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
Central European "heritage"
•
Former legal monopolies
1. trying to preserve their position
2. engaging in activities that might be looked
exploitative
• Regulation exists, but has its problems
• Consumers should still "learn competition"
 Room for competition policy
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OTP Bank cases
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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
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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
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Main questions raised
1. Unilateral contract modification – is it a competition law
question? (or civil law)
•
We think YES
2. Financial regulation allows it – can competition policy
intervene? (DT case)
•
We think YES
3. Should it be considered as a potential abuse of
dominance? (or consumer protection)
•
We think YES
4. Does the right for unilateral contract modification
automatically leads to dominance? (contractual lock-in)
•
We think NO
5. Can we show exclusionary effect of raising switching costs
when only very few consumers are switching?
•
We think it is UNLIKELY
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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
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Significant market power
Three factors were considered in the
analysis of dominance:
1. Regulation of unilateral contract
modifications  low level of transparency
2. High switching costs
3. Pricing behavior and market share
evaluation of OTP Bank
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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
1. Present consumers (termination) – needs information
2. 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
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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
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Dom3: pricing and market shares
•
Trade-off of an ex-post price increase
1. Increased revenue from old consumers (lock-in effect)
2. 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
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Dom3/2: Pricing
(unsecured personal loan segment)
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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
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Estimated indirect effect
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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
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Commitment decision
The Competition Council of GVH accepted the following
commitments from OTP Bank
1. 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
2. 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)
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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)
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Thank you for your attention
Comments are welcome:
[email protected]