Since the start of the economic recovery in 2014, Spanish banks’ revenues have registered an average annual decline of close to 5%, a drop heavily influenced by a path of historically low interest rates—which narrow the most recurring margins of the income statement—and a strict regulatory framework. Meanwhile, commission income has recorded an average increase of 1.4% during that period, so that its share of total income has risen moderately to 25%, but still represents a much lower percentage than in other European Union countries.
This fact, so favorable for the consumer, is not entirely to the liking of banking supervisors (the European Central Bank and the Bank of Spain), who have publicly called on the industry, in addition to greater consolidation efforts, to increase commission income as a lever to strengthen its profitability and solvency in a context of abnormally low interest rates.
Despite everything, Spanish banks have decided to maintain a moderate commission commercialization model. Specifically, the commissions paid by customers for financial services offered through traditional channels are 58% lower than those charged by banks in the main European Union countries (67% lower when compared to those offered through digital channels). According to a study conducted by Deloitte between 2017 and 2018—Banking services in Spain in the European context—Spain ranks as the second most competitive country in its offering of basic (transactional) services, both in price and in the number and manner of offering these services. Its service catalog is broader and also more accessible (more than 73% of the services offered are provided through both branches and digital channels). Furthermore, Spanish banking also has the highest number of free services: 87 services representing 76% of the catalog offered in Spain, 49% more than the European average.
So, why does Spanish banking deviate so much from European parameters? Or, put another way, why does Spain continue to maintain such a competitive and user-friendly offering of financial services? There are at least four reasons that explain this behavior.
Firstly, the conviction that the most attractive business model for both commercial banks operating in Spain and their customers is the relationship banking model, where long-term customer loyalty to their institution is the cornerstone that differentiates the Spanish model from its European counterparts. With the exception of the United Kingdom, which has a financial system with free access and use of a narrow portfolio of common services, in the main EU countries, banking operates, on the contrary, on a more distant model, in which financial services are “packaged” and offered to customers as a menu, as is already done in other industries, such as telecommunications.
The second reason explaining these low commissions is that Spanish banks are more efficient than their European rivals. Specifically, the efficiency ratio in Spain is 53% compared to 65% on average in the EU. This competitive advantage of the Spanish banking system in terms of costs and productivity gives it a much greater capacity to pass on more favorable prices to consumers, without undermining the return on equity.
Additionally, another powerful reason must be highlighted: Spanish banking operates in a highly competitive environment, despite the higher levels of sectoral concentration recorded since the beginning of the crisis, mainly due to the disappearance of savings banks. This competition is guaranteed by the low entry and exit barriers in the Spanish banking sector; by the business model that Spanish banks have decided to adopt; and by the digital transformation of the sector that promotes the incorporation of new entrants. Therefore, the greater degree of concentration in Spain has not translated into a lower quality or more expensive banking service offering for the banking consumer.
Finally, it is undeniable that the prices of financial services play a key role in customers’ choice and retention with their institution. Consumers in Spain have shown a strong aversion to rising financial service prices for three reasons explained by behavioral economics: anchoring or deeply rooted opinions, the impact of gratuity or the zero-price effect, and the lack of attractiveness of what a financial service represents for consumers.
That is, when consumers evaluate the price of services associated with a current account, they tend to gather information from their environment randomly, whether reasonable or not. Since 76% of the services offered by Spanish commercial banking are free, consumers assume that the “fair” value of these services should be zero. This interpretation is not easy to change, because when the price of a product is marginal or close to zero, any increase in it creates stronger mental resistance in the consumer than when a similar increase occurs with a good or service that already has a pre-established price, even if it is low for the consumer. And all this becomes even more complicated when the product is difficult to understand or is not very tangible. In this way, the consumer tends to undervalue the implicit costs in the production of that financial product or service and ends up assuming that its value must be close to zero.
In summary, resistance to charging for financial services intensifies when the consumer is not aware of the benefit these services provide or perceives a low level of utility for themselves, without valuing the complexity of the processes that support the liquidity and security of their savings. Consequently, banking institutions, in general, face a commercial dilemma that is not easy to resolve: either they maintain the gratuity of financial services, absorbing the implicit costs involved and affecting the sector’s profitability, or they propose, in a highly competitive environment and against consumer perception, charging for those products and services with greater added value for users.
The truth is that, as in any other business activity, the sustainability of the banking business depends, to a large extent, on pricing policy, which requires financial institutions to make a permanent effort to find an adequate balance between obtaining a return higher than the cost of capital and maintaining customer satisfaction. Spanish banking has so far prioritized customer loyalty and focused its commercial business model around the consumer.
Juan Carlos Delrieu, Director of Strategy and Economic Analysis
