Parliamentary Replies
Ministerial Statement on Bank Charges by DBS/POSBank
Ministerial Statement
Ministerial Statement on Bank Charges by DBS/POSBank
Date: 09 May 2000
Date: For Parliamentary Sitting on 09 May 2000
1. Many members of the House have raised questions about DBS' recent decision to levy a $2 monthly fee on POSBank accounts with less than $500 balance and charges for POSBank cheque services. Let me answer them together, by explaining the background of POSBank's merger with DBS bank, the present status of DBS bank, the Government's proper role, how we can resolve the immediate problem, and how banking services can be kept affordable for all Singaporeans.
POSBank
2. Until 1998, when POSBank was merged with DBS Bank, POSBank provided free banking services to all its depositors. As a result, Singaporeans with modest savings would open accounts with POSBank rather than any other bank. Small accounts comprised a majority of POSBank accounts: 36% of POSBank savings accounts had balances less than $100, while 52% had balances less than $500. Furthermore, because opening a POSBank account was free, Singaporeans often opened more than one account with POSBank. In 1998, POSBank had 5.2 million savings accounts, far more than the number of people in Singapore.
3. Mr Hawazi Daipi asked whether POSBank had been losing money on its small accounts. The answer is yes. POSBank estimated that out of the 5.2 million accounts, 3.8 million (three-quarters) were uneconomic, i.e. revenue from these small accounts was less than the costs of servicing them. POSBank did not try to recover even part of this cost from the small depositors. Instead it cross-subsidised the small depositors using the larger accounts, on which it could earn profits from the spread between its deposit and lending rates. Indeed from 1978 onwards, POSBank even paid higher interest rates on small deposits than on large deposits.
4. This policy was not sustainable. As our financial sector developed, commercial banks and fund managers provided new services and products that offered higher returns than a POSBank savings account. As Singaporeans became better educated and financially more sophisticated, they grew more sensitive to the returns their savings were earning. They were no longer content to park their savings in a POSBank account, especially if they had substantial savings. To "make their money work for them", they began to shift the savings to other banks offering better fixed deposit rates, and into other forms of investments.
5. As a result, in a growing market, POSBank's share of savings deposits declined, from 64% in 1979 to 47% at end-97. In 1997, as the Asian crisis intensified, commercial bank interest rates rose. The gap between interest rates offered on POSBank savings accounts and commercial bank fixed deposits widened. Consequently, POSBank began losing its bigger depositors who accounted for most of its deposits. Depositors with balances of $50,000 and above comprised only 3% of the total number of POSBank account holders, but 48% of POSBank's total deposit base. In March 98, POSBank was forced to reverse its policy of paying smaller accounts higher interest, and instead paid large accounts a higher interest rate than for small accounts1.
6. It was clear that POSBank did not have a promising future as a stand-alone savings bank, providing free banking services to small accounts on the traditional model. This was one reason why in 1998, the Government decided to merge POSBank with DBS Bank. Merger gave the combined bank economies of scale, and enabled it to improve customer services. The objective was to build a bank large enough to compete internationally, and to maintain banking services for Singaporeans that were affordable, but not necessarily free.
7. These issues were fully debated when Dr Richard Hu moved the Second Reading of the legislation to corporatise POSBank on 12 Oct 98. Dr Hu said in his Second Reading speech (Hansard, Vol. 69, col. 1027, 12 October 1998):
"The Government recognises that these market distortions have to go [i.e. referring to POSBank's tax exemption, below market mortgage rates, and difficulty gathering deposits]. However, to ease the burden of adjustment in this privatisation exercise, we are taking care to ensure that painful disruptions for POSBank's depositors and borrowers are minimised. We therefore set out a transitional arrangement to help all parties adjust over time.
8. Many MPs spoke during the debate. Nobody opposed the Bill. Dr S Vasoo raised concerns over the service charge (ibid., col. 1036):
"One is the service charge, i.e. whether service charge to small account holders could be reviewed and whether DBS could be advised that the service charge would not be raised unnecessarily at the expense of the small account holders."
9. Dr Toh See Kiat also supported the Bill, but spoke about the social objective of POSBank (ibid., col. 1043):
"There is after all still a social objective that a national institution like the POSBank can serve, the social initiative of promoting thrift and saving."
10. Dr Tan Cheng Bock supported the Bill. He had discussed the problem thoroughly with Dr Wang Kai Yuen, who had been a board member of POSBank, and was expressing their shared views. Dr Tan explained clearly why the removal of the subsidy was unavoidable (ibid., col. 1045-46):
"A third of POSBank's customers, including children, students and foreign workers, have deposits of $100 or less. In fact, over 90% of POSBank's deposit base is contributed by only 20% of the customers. Therefore, POSBank's accounts are being subsidised. Moreover, the cost of servicing these accounts has been escalating all these years, as costs of ATMs, staff and premises have gone up relentlessly. POSBank could not have gone on subsidizing such a large proportion of its depositors. The House might be interested to know that the Bank had been considering for some time the recovery of a portion of these costs from its customers. Some measures have already been taken, for example, GIRO charges on service providers and charge for coin exchange. More were being contemplated. As I have indicated earlier, whether POSBank is merged or not, the days of free services from POSBank were numbered."
11. Even Mr Chiam See Tong only asked for the grace period for Credit POSBank interest rates to be extended from 4 to 6 years, although he then inexplicably proceeded to vote against the Constitutional Amendment to delete POSBank from the Fifth Schedule to the Constitution. In contrast, after hearing the debate, Mr Low Thia Khiang supported the Constitutional Amendment.
12. Winding up the debate, Dr Hu gave this reassurance (ibid., col. 1051-52):
"DBS has assured us that it will continue to provide services for the small depositors and indeed children up to 12 years, students up to 21 years and full-time National Servicemen will all continue to be able to have a POSBank account without a service charge."The objective, as I have explained earlier, was to build on Government's wish to develop a strong bank in Singapore, and at the same time we wanted to ensure that the range of POSBank's services would be maintained as far as possible. Of course, over time, some things will have to change but, by and large, the best features will be maintained for as long as feasible. The combined bank, headed by DBS, will ensure that POSBank's social functions are retained, and this includes the provision of affordable banking services to small depositors."
13. It is clear from this debate that MPs recognised the need for POSBank to change. Some sought reassurance that service charges would not be unnecessarily raised, and that DBS would not forget POSBank's social functions. Addressing these concerns, Dr Hu made clear that the market distortions had to go, but that the Government had arranged to minimise painful disruptions for depositors and borrowers of POSBank. He stated that children, students and full-time national servicemen would continue to have POSBank accounts without service charge, and that for all other small depositors banking services would remain affordable.
DBS
14. It has been 19 months since the Bill was passed, and POSBank was merged with DBS. DBS is now introducing a monthly fee on POSBank Savings accounts with less than $500 balance. Most banks in Singapore already impose similar or higher charges. DBS has explained that it will still make losses with the $2 fee, which only partially covers the cost of maintaining such a small savings account. Furthermore, it is exempting from this fee accounts of those aged below 21 or 62 and above, full-time national servicemen, as well as those on public assistance.
15. Several MPs have asked the Government to request DBS to exempt small savings accounts from the $2 monthly charge. They include Dr S Vasoo, Dr Lily Neo, and Mr Chiam See Tong. However, the Government cannot do so. DBS is a commercial institution, and must have a free hand to make commercial decisions. DBS has a natural interest in looking after its customer base, and in ensuring that any charges it imposes are well explained and justified to the public. For the Government to direct DBS as to what it should or should not do, on this or any other matter of business judgment, would defeat the purpose of merging POSBank with DBS. It would prevent DBS from making decisions on commercial grounds like other market players, and make it difficult for DBS to develop into a strong and competitive bank, in Singapore and in Asia. Ultimately, Singaporeans will be best served by strong banks which are able to reap the benefits of scale and technology, and thereby provide Singaporeans with affordable, high quality banking services.
The Government
16. Mr Ong Ah Heng asked whether the imposition of bank charges is consistent with the Government's promotion of a cashless society. The answer is yes. A cashless society benefits all parties - not only the banks, but also companies and individuals who can receive and make payments electronically, using ATMs or GIRO. Electronic payments are efficient, and much cheaper than traditional transactions. But they still involve costs, which banks have to recover, at least partially, from companies and individuals who use the system. It is not possible for banks simply to absorb these costs, and provide services for free.
17. Mr Low Thia Khiang asked how many Singaporeans maintain a bank account for GIRO transactions. We do not have an exact number, but probably every worker in Singapore receives wages through GIRO, which would be 2 million accounts. However, our main concern should be the lower-income Singaporeans. This group is often unable to build up significant savings in their bank accounts. Yet they need to have a savings account to receive their salaries, and to pay utilities and telephone bills by GIRO.
18. According to CPF statistics (as at 31 Mar 2000), there are about 341,000 active CPF members, aged between 21 and 55, earning not more than $1,500 per month. These will be the Singaporeans who may face difficulties with the bank charges.
19. Mr Low Thia Khiang also asked if the Government considers bank charges on lower-income families a desirable outcome of a free-market economy.
20. To consumers no new fee is welcome. Even $2 a month may be an appreciable expense for lower-income Singaporeans. As the NTUC has pointed out, workers receiving their wages by GIRO have little alternative but to maintain one savings account, yet lower-income workers may need to draw out most of their salary once it has been paid in, rather than leave $500 in their account.
21. However, Government intervention in the market, which Mr Low seems to be proposing, is not the solution. Our fundamental approach to improving the lives of Singaporeans is to foster self-reliance, and to avoid state welfare and subsidies. The Government does subsidise education, basic health-care and the assets of citizens, particularly public housing. But it does not subsidise consumption. In Singapore consumption items are priced at their full economic cost, even essentials like water, electricity, telephone charges, and basic food-stuffs. The result has been to create an efficient economy which generates many jobs for Singaporeans.
22. This approach has raised standards of living for all Singaporeans, and reduced poverty to a very low level. Our record in reducing poverty is far better than many other countries which have taken what looks like a more compassionate approach, and used subsidies and welfare to help their poor. In Singapore essentials of life are not free, but nearly everyone can afford them. We have no reason to treat bank charges differently from other items of consumption, and have them subsidised by the Govern-ment, or have the Govern-ment compel banks to provide services for free.
A Pragmatic Solution
23. How then can we help lower-income Singaporeans to cope with bank charges? Mr Matthias Yao of the NTUC suggested that in order to meet the requirement to have a balance of $500 with DBS, lower-income workers could transfer $500 from their CPF accounts to DBS as a fixed deposit. DBS could then consider this sum sufficient to waive the bank charges on their savings accounts. This is a practical suggestion. While the lower-income workers may not have much discretionary savings, many of them have significant CPF balances, even in their Ordinary Accounts. If they could mobilise these savings, it would help them avoid the bank charges.
24. CPF has indeed been planning to liberalise the rules, to allow members to invest more funds from their CPF Ordinary Accounts, and even their Special Accounts, with banks and private fund managers. It is doing so not specifically to address the issue of bank charges, but for long-term reasons, following the recommendation of Mr Mah Bow Tan's Inter-Ministerial Committee on the Ageing Population, which the Govern-ment had accepted. The objective is for Singaporeans to earn better long-term returns for their CPF savings, and thus build up their retirement nest-egg.
25. The liberalisation will naturally apply to all qualifying financial institutions, and not just to DBS. The details will take a few months to work out, but there is no in-principle difficulty. It should be feasible to lift the requirement that CPF members maintain the full Minimum Sum in their CPF accounts, and to allow them to take out even their Minimum Sum, provided it is to invest in a selected class of safe investments for their retirement needs.
26. Mr Matthias Yao's proposal, therefore, is in line with the Govern-ment's policy to free up CPF funds, and allow CPF members more latitude to deploy these funds prudently in suitable investments managed by the private sector, where they can earn returns equal to and better than the CPF interest rate.
27. DBS has accepted NTUC's suggestion, and has decided to defer the $2 charge and $500 minimum balance on depositors with one savings account, until the scheme for CPF members to take out their CPF money to deposit or invest is ready.
Affordable Banking Services
28. Beyond the immediate question of helping workers to meet bank charges on small accounts, the longer-term issue is how banking services can be kept affordable, to businesses as well as lower-income Singaporeans.
29. Mr Tay Beng Chuan expressed concern that further bank mergers in Singapore would lead to more increases in bank charges. Whether bank charges go up in future will depend on the costs that banks incur in various transactions. But charges should not rise simply as a result of bank mergers, because the banking industry in Singapore is not overly concentrated. We have enough banks to compete against one another. The 5 local banks2 presently have 61% of the market share. In comparison, in Australia 4 major banks3 have 68% market share, and in Canada 4 major banks4 have 70% of market share.
30. In Singapore, DBS has 26% market share, while OCBC, UOB and OUB each have about 10%, and KTB has 5%. Even if two of these banks merged, the new combined bank would have no more than 20% market share. Then the two largest banks - DBS and the new bank - would together have less than half (at most 46%) of the market. In comparison, the two largest banks in Hong Kong - HSBC and the Bank of China group - together have 55% of the market. In Denmark, another small and developed market, the two largest banks5 also have 55% market share.
31. The Singapore banking market is less concentrated than in most other countries. Bank mergers should therefore not lead to lack of competition and high bank charges. However, if this does become a problem, and MAS finds that banks are not being pressured enough to cut costs and improve efficiency, or are charging excessive fees, it will consider opening up the market further to introduce greater competition.
32. Mr Inderjit Singh suggested that we consider fully liberalizing banking in Singapore, so that foreign banks can be given an opportunity to provide the full range of services that the POSBank provided in the past, with unlimited branches in Singapore.
33. MAS is implementing a phased programme of liberalisation in domestic banking. Whether or not to liberalise banking fully in Singapore, and allow foreign banks to have unlimited branches providing a full range of services, is a major policy decision with implications for our whole financial system. However, while a liberalised banking industry will result in more efficient and competitively-priced banking services, it will not enable banks to provide free or subsidised banking services.
34. Every banking service involves a cost. POSBank could provide the "free" services it did in the past precisely because banking was a closed-door industry, and banks could reap surplus profits from large depositors to cross-subsidise the small accounts. Now that our banking environment has become more open and competitive, it has become much more difficult for any bank to cross-subsidise small-accounts in this way. Indeed, most foreign banks in Singapore charge more, or impose higher cut-offs for accepting accounts than local banks.
35. Mr Inderjit Singh also asked if we would consider implementing an alternative to the previous POSBank, like a cooperative with a banking licence, to encourage savings. In the same vein, Mr Seng Han Thong asked how we could provide low-cost banking facilities for low-income workers.
36. We must continue to promote thrift and savings, especially among the young. We must also ensure that workers have affordable banking facilities. However, setting up a co-operative bank may not be the answer. Like commercial banks, co-operative banks incur costs in providing banking services. If they are small, they will be at a major disadvantage because they will lack economies of scale, which is becoming more and more vital for keeping costs to the minimum.
37. Co-operative banks overseas do charge for their services. For instance several American and Australian cooperative banks, commonly known as credit unions, charge fees on savings accounts that fall below a minimum sum. They also levy charges on every counter withdrawal, and on ATM usage above a stipulated level.
38. These co-operative banks justify their charges by explaining that this is an equitable system of cost sharing: charges incurred for using particular services are borne by those co-operative members using the services. They believe that this is fairer for all co-operative members.
39. Other co-operative banks do not impose banking charges. But instead they charge membership fees. These membership fees are really in lieu of banking charges, or a minimum account balance.
40. The banking industry is undergoing rapid consolidation and change worldwide. Banks are merging and rationalising, closing branches, saving costs, and striving to improve their returns on equity. Many developed countries, e.g. Britain, the United States, Australia and New Zealand, are facing this same basic question: how to provide affordable basic banking services to the masses?
41. New Zealand is an instructive example. Its banking industry was fully liberalised, leading to foreign banks achieving complete domination of the market. The Deputy Prime Minister Mr Jim Anderton has recently advocated setting up a People's Bank, also called a Kiwi Bank, which will involve the post office, New Zealand Post
[NZ Post]. The bank is intended to service the low income, as well as people in small or rural towns which commercial banks find uneconomical to service.
42. Mr Anderton has stated that the proposal would not proceed unless it was financially viable. But the Kiwi Bank has not yet been established to be financially viable. A New Zealand academic, Mr David Tripe, director of the centre for banking studies at Massey University, Palmerston North recently published an article analysing the idea. It was titled "Kiwi Bank's Draft of Idealism"
[New Zealand Herald 4 April 2000]. He wrote:
"The focus of the Kiwi Bank proposal seems to be on the issues of bank fees and charges, and geographic shrinkage in the bank's networks."There is a common perception that there will be no trans-action charges. The reason other banks charge for transactions is because they have a cost, and the fairest source of recovery is from those who impose those costs on the banks. Charges are not imposed because the banks have a sadistic desire to cause misery. A Kiwi Bank run through NZ Post will have costs for transaction services. ? Who will pay these costs?
"The straightforward solution is to charge the cost to those who incur it - levy customer transaction charges. But that may not be regarded as acceptable.
"Suppose the Govern-ment decided that the costs should just be added to NZ Post's costs, because it is a state-owned enter-prise. Increasing NZ Post's costs in this way would be likely to force it to increase charges for other services, particularly postage. This might make NZ Post's services uncompetitive compared with other operators ?
"Alternatively, the Govern-ment could cover transaction costs by paying NZ Post a subsidy. In that case, taxpayers in general would end up paying the costs of transactions for Kiwi Bank customers. This would also give Kiwi-Bank a taxpayer-financed subsidy to undercut other banks and financial institutions against which it was supposed to compete."
43. Mr David Tripe did not conclude that the Kiwi Bank was a bad idea. But he made it clear that it was not an ideal solution. There is always a cost to conduct banking transactions, a fact not appreciated by many people, and someone has to pay for it. The challenge and way forward is to explore ways to deliver the banking services more efficiently and at lower costs. Subsidy is not the solution.
44. Mr Tripe's arguments about the Kiwi Bank apply also to Singapore. But our situation is different from New Zealand and other developed countries, in two important respects. Firstly, Singapore is a city, not a country with a rural population. So the problem of banks being unwilling to service rural areas does not arise. Banks can service Singaporean customers at quite low cost, although not for free.
45. Secondly, while lower-income Singaporean workers may not have much discretionary cash savings, most have significant cash balances in their CPF. For example, out of the 341,000 active CPF members earning less than $1,500, only 35,000 have less than $1,000 net balance in their CPF Ordinary Accounts, and of these 12,000 are below 30 years old. If we add in their Special Account, then lower-income Singaporeans have even more.
46. Once CPF members can take these balances out to invest for long-term retirement purposes, and earn better returns than the CPF can offer, they will become highly desirable customers of financial institutions. Banks will court them for the privilege of managing their retirement funds, which will be a stable, long term source of funding and business for the banks. Under these circumstances, banks will need no encouragement to provide these "low-income" Singaporeans with basic banking services that are accessible and affordable.
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2 DBS, OCBC, UOB, OUB, Keppel TatLee Bank.
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4 Royal Bank of Canada, Canadian Imperial Bank of Commerce, Bank of Montreal, Toronto-Dominion Bank.
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5 Den Danske Bank and Unibank of Denmark A/S.
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