Professors: No, banks are not cheating small customers – those customers are actually being pampered
BOOK REVIEW: Scapegoating the finance sector has become a national sport. Imagine, banks are daring to charge negative interest. But much of the criticism is based on prejudice, claim two professors.
ResearcherZone | 17. May 2021
By Michael Møller and Niels Christian Nielsen, Professors at the Department of Finance, CBS. Translated by Helen Dyrbye
Finns carry knives, blonds are not too smart and Americans lack manners.
Prejudice is everywhere and there is – with good reason – plenty of criticism of prejudice, including stereotypical perceptions of large groups of people.
In many areas, prejudice is not terribly dangerous, as it is viewed as humoristic.
It can be irritating for people from Aarhus to hear stories about their ‘shortcomings’, but hardly anyone telling the stories believes that the inhabitants of Aarhus are really less intelligent than people from other areas of Denmark.
The most dangerous forms of prejudice are those people believe without any discussion. Like those in the finance sector.
In our new book ‘Fakta og fordomme om finanssektoren’ (Facts and prejudice in the finance sector), we have attempted to identify and disprove some of the many preconceived ideas about banks by means of everyday economic theory.
We are both professors at CBS’ Department of Finance with expertise from the boards of various banks (see end of article).
In this article, we refute some of the most widespread instances of prejudice and explain why prejudice is so hard to root out.
The hostility is at least 2,500 years old
Prejudice against the finance sector and its employees is rife. Some traces back to antisemitism.
In many countries, for long periods, many jobs were off limits for followers of the Jewish faith – for example, they could not own real estate, occupy official public positions etc.
This led to an overrepresentation of Jews in jobs such as moneylending.
Hostility towards financiers and antisemitism is therefore very closely linked. However, the bad feeling can be traced back much further.
As the prophet Jeremiah said around 2,700 years ago, when he felt unfairly treated: “I have neither lent nor borrowed, yet everyone curses me.” He was inferring that if he had done, he would have understood the curses. So the prejudice is firmly entrenched.
Typical instances of prejudice against the finance sector
The following views are surprisingly common and reflect just some of the many forms of prejudice that prevail concerning the finance sector:
- The finance sector is awash with companies focused solely on making a profit
- The finance sector is far too big and employs far too many people, and the customers pay the price
- Banks fleece small customers because they are too lazy to move
- Changing banks or building societies is too expensive
- Bankers are more cynical and less honourable than other people
- Bank managers have far too many perks, their golden handshakes are extortionate, and customers foot the bill
- It is unreasonable if regular employees have to pay to keep money in the bank.
Through the lens of standard economic theory, such instances of prejudice seem astonishing, as they all contradict common sense.
Here, we would just like to focus on refuting the last two examples.
Bank managers’ salaries are covered by the shareholders
Bank managers’ salaries and perks cause widespread dissatisfaction. But bank managers’ salaries come out of shareholders’ pockets. If banks pay too much in salary, shareholders are the ones with a problem because then profits fall correspondingly.
This does not affect the customers. So shareholders are the ones who should be complaining, not customers.
Just consider Danske Bank, for example, which has a strong major shareholder in the guise of the AP Moller Group. Wouldn’t you think the AP Moller Group is capable of safeguarding its own interests against money-grubbing bank managers? Do newspapers and Joe Bloggs need to help out with good advice? A banal comment like that rarely features in the heated debate on bank managers’ salaries.
Small customers enjoy the best terms
In recent years, small depositors have enjoyed excellent terms and are still pampered.
Most banks still accept deposits of under a certain maximum limit – now reduced to about DKK 100,000 – for zero interest. In other words, customers neither receive nor pay interest.
That can seem unreasonable if you are used to receiving interest on your savings. But zero interest is actually exceptionally favourable these days.
Large professional customers – companies, pension funds, municipalities – pay around 0.6% interest to keep their money in the bank.
Minister of Economic and Business Affairs Simon Kollerup knows this very well, yet he chooses to join in the widespread indignation over banks paying a negative rate of interest on demand deposits.
He has just convened a meeting with Finance Denmark, a business association, to discuss the matter.
Two things are worth noting:
- First, that the state does the same as the banks. The state also demands negative interest when lending money linked to refinancing state debt, to the detriment of those buying bonds, including pension funds, i.e. the country’s many employees. That affects pension savings.
- The other, equally important aspect is that small depositors have better terms than large professional depositors. And that is not all.
Small customers are more expensive for banks
Small customers are pampered more because their deposits are covered by a deposit guarantee. Large depositors can lose money if a bank folds, whereas small depositors (under DKK 750,000) are covered by the deposit guarantee.
Of course, this guarantee costs money, but the banks cover the cost.
The more small deposits a bank has, the more it pays into the insurance scheme (known as Garantiformue) in order to finance the guarantee for the small customers if the bank goes bankrupt.
Small depositors should therefore logically pay a bit more in the form of negative interest to keep their money in the bank than large customers, because they receive a better product, since their deposits are secured by the guarantee.
And for the record:
If a bank has money it wishes to invest safely for a short period, it also has to accept a negative rate of return.
If a bank deposits money in the National Bank, the bank will have to pay for the privilege.
If a bank buys government bonds it will receive a negative return, unless the bonds have a very long time to maturity.
Negative interest for short-term deposits and on investments in short-term bonds is a fact of life for everyone these days – except small depositors.
Bearing that in mind, it seems strange that the terms and conditions offered small depositors cause such a furore. They are treated better than any other group.
Prejudice is hard to root out
In ‘Fakta og fordomme om finanssektoren’ (Facts and prejudice about the finance sector) we attempt to refute even more kinds of prejudice.
However, changing prejudice about the finance sector is an almost impossible task. This is due to three factors:
First the prejudice against the finance sector is more entrenched than a lot of other kinds of prejudice. It cannot be dispelled even with good arguments.
Second the press and media play a significant role in forming opinions. People enjoy reading reports that confirm their convictions.
Imagine a newspaper that receives two stories – one about a Golden Retriever that has attacked a child, and the other about a Doberman that has attacked a child.
The news value would support printing the story about the Retriever, but, more often than not, the newspaper will print the Doberman story. That is what its readers expect and where they will thrill with disgust at dog owners who have no control over their dangerous animals.
Be cautious about always thinking the worst
Finally, there is a tendency to view bankers as dishonourable. The favourite explanation given by the press – and newspaper readers – when something goes wrong in the finance sector is that a crime must have been committed.
But what about considering alternative explanations? ‘Ignorance and laziness’ in their broadest sense – in other words, that people are neither skilled in every field nor have time to check everything, unfortunate circumstances, unclear task delegation etc. – could also be relevant explanations.
Newspapers write plenty of untruths. They often translate the English ‘billion’ into ‘billion’ in Danish, though it actually means ‘trillion’. But it would be unreasonable to believe this is always an intentional lie.
Often newspapers regret such mistakes.
In matters related to the finance sector, many people automatically assume criminal intent is at the heart of the matter without considering whether any other explanations are equally likely.
Banks have had various blots on their copy books, from money laundering to incorrect charges on old claims. But why believe there is always an underlying desire to cheat and defraud?
Often the reward is so humble compared with the risk that dishonesty seems an unlikely explanation. You would have to be not just dishonest but a complete imbecile to do such a thing intentionally because the reward is simply not worth the risk.
People rarely stop to think twice about whether criminal intent is involved.
We would urge you as a person, news consumer and bank customer to think about your prejudice. Consider, in particular, whether your prejudice is so prevalent that you do not even realise it is prejudice.