gouging problem as Mexico’s incoming administration. Its proposed bill would prohibit banks from charging clients in a whole host of areas, including:
- Checking their account balance.
- Requesting past bank statements.
- Withdrawing cash.
- Replacing bank cards, whether due to loss or theft.
- Depositing a check.
- Annual credit card fees.
- Maintenance fees on low-balance accounts.
The bill would also require the Bank of Mexico and Mexico’s banking regulator to draw up a plan to incrementally lower commissions on bank transfers.
Naturally, the banks are up in arms. “It’s terrible,” said Sergio Zermeno, a Mexican banking expert. “What’s truly worrisome is that we’re barely emerging from the shock that hit the country’s financial markets, resulting from the cancellation of the airport.”
That happened just ten days ago, on October 29. Following a referendum on the issue, which returned a clear majority in favor of scrapping the project, now in its fourth year of development, Mexico’s President Elect Andres Manuel Lopez Obrador (AMLO for short) announced that he would do precisely that, in the process jeopardizing billions of dollars of investment, some of it already spent.
The news triggered an immediate slide in the shares of Grupo Financiero Banorte, the bank most exposed, albeit indirectly, to the airport project, Banorte, whose stock also suffered the biggest hit Thursday and Friday. Over the past four weeks, its shares tumbled 28%.
But it’s not just Mexican banks that could be affected by AMLO’s proposed fee limit bill. Most of Mexico’s biggest banks are subsidiaries of global banks — a hangover from the Tequila Crisis — and their revenues and profits are arguably even more heavily dependent on fees and commissions.
A recent investigation by Mexico’s Commission for the Protection and Defense of Financial Services (CONDUSEF) revealed that the five biggest global banks operating in Mexico — Citi, BBVA, Santander, HSBC and Scotiabank — charge, on average, 19 percentage points more in fees and commissions than they do in their home markets. A staggering 39% of Santander Mexico’s revenues come from commissions and fees, compared to 20% in Spain. For Citi’s Mexican subsidiary, Banamex and HSBC Mexico, it’s 33%, and for BBVA Bancomer, it’s 36%.
For Bancomer’s parent company, BBVA, which depends on its Mexican market for around a third of its global profits and is already reeling from the ill effects of Turkey’s debt crisis on its subsidiary there, Garanti, the impact of a cut in fees could be brutal. The bank’s shares in Madrid tumbled over 6%, their worst fall since the Brexit vote in June 2016, and are now trading at their lowest level since that fateful day. So far this year, they have plunged 30%. Somewhat less exposed to Mexico, Santander saw its shares slide over 2%. By Don Quijones.
Now everything is up in the air, so to speak. Read… Whiff of Panic After Mexico Voted to Scrap Mega-Airport & Corruption Project
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What the banks are failing to realize is if that money
is left in the economy it will multiply many times over.
The banks will benefit, just a little later.
$6.2 billion in over draft fees in the US???? If you assume $100 charge per overdraft that means 62 million overdraft transactions. If thats true it means lots of people struggling to get by
Attached link says American overdraft fees in 2016 totaled $15B (not $6.2B). At an average $24/overdraft, that’s 428M overdraft transactions.
I don’t even know how to put that number into perspective (3 for each of the 150M wage-earners in the US?).
Excellent point, perspective!
The $24 average overdraft fee is a bargain when compared to Payday Lending fees.
An example: https://www.acecashexpress.com/~/media/Files/Products/Payday/Internet/Rates/TX_FeeSchedule.pdf
People make poor financial decisions as a matter of course, most have little or no training in managing personal finance. Couple that with undisciplined consumer desire and you have cooked a recipe for disaster.
So you’re saying short the Mexican economy for massive gains I’m not on it!
I’m waiting for standard and poors and other financial rating agencies to downgrade Mexico’s credit to junk. In my opinion Mexico is collapsing into a depression brought on by declines in oil production, a devaluing peso, huge Dollar denominated debts, rampant fraud, skyrocketing energy prices, gang warfare, and a criminally incompetent government. It’s just sad.
The banks never learn just greedy all the time trying to screw their customers. As for the Spanish Banks very risky business model.
In Mexico I expect a cuenta de nómina is very low fee, maybe zero fee. In Europe there are debit accounts, with online services, with few or near zero fees. When there are fees for those (depends on country) there may be card replacement, ATM usage outside of country or of banks not in that bank’s system, and account maintenance. With two debit accounts you are able to transfer for free between countries or to other accounts.
Point being that guaranteed minimum free service account, i.e. debit account with card and online facilities, is maybe what should be expected –
a country expects you to use its monetary system after all.
For other types of account it is something else. You would think there would be competition between the existing banks for customers and deposits, so the revenue will just transfer to lower interest on deposits or similar. I expect banks like the reliable income stream of service charges, similar to VAT in the sense that it is hard to avoid. Nothing wrong with having no fees either , much clearer for the user, but I expect if a customer is asking credit lines, is depositing for returns, is using the bank as a business service, then they should not be surprised if the bank also uses them for its own business. Likely the reason banks don’t use a zero fee model across the board is because it does not work – serious depositors are not going to invest with a bank offering lower returns to fund everyone else’s service costs,unless every other bank is offering lower returns also,which would be the point of the new law I suppose. Makes the richer pay, but the banks will skim their profits either way…at least no fees might put a stop to endless hidden expenses and a discreet gouging across the board.
Well maybe those poor gouged customers have to educate themselves a bit and compare prices. Unless of course there is a monopoly which keeps cheaper competition at bay – maybe the case in Mexico. For Europe I can tell you that for example current accounts have historically been accepted loss leaders to German banks, a product necessary to offer in order to get other profitable business from bank customers. People would watch their balances closely and generally make great efforts to avoid any fees. In the UK, a larger part of the customer base is quite likely to miss deadlines, drift into overdraft and incur other avoidable fees. It’s just a question of where people choose to spend their attention and money.
How about a little of that in this country? Nah, never going to happen.
Obrador: “No more price gouging poor people.”
Sergio Zermeno, Mexican banking expert:
Best laugh I’ve had in quite a while. We’re living in a Dostoyevsky novel.
The Mexicans did not hear the warnings that from their possible future we sent them from Venezuela, and they chose a hardline Socialist for president, AMLO has done the same things that Chavez did when he was elected in 1998 and 1999, let’s wait for him to take power in December, sadly I think the next step is to propose reforms in the political structure of the Mexican State that will allow him to gradually concentrate power in his hands, under the flag of social justice and equal access to power to everyone, gaining control through clientelism and corruption allowed from the power in exchange for loyalty, when the mayority of Mexicans realize what happened they will find themselves in line to purchase subsidized food or making plans to emigrate. I hope to be wrong this time.