HUP: Bank Fees in Croatia Are Below the European Union Average

Following interventions in retail prices of food products, the state is now intervening in the principles of banking operations, significantly limiting the ability to charge fees across a broader range of services. However, the Croatian Employers’ Association, in its weekly review of financial trends, states that the levels of fees as well as the prices of all services have been determined and should continue to be determined in the market.

The right to determine prices and the spectrum of services is the foundation of a market economy and market competition and is one of the levers for strengthening competition and the fight for consumers. Through direct intervention, the state positions itself as a market arbiter, which significantly undermines business freedom and weakens market mechanisms.

After the determination of energy prices, food products, and banking services, the question arises as to which sectors the state will decide to regulate in the upcoming period, arbitrarily declare services free, ‘remove’ funds for investments and productivity growth from employers, wage increases, and the opening of new jobs? Which services and goods will be declared essential – the prices of coffee in hospitality establishments, food preparation and serving services, telecommunications, household equipment? Will the state then become the main supplier of ‘essential’ products and services if market players withdraw? There is no doubt that the state’s tendency to intervene in the economy does not contribute to productivity growth of an economy that, in the past year of strong GDP growth (3.8 percent), has decreased in light of a relatively higher employment growth of 4 percent, while at the same time the state is abandoning productivity growth in the projections for this year’s budget.

Revenue from fees for banks is not just profit, but these revenues finance significant investments in digitalization, security, and infrastructure maintenance – bank clients expect constant quality service growth in these areas, given that stability, predictability, and support in daily financial transactions and business are of crucial importance.

All relevant analyses show that the fees of Croatian banks are lower than in most EU member states, and interest rates are aligned with the averages of European countries. In the domestic banking market, we are witnessing relatively strong competition , as evidenced by the offers of housing loans in recent weeks, which bring clients tens of thousands of euros in savings over the entire repayment period. During the historically strongest growth of interest rates in the euro area, this growth has been amortized in Croatia, preventing a cost shock to citizens.

The net income of domestic banks from commissions and fees for businesses and households in 2024 amounted to about 270 million euros, of which about 40 percent relates to households. Contrary to popular narratives about high banking fees, data shows a decrease in total net income of banks from fees and commissions over the last two years from 1.07 to 0.75 percent of GDP, making the levels of these cost burdens comparable to those in neighboring Slovenia.

Stable Banking Necessary for Stable Growth

It is important to compare this data with economic capacity measured by GDP share, given that economic growth stimulates a higher volume of transactions and activities, thus increasing both revenues and expenses of banks in the area of fees and commissions. The share of net income from fees and commissions in the total net income of Croatian banks is lower than in comparable euro area members. For a long period, this share in Croatia has been stable between 22 percent and 26 percent, with a slight increase in 2021 and 2022, while in the same period in the euro area it was at levels of 27 percent and 34 percent.

One of the important functions of bank fee income is to ensure stability and the ability of banks to provide and develop quality services for their clients. Banks in the EU and Croatia are intensively investing in digitalization, security, and infrastructure maintenance, which require a high level of expertise and significant financial resources. Aware of the growing cyber threats globally, Croatian banks are implementing a range of measures to ensure the security of their clients’ funds.

The recently announced removal of the ability to charge for a wide range of banking services without restrictions will make it difficult in the long term to cover actual costs and eliminate the capacity for investment in innovations. Such a proposal implies significant adjustments to business models and careful planning of future investments, which could negatively impact service quality. Additionally, banking services in Croatia can also be provided by banks headquartered in other EU countries, raising the question of how their operations will be regulated in a fair market competition, given that it could be shown that service providers without employees, branches, ATMs, and who do not pay taxes in Croatia could gain a market advantage.

The adoption of such legal solutions for one of the most important sectors of the economy in an expedited manner without adequate time for analysis of all possible effects creates additional nervousness. Fees provide banks with stable revenues even when interest rates fall or demand for loans wanes. This form of income allows banks to adapt to changing market conditions and maintain financial stability.

In light of global tensions, rising inflation, and macroeconomic uncertainties, the European Central Bank emphasizes the need to strengthen the banking sector and deregulation, while HUP is going in the opposite direction – although it is crucial in the upcoming period to ensure the strength of the banking sector so that it can finance the economy and the state and successfully adapt to current challenges. The proposed legal solution that prevents banks from charging for services without clear criteria and limitations certainly does not contribute to the stability we need.

Banks Support Free Accounts for Socially Vulnerable

Finally, it is essential to be aware that in no EU country is there a practice where a wide range of services in a sector is legally regulated as free for all users without clear criteria. In most EU countries, it is standard that basic accounts for socially sensitive groups are not charged, which is a model we already have in Croatia. Several countries have legally regulated free accounts for all citizens, but with significantly smaller service scopes, allowing banks to maintain business sustainability. Therefore, if we want to have a developed and competitive banking sector, it is necessary to ensure equal business conditions, employers believe.

Banks do not oppose the introduction of free accounts, but they oppose the proposal that does not contain social criteria and clear limitations for such free services. Socially sensitive groups should still have access to a wide range of banking services without fees. Banks are under scrutiny for alleged ‘record profits’ even though their profitability measured by the ratio of profit to invested capital (ROE) has not exceeded 8.5 percent on average over the last six years, which is significantly below the CEE region average of 12.5 percent and below levels in Slovenia (11.9 percent), Austria (10.1 percent), and some other EU members.

Also, contrary to prevailing views in the public space, the internationally comparable gross profitability of Croatian companies is, despite improvements in recent years, still 25 percent below the CEE region average and even 55 percent below the EU average. Within the framework of the known positive correlation in the professional literature between long-term nominal GDP growth and ROE, it even emerges that the 10-year average profitability of banks (ROE 7.4 percent) is unexpectedly low compared to the average nominal GDP growth (6.0 percent). Namely, CEE region countries achieved an average ROE of as much as 12.4 percent at an average nominal GDP growth of 7.7 percent.

It should also be noted that the growth of bank profits has not been achieved ‘at the expense’ of the population, but is a consequence of Croatia’s entry into the euro area. Specifically, net interest income from client operations increased by net income from commissions and fees as a percentage of GDP is declining. Net interest income from client operations (households and non-financial enterprises) increased by net income from commissions and fees in the first half of 2024 compared to the first half of 2019 by only 11 percent compared to GDP growth of as much as 57 percent. This means that the share of net interest income from client operations increased by net income from commissions and fees recorded a decline in GDP share of almost 30 percent over the past five years.

In conclusion, there is no activity or company in Croatia that is legally prohibited from charging a fee for a service that has its costs, as such a business model would be unsustainable. A stable and well-capitalized banking system is crucial for the continued growth of GDP, a stable business environment, overall economic stability, and prosperity. Banking financing provides crucial support for economic growth, a stable banking system instills confidence in investors, companies, and citizens, and participates in international financial flows, making it easier to attract investments into the economy. It is extremely important that interest rates are aligned with the averages of euro area countries, and in some segments such as housing loans, they are even lower to benefit the housing issues of young families. Finally, a stable system minimizes systemic risks and prevents the spread of crises. It is completely unclear why we risk destabilizing banks due to an average annual cost of fees for current accounts of 24 euros.