RBI Is On The Wrong Track On Bank Fees: Competition Is Key, Not Account Portability

Will you move your account from one bank to another if the law allows you to carry your account number with you? The Reserve Bank of India (RBI) seems to think so. It believes that allowing customers to port their money from bank to bank like mobile numbers will increase competition and help reduce service charges.

RBI Deputy Governor S S Mundra is quoted by Mint as saying that digital technology and the linking of bank accounts to Aadhaar numbers allows for easy portability. “As such, the prospect of an aggrieved customer silently moving her account to another bank in the near future has become very real.”

Not so fast. The RBI should not confuse the possible with the probable. Porting numbers makes eminent sense with mobile phones, but carting bank account numbers is not that useful to customers.

While it is true that some private sector banks load customers with all kinds of charges – for not maintaining minimum balances, coming too often to the branch, issue of additional cheque books, et al – customers still pay up. This is not for lack of options, but due to the sheer utilitarian stickiness of a bank account once it is opened.

Nothing stops an unhappy customer from just opening a new account with another bank. Smart customers often don’t bother about formally closing an existing account; they simply transfer the balances with a cheque to the new bank and leave the bank they are unhappy with gnashing their teeth. Once you port your cash balances, it is the bank which faces costs in maintaining a dead account on its books; it can do zilch about you moving on.

So, there is no real barrier to abandoning a bank you are unhappy with.

The real reason why people don’t dump the bank they are currently using is the wider linkages and services linked to the bank account. Leaving aside no-frills accounts used by the relatively poor, middle and upper middle-class customers – who are the ones paying high bank service charges – have more than one relationship with a bank. There could be mutual fund accounts, insurance payments, broking and demat accounts linked to the core bank account.

If you raise a home loan, it is a tad easier to do it with your existing bank if the interest rates are competitive, since the EMIs can be arranged easily through electronic clearing. If you already have an EMI going, changing your bank account means going back to the home loan company and changing all the documentation, and redoing the paperwork.

Many bank accounts also tend to be salary accounts, where the choice of bank is often decided by the employer. So, portability is not of much use here.

The real exit barriers to banking are unrelated to your account number. They relate to the other financial linkages to your bank account.

Unlike mobile number portability, which helps you receive calls from people who already have your number even after you change your service provider, a bank account number is not all that important to own. Barring your employer or your loan provider, your account number is irrelevant to anyone.

Yes, there may be a problem with some banks charging high service fees. But the answer to high fees is not account number portability, but more competition. With mobile phone companies and e-wallets turning into payments banks, and with other types of financial intermediaries entering banking, competition is on its way. Charges will come down when customers realise that they can bank elsewhere.

This can be done by starting a new account with someone who charges lower fees for services – and without disabling the old one which may have your broking or demat or EMI payments attached to it.

Portability of account numbers will not impact service charges as much as increased competition.

Consider how payments banks are already shaking up the humble savings deposit rate. The big public and private sector banks pay 4 per cent, but Airtel Bank offers 7.25 per cent, India Post 5.5 per cent, and Kotak Mahindra and Yes Bank 6 per cent. Why not shift your idle deposits to these banks instead of trying to migrate your entire existing banking relationship to another bank?

The RBI is on the wrong track when it comes to bank fees. Those who don’t want to pay can already move their accounts to cheaper options. And those who can afford to pay should not be given a hidden subsidy in the name of helping those who can’t. This is like saying that credit card merchant discount rates should be low whether you eat at a five-star hotel or an Udipi joint. In a competitive marketplace, banks should be free to decide what they should charge customers. It they gouge them, customers have options. RBI must focus on creating on those options rather than micro-managing rates, whether it is on banking services, or card discount rates.