8 March 2019

Zimbabwe: High Bank Service Charges - Case for Crypto-Currencies

analysis

Bank service charges or fees make a compelling case for the mass adoption of crypto-currencies, particularly in developing countries, where these fixed costs remain disproportionately high.

In fact, in some lands, it is these high bank charges that actually discourage people from using financial services offered by banks.

The overall cost of accessing banking services increases when expenses like transport to and from the physical offices of the bank are factored in.

In addition, the very low wages earned suggest that since many families survive at or just above the poverty datum line, therefore they will be very sensitive to extra costs like bank service charges or fees.

Zimbabwean banks demand their clients to maintain a balance that makes it possible for the bank to deduct $5 in fees every month, irrespective of whether the account is accessed during the month or not.

For the majority of workers who earn less than $400 per month, such a fixed monthly cost only drives people away from the traditional banking system and there is documentary evidence to support this.

To illustrate, the Reserve Bank of Zimbabwe's October 2018 monetary policy statement revealed that depositors are not very keen on keeping their funds inside the banking system.

According to the statement, demand deposits -- customer bank deposits that can be withdrawn any time without notice --comprise 65% of all bank deposits, a clear indication of an unwillingness to fully use the banking system.

In any case, a number of Zimbabweans lost out at the end of the hyperinflation period in 2009, when bank account holders' balances simply disappeared without explanation. Subsequently confidence in banks tanked.

The same happened to the insurance industry and, to this day, pension rights groups are still fighting for fair compensation. According media reports, some pensioners reportedly received payouts not exceeding $5 despite having made contributions for years.

Why many remain unbanked

Weak consumer protection laws and inept regulatory bodies in some developing countries mean banks can connive to levy high charges, without facing significant risks of being penalised.

When the same banks fail, deposit insurance is inconsequential, only a maximum of $100 per depositor is paid regardless of the level of losses.

This reinforces distrust of the financial system, a fact supported by a World Bank Global Findex Database of 2017, which also revealed that 1,7 billion people around the world remain unbanked. According to the Global Findex Database, a lack of documentation and distrust in the financial system were both cited as these reasons why roughly a fifth of adults globally, do not have a financial institution account.

Interestingly, banks cannot carry on the same way in developed countries like the United States, as they normally do in developing nations.

The US has applicable laws and institutions to deal with banks' malpractices with respect to deposit-taking as well as lending. For instance, the Truth In Lending Act (TILA) passed in 1968, compelled banks to be more truthful when advertising or informing potential clients about the cost of borrowing. There is legal protection for bank clients.

While such laws do not offer 100% protection, the legal threat posed ultimately forces banks to toe the line, something that cannot be said of developing countries like Zimbabwe, which is yet to pass a consumer protection law, some 39 years after gaining independence.

Inversely, banks' refusal to set up in rural areas amplifies the extent of global financial exclusion.

Apparently, banks cannot establish a branch in areas not dominated by regular income earners as this denies them the opportunity to earn fixed service income, enough to cover overhead costs. For instance, areas dominated by smallholder farmers are ignored because such farmers do not regularly receive an income, which banks use to fund part of their operations.

Crypto-currencies case

Given this whole background, it is easy to see why crypto-currencies could see a mass adoption in the coming few years.

Whereas potential bank customers have to contend with transport costs when accessing banking services, with crypto-currencies it is simply getting internet access via a mobile phone or a computer, there is no costly and inconveniencing long-distance travelling .

In certain instances, people might be compelled to open an account but the centralised nature of the banking system means many will remain under-banked despite possessing a bank account.

To illustrate, Zimbabwe is a major tobacco-producing country with the multi-million dollar industry now dominated by tens of thousands of smallholder farmers.

A few years ago, the Zimbabwe government made it a mandatory requirement for all tobacco farmers to open a bank account while suspending payments of tobacco proceeds in cash.

Farmers duly obliged by opening bank accounts with different financial institutions, which are mostly based in Harare and many were issued with credit cards to facilitate payments.

Herein lies the problem, tobacco farmers reside in farming towns outside Harare and with a few banks having branches in such remote places, this meant that for the majority of new account holders, they would have to travel to Harare or any other town just to access banking services.

Even worse, if a tobacco farmer has a major query about their bank account or they lost a credit card, then only a visit to the head office in Harare will suffice, a costly exercise! If the tobacco farmer were to opt for crypto-currencies instead, a similar scenario will be resolved without the need for an account holder to incur transport costs. Blockchain technology, which underpins crypto-currencies, eliminates the very query to begin with.

A complex verification and validation of records means there is a remote chance of encountering a typographical error or any other problem which might necessitate the need to travel more than 100 kilometres to get the problem fixed.

Crypto-currencies will potentially solve the confidence issues that presently beset the financial system, particularly where the unbanked are concerned. Transparency has been one key to the success of crypto-currencies like bitcoin thus far because the blockchain technology, which is essentially a publicly distributed ledger, allows anyone to verify or authenticate transactions.

This level of transparency has not existed within financial systems before.

Lower costs

Of course, crypto-currencies have small in-built transactions costs, but these are significantly lower than what is obtaining within traditional banking system.

The other appealing aspect of crypto-currencies has to be the ability of two or more people to transact without having to go through intermediaries, a process which normally comes with high costs.

Going back to the example of tobacco farmers, further problems are experienced when two neighbours, who are new account holders, want to perform a transaction with funds in the banking system.

The buyer will have to travel to the nearest town or business centre to withdraw funds or transfer money to an account of his neighbour, the seller. This might seem ridiculous, but it has been happening for years and it is the only way the seller can be assured that the buyer has an adequate balance to fund the transaction.

A mobile phone company, Econet Wireless, has since stepped in, allowing people to transfer fiat money with more ease via mobile phones. The mobile phone application, EcoCash, which now enjoys a virtual monopoly, can only go as far as facilitating the ease of moving funds inside national borders.

Cross-border payments are only possible after one pays a visit to a banking institution to make the deposit of the appropriate foreign currency deposit. The intermediaries involved here include the public transport operator, the resident bank plus a clearing bank and all demand a fee for their services. Crypto-currency payments or funds transfer are normally seamless inside borders just like they are seamless outside borders and the cost is much smaller than the conventional route. There are no intermediaries and this lowers the cost of the entire transaction.

Crypto-currencies surpass the mobile money transfer application by a wide margin and, once the ignorant population becomes aware of this, more people will abandon the banking system.

Zimwara is a writer and economic analyst. New Perspectives column is a weekly column coordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society (ZES)

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