1. 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

2. 29/11/2007OTP Bank cases2 Central European "heritage" Former legal monopoliesFormer legal monopolies 1.trying to preserve their position 2.engaging in activities that might be looked exploitative Regulation exists, but has its problemsRegulation exists, but has its problems Consumers should still "learn competition"Consumers should still "learn competition"  Room for competition policy

3. 29/11/2007OTP Bank cases3 The OTP Bank cases The actions investigated are unilateral contract modification allowed by financial regulationThe actions investigated are unilateral contract modification allowed by financial regulation First case: personal loans (Vj-12/2006)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)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

4. 29/11/2007OTP Bank cases4 Potential theories of harm Exploitative abuseExploitative 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 abuseExclusionary abuse –Raising switching costs: foreclosing rivals' access to potentially switching consumers

5. 29/11/2007OTP Bank cases5 Main questions raised 1.Unilateral contract modification – is it a competition law question? (or civil law) We think YESWe think YES 2.Financial regulation allows it – can competition policy intervene? (DT case) We think YESWe think YES 3.Should it be considered as a potential abuse of dominance? (or consumer protection) We think YESWe think YES 4.Does the right for unilateral contract modification automatically leads to dominance? (contractual lock-in) We think NOWe think NO 5.Can we show exclusionary effect of raising switching costs when only very few consumers are switching? We think it is UNLIKELYWe think it is UNLIKELY

6. 29/11/2007OTP Bank cases6 Market background Very asymmetric marketVery 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)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 5xBig growth between 2004-2006: stock in personal loans multiplied almost 5x

7. 29/11/2007OTP Bank cases7 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

8. 29/11/2007OTP Bank cases8 Dom1: low transparency level Unilateral contract modifications – rational to give this right to the service providerUnilateral contract modifications – rational to give this right to the service provider Constraints on abusing it should be threat of losingConstraints on abusing it should be threat of losing 1.Present consumers (termination) – needs information 2.Future consumers (reputation) – needs transparency Financial regulation in HungaryFinancial 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

9. 29/11/2007OTP Bank cases9 Dom2: switching costs Consumers needs to be informed about the change + needs to be rational to switchConsumers needs to be informed about the change + needs to be rational to switch Switching costs are substantial in banking (sector inquiry results)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

10. 29/11/2007OTP Bank cases10 Dom3: pricing and market shares Trade-off of an ex-post price increaseTrade-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)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

11. 29/11/2007OTP Bank cases11 Dom3/2: Pricing (unsecured personal loan segment)

12. 29/11/2007OTP Bank cases12 Exploitative effects examined Direct effect: 30-40'000 consumers paid a price increase that was practically not possible to avoidDirect 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 feeIndirect (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

13. 29/11/2007OTP Bank cases13 Estimated indirect effect

14. 29/11/2007OTP Bank cases14 Exclusionary effect examined No effect of the fee increase was shown on competitors' share of inflowing consumersNo effect of the fee increase was shown on competitors' share of inflowing consumers OTP's shares of inflowing consumers are also decreasingOTP's shares of inflowing consumers are also decreasing Main reason: very low ratio of terminating (switching) consumers  small base to forecloseMain reason: very low ratio of terminating (switching) consumers  small base to foreclose

15. 29/11/2007OTP Bank cases15 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 mailOTP 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 changesIt 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 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)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)

16. 29/11/2007OTP Bank cases16 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)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)Commitments from the leading market player might lead other banks to adapt similar behavior (self-regulation)

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