Scents of competition between banks have begun to rise in recent weeks. First, the banks have begun to brand themselves as providing better service, which also takes into account us customers. Subsequently, as the Bank of Israel raised the interest rate, the battles over savers' money began.
The banks, which for years offered zero interest rates on deposits, understood that in order to make us choose them, they had to make a better offer. Deposit rates began to rise, and most banks now offer an annual interest rate of around 4 per cent, slightly below the current inflation rate of 4.6 per cent, indicating that money on deposits has eroded but less. The interest of the banks is clear – when we deposit our money with them for a fixed and predetermined period, they lend it to other customers, who pay significantly higher interest than the depositors will receive.
As expected, the increase in the Bank of Israel interest rate was not fully rolled over to savers, who are forced to make do with little, but was fully imposed on borrowers who have to deal with higher than expected monthly repayments. This gap has led to a celebration of profits for the banks—the five largest banks earned a combined NIS 24 billion last year.
Let them squabble
It seems that the battles over the quality of service and the level of interest on deposits have reached an exhaustion, and now the banks are wrestling with a new mudbox – interest on a positive current account balance. The opening shot came from Discount Bank, which began offering (through its Paybox app) an interest rate of 3% on a credit balance. Nearby, Bank Leumi offered a ridiculous interest rate of 1% for up to NIS 10,000.
Bank of Israel, photo: Contact
The latest moves are still not enough, but it is definitely a step in that direction. For decades, the banks stagnated and there was no real competition for the public's money. The lack of competition stemmed from various reasons, including the conservatism of customers who fear transferring their accounts to a competing bank, but also due to the fact that the regulator, the Bank of Israel, has not succeeded in forcing competition in the industry. The losers, as usual, were the customers.
Various elements in the political system propose forcing the banks to grant customers interest on current account balances. This can indeed be determined by law and the banks will be forced to comply with it, but it would be a bitter mistake to think that this will increase competition in the industry. On the contrary, setting interest rates in law will lead to all banks giving exactly the same interest rate, which will effectively eliminate competition completely, and we will return to an era in which banks continue to celebrate at the expense of their captive customers.
It would be better for politicians to stop trying to interfere in the industry and let the competition continue to escalate, for the benefit of all of us.
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