Taking Counsel: How strong is competition in Estonia's banking sector?

  • 2008-05-08
  • By Risto Ruutel [Glikman & Partnerid]
Estonia's commercial banks in recent weeks have announced their economic results for 2007, and apparently they are doing very well. Even the smaller market players 's e.g., Nordea Bank, Sampo Bank 's showed remarkable results despite a smaller customer base and market share. However, it remains to be seen whether the banks' profits were derived from effective commercial activities in the presumably "competitive environment," or if they were solely based on last year's robust economic growth and the booming real estate sector.

There are already some indications that the Estonian banking sector might not be wholly competitive. In the past few years the European Commission has carried out inquiries in the financial services sector (working closely with the national competition authorities and financial supervision authorities) and reached a conclusion that there are significant problems in the national financial services markets (including retail banking), as well as in the common market as a whole.

The identified problems involve a lack of efficient competition, high entry barriers caused by vertical integration, lack of transparency of pricing policies, possible anti-competitive collusion between the market players, etc. The commission has specifically referred to retail banking as one of the sectors where, due to high barriers of entry, no new market players will likely appear and help foster competition. The commission also expressed concern that the bank fees are higher than expected and financial institutions are cooperating with each other in ways that might not be in conformity with the Competition Law.

Estonia's banking sector might suffer several of the abovementioned competition questions. For instance, the service fees of Estonian banks (especially the bigger players) have caused controversy and debate among customers for quite some time. Customers seldom understand what services are supposedly rendered for the fee and what are the bank's costs associated with the service. There is, for instance, considerable disparity among banks in relation to the fees for transfers, including the differentiation of in-house and domestic transfers in some banks, while there is no such differentiation in other banks. Curiously, fees tend to be higher in banks with the biggest market share, although it should be the opposite when taking into account the efficiencies created by economies of scale.

Furthermore, Estonian banks have cooperated with each other in situations where one would rather expect them to compete. For example, the Estonian Banking Association (having a majority of Estonian banks as members) has announced that its members have decided to simultaneously decrease the daily transfer limits to the exact same amount (320 euros) when the customer uses permanent passwords. That low daily limit will render the permanent passwords virtually useless and force customers to buy special equipment to make bigger transfers.

Clearly, the limits of transfer would have provided banks the opportunity to compete with each other for customers 's letting customers decide upon the risks related to permanent passwords. But now that banks have mutually agreed on the identical and simultaneous decrease of daily transfer limits, they don't have to worry about an exodus of clients. The agreement is thus a lessening of the competition that exists between them.
The Estonian Competition Authority has recently started to investigate the banks' service fees for card payments. It remains to be seen whether the investigations will be confined to card payments or if it will be broadened to encompass other fees and tariffs. No matter what the Competition Authority decides to investigate, it is already clear that the banks should make their activities and pricing policies more transparent and avoid collusion when it is likely to weaken competition between them.

Risto Ruutel is an attorney at law a  Glikman & Partnerid, a member firm of Baltic Legal Solutions, a pan-Baltic integrated network of law firms including Kronbergs & Cukste in Latvia and Jurevicius, Balciunas & Bartkus in Lithuania, dedicated to providing a quality 'one-stop shop' approach to clients' needs in the Baltics.