Rights for unilateral contact modifications as a potencial source of market power: the OTP Bank...

Rights for unilateral contact modifications Rights for unilateral contact modifications as a potencial source of market power:as a potencial source of market power:

the OTP Bank casesthe OTP Bank cases

2007 Toulouse ACE conference2007 Toulouse ACE conference

Gergely Csorba and Surd KovatsGergely Csorba and Surd Kovats

Hungarian Competition Authority (GVH)Hungarian Competition Authority (GVH)

The views expressed here are not purported to represent those of the GVHThe views expressed here are not purported to represent those of the GVH

29/11/200729/11/2007 OTP Bank casesOTP Bank cases 22

Central European "heritage"Central European "heritage"

• FFormer legal monopoliesormer legal monopolies

1.1. ttryryinging to preserve their position to preserve their position

2.2. eengagngaging ing in activities that might be looked in activities that might be looked exploitativeexploitative

• Regulation exists, but has its problemsRegulation exists, but has its problems• Consumers should still "learn competition"Consumers should still "learn competition"

Room for competition policyRoom for competition policy


The OTP Bank casesThe OTP Bank cases

• The actions investigated are unilateral contract The actions investigated are unilateral contract modification allowed by financial regulationmodification 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 In August 2005, bank raised termination fees from

5.000 HUF to 35.000 HUF 5.000 HUF to 35.000 HUF – Ended with a commitment from OTP BankEnded 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% In August 2005, bank raised termination fees from 0%

to 2,7-3,6%to 2,7-3,6%– In October 2005, cancelled an upper bar on handling In October 2005, cancelled an upper bar on handling

fee fee increase in monthly repayments increase in monthly repayments– No decision yet, will not discuss itNo decision yet, will not discuss it


Potential theories of harmPotential theories of harm

• Exploitative abuseExploitative abuse– It was not the final level of price / fee that was It was not the final level of price / fee that was

challenged (it was not the highest on the market), challenged (it was not the highest on the market), but the ex post increase that was hardly avoidablebut the ex post increase that was hardly avoidable

– Raising switching costs: deterrence from Raising switching costs: deterrence from terminating an already unfavorable contract terminating an already unfavorable contract (interest rates have been falling)(interest rates have been falling)

• Exclusionary abuseExclusionary abuse– Raising switching costs: foreclosing rivals' access Raising switching costs: foreclosing rivals' access

to potentially switching consumersto potentially switching consumers


Main questions raisedMain questions raised1.1. Unilateral contract modification – is it a competition law Unilateral contract modification – is it a competition law

question? (or civil law)question? (or civil law)• We think YESWe think YES

2.2. Financial regulation allows it – can competition policy Financial regulation allows it – can competition policy intervene? (DT case)intervene? (DT case)

• We think YESWe think YES

3.3. Should it be considered as a potential Should it be considered as a potential abuse of abuse of dominance?dominance? (or consumer protection) (or consumer protection)

• We think YESWe think YES

4.4. Does the right for unilateral contract modification Does the right for unilateral contract modification automatically leads to dominance? (contractual lock-in)automatically leads to dominance? (contractual lock-in)

• We think NOWe think NO

5.5. Can we show Can we show exclusionary effect exclusionary effect of raising switching costs of raising switching costs when when only very few consumers are switching?only very few consumers are switching?

• We think it is UNLIKELYWe think it is UNLIKELY


Market backgroundMarket background

• Very asymmetric marketVery asymmetric market– OTP Bank holds retails monopoly till 1987, still largest OTP Bank holds retails monopoly till 1987, still largest

(25% of total assets) + reputation advantage(25% of total assets) + reputation advantage– 6-7 moderately sized banks (5-10%)6-7 moderately sized banks (5-10%)– About 30 smaller banksAbout 30 smaller banks

• OTP's share in personal loans is about 40-60% in OTP's share in personal loans is about 40-60% in contract number (30-40% in loans' value)contract number (30-40% in loans' value)

• Big growth between 2004-2006: stock in personal Big growth between 2004-2006: stock in personal loans multiplied almost 5xloans multiplied almost 5x


Significant market powerSignificant market power

Three factors were considered in the Three factors were considered in the analysis of dominance:analysis of dominance:

1.1. Regulation of unilateral contract Regulation of unilateral contract modifications modifications low level of transparency low level of transparency

2.2. High switching costsHigh switching costs

3.3. Pricing behavior and market share Pricing behavior and market share evaluation of OTP Bankevaluation of OTP Bank


Dom1: low transparency levelDom1: low transparency level• Unilateral contract modifications – rational to give Unilateral contract modifications – rational to give

this right to the service providerthis right to the service provider• Constraints on abusing it should be threat of Constraints on abusing it should be threat of

losing losing 1.1. Present consumers (termination) – needs informationPresent consumers (termination) – needs information2.2. Future consumers (reputation) – needs transparencyFuture consumers (reputation) – needs transparency

• Financial regulation in HungaryFinancial regulation in Hungary– Notice about modifications should be published only in Notice about modifications should be published only in

bank officesbank offices– Consumers should inform the bank in 15 days about Consumers should inform the bank in 15 days about

not accepting the changenot accepting the change– Should quit the contract in a further 30 daysShould quit the contract in a further 30 days


Dom2: switching costsDom2: switching costs

• Consumers needs to be informed about the Consumers needs to be informed about the change + needs to be rational to switchchange + needs to be rational to switch

• Switching costs are Switching costs are substantialsubstantial in banking in banking (sector inquiry results)(sector inquiry results)– Entry + exit costs are on average 5-8% of the loan's Entry + exit costs are on average 5-8% of the loan's

present valuepresent value– Our econometric studies identified further significant Our econometric studies identified further significant

switching costs besides explicit entry / exit costsswitching costs besides explicit entry / exit costs– Banks' market shares (and so entering consumers) Banks' market shares (and so entering consumers)

do not seem to be responsive to termination feesdo not seem to be responsive to termination fees


Dom3: pricing and market sharesDom3: pricing and market shares

• Trade-off of an ex-post price increaseTrade-off of an ex-post price increase1.1. Increased revenue from old consumers (lock-in effect)Increased revenue from old consumers (lock-in effect)2.2. Lost revenue from new consumers (demand effect)Lost revenue from new consumers (demand effect)

• If stock of old consumers is big enough, it might If stock of old consumers is big enough, it might be beneficial (rip-off pricing logic)be beneficial (rip-off pricing logic)

– Although shares in new consumers can declineAlthough shares in new consumers can decline– But shares in stock of contracts may not fall But shares in stock of contracts may not fall

considerably, especially if growth slows downconsiderably, especially if growth slows down– These patterns seem to be recognizable in the caseThese patterns seem to be recognizable in the case


Dom3/2: Pricing Dom3/2: Pricing (unsecured personal loan segment)(unsecured personal loan segment)


Exploitative effects examinedExploitative effects examined

• Direct effectDirect effect: 30-40'000 consumers paid a : 30-40'000 consumers paid a price increase that was practically not price increase that was practically not possible to avoidpossible to avoid– We see no peak in termination data in that monthWe see no peak in termination data in that month

• Indirect (locking) effectIndirect (locking) effect: additional consumers : additional consumers deterred from termination, although they deterred from termination, although they might have done it at the original feemight have done it at the original fee– We estimated this number for 20-30'000We estimated this number for 20-30'000


Estimated indirect effectEstimated indirect effect


Exclusionary effect examinedExclusionary effect examined

• No effect of the fee increase was shown on No effect of the fee increase was shown on competitors' share of inflowing consumers competitors' share of inflowing consumers

• OTP's sOTP's shares of inflowing consumers are hares of inflowing consumers are also decreasingalso decreasing

• Main reasonMain reason: very low ratio of terminating : very low ratio of terminating (switching) consumers (switching) consumers small base to small base to forecloseforeclose


Commitment decisionCommitment decisionThe Competition Council of GVH accepted the following The Competition Council of GVH accepted the following

commitments from OTP Bankcommitments from OTP Bank1.1. Increase of market transparency and mobility fIncrease of market transparency and mobility for all or all of of its its

banking productsbanking products• OTP informs clients about OTP informs clients about unfavorable unfavorable unilateral unilateral contract contract

modifications via personal mail modifications via personal mail • It allows 30 days (15 It allows 30 days (15 days days more) more) for consumers to decide for consumers to decide

about not accepting the changesabout not accepting the changes2.2. Compensation of consumers harmed (personal loan Compensation of consumers harmed (personal loan

contracts signed with the initial fee)contracts signed with the initial fee)• For those having terminated their contracts, OTP repays For those having terminated their contracts, OTP repays

15.000 HUF each15.000 HUF each (30-40'000 consumers) (30-40'000 consumers)• FFor those having not terminated, OTP offers the or those having not terminated, OTP offers the

possibility of early settlement at the possibility of early settlement at the reduced reduced termination termination fee of 20.000 HUFfee of 20.000 HUF (1-200'000 consumers) (1-200'000 consumers)


Concluding remarksConcluding remarks

• These demand-sided remedies can make These demand-sided remedies can make abuses based on unilateral contract abuses based on unilateral contract modifications less likely to happen in the modifications less likely to happen in the future (see also Fletcher – Jardine 2007)future (see also Fletcher – Jardine 2007)

• Commitments from the leading market player Commitments from the leading market player might lead other banks to adapt similar might lead other banks to adapt similar behavior (self-regulation) behavior (self-regulation)

Thank you for your attentionThank you for your attention

Comments are welcome:Comments are welcome:

[email protected]@gvh.hu

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