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Gergely Csorba and Surd Kovats Hungarian Competition Authority (GVH)

Rights for unilateral contact modifications as a potencial source of market power: the OTP Bank cases 2007 Toulouse ACE conference. Gergely Csorba and Surd Kovats Hungarian Competition Authority (GVH) The views expressed here are not purported to represent those of the GVH.

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Gergely Csorba and Surd Kovats Hungarian Competition Authority (GVH)

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  1. Rights for unilateral contact modifications as a potencial source of market power:the OTP Bank cases2007 Toulouse ACE conference Gergely Csorba and Surd Kovats Hungarian Competition Authority (GVH) The views expressed here are not purported to represent those of the GVH

  2. Central European "heritage" • Former legal monopolies • trying to preserve their position • engaging in activities that might be looked exploitative • Regulation exists, but has its problems • Consumers should still "learn competition"  Room for competition policy OTP Bank cases

  3. The OTP Bank cases • The actions investigated are unilateral contract modification allowed by financial regulation • First case: personal loans (Vj-12/2006) • In August 2005, bank raised termination fees from 5.000 HUF to 35.000 HUF • Ended with a commitment from OTP Bank • Second case: housing loans (Vj-41/2006) • In August 2005, bank raised termination fees from 0% to 2,7-3,6% • In October 2005, cancelled an upper bar on handling fee  increase in monthly repayments • No decision yet, will not discuss it OTP Bank cases

  4. Potential theories of harm • Exploitative abuse • It was not the final level of price / fee that was challenged (it was not the highest on the market), but the ex post increase that was hardly avoidable • Raising switching costs: deterrence from terminating an already unfavorable contract (interest rates have been falling) • Exclusionary abuse • Raising switching costs: foreclosing rivals' access to potentially switching consumers OTP Bank cases

  5. Main questions raised • Unilateral contract modification – is it a competition law question? (or civil law) • We think YES • Financial regulation allows it – can competition policy intervene? (DT case) • We think YES • Should it be considered as a potential abuse of dominance? (or consumer protection) • We think YES • Does the right for unilateral contract modification automatically leads to dominance? (contractual lock-in) • We think NO • Can we show exclusionary effect of raising switching costs when only very few consumers are switching? • We think it is UNLIKELY OTP Bank cases

  6. Market background • Very asymmetric market • OTP Bank holds retails monopoly till 1987, still largest (25% of total assets) + reputation advantage • 6-7 moderately sized banks (5-10%) • About 30 smaller banks • OTP's share in personal loans is about 40-60% in contract number (30-40% in loans' value) • Big growth between 2004-2006: stock in personal loans multiplied almost 5x OTP Bank cases

  7. Significant market power Three factors were considered in the analysis of dominance: • Regulation of unilateral contract modifications  low level of transparency • High switching costs • Pricing behavior and market share evaluation of OTP Bank OTP Bank cases

  8. Dom1: low transparency level • Unilateral contract modifications – rational to give this right to the service provider • Constraints on abusing it should be threat of losing • Present consumers (termination) – needs information • Future consumers (reputation) – needs transparency • Financial regulation in Hungary • Notice about modifications should be published only in bank offices • Consumers should inform the bank in 15 days about not accepting the change • Should quit the contract in a further 30 days OTP Bank cases

  9. Dom2: switching costs • Consumers needs to be informed about the change + needs to be rational to switch • Switching costs are substantial in banking (sector inquiry results) • Entry + exit costs are on average 5-8% of the loan's present value • Our econometric studies identified further significant switching costs besides explicit entry / exit costs • Banks' market shares (and so entering consumers) do not seem to be responsive to termination fees OTP Bank cases

  10. Dom3: pricing and market shares • Trade-off of an ex-post price increase • Increased revenue from old consumers (lock-in effect) • Lost revenue from new consumers (demand effect) • If stock of old consumers is big enough, it might be beneficial (rip-off pricing logic) • Although shares in new consumers can decline • But shares in stock of contracts may not fall considerably, especially if growth slows down • These patterns seem to be recognizable in the case OTP Bank cases

  11. Dom3/2: Pricing (unsecured personal loan segment) OTP Bank cases

  12. Exploitative effects examined • Direct effect: 30-40'000 consumers paid a price increase that was practically not possible to avoid • We see no peak in termination data in that month • Indirect (locking) effect: additional consumers deterred from termination, although they might have done it at the original fee • We estimated this number for 20-30'000 OTP Bank cases

  13. Estimated indirect effect OTP Bank cases

  14. Exclusionary effect examined • No effect of the fee increase was shown on competitors' share of inflowing consumers • OTP's shares of inflowing consumers are also decreasing • Main reason: very low ratio of terminating (switching) consumers  small base to foreclose OTP Bank cases

  15. Commitment decision The Competition Council of GVH accepted the following commitments from OTP Bank • Increase of market transparency and mobility for all of its banking products • OTP informs clients about unfavorable unilateral contract modifications via personal mail • It allows 30 days (15 days more) for consumers to decide about not accepting the changes • Compensation of consumers harmed (personal loan contracts signed with the initial fee) • For those having terminated their contracts, OTP repays 15.000 HUF each (30-40'000 consumers) • For those having not terminated, OTP offers the possibility of early settlement at the reduced termination fee of 20.000 HUF (1-200'000 consumers) OTP Bank cases

  16. Concluding remarks • These demand-sided remedies can make abuses based on unilateral contract modifications less likely to happen in the future (see also Fletcher – Jardine 2007) • Commitments from the leading market player might lead other banks to adapt similar behavior (self-regulation) OTP Bank cases

  17. Thank you for your attention Comments are welcome: csorba.gergely@gvh.hu

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