Costa Rica Banks – Competition Benefits Clients

You can bet your bottom dollar on it: the banking industry in Costa Rica has come a long way.

A couple of decades ago there basically weren’t any private banks in Costa Rica. The government-owned banks were the only option for traditional banking services in the country, and these offered few services and what is generally regarded as poor customer service.

“Back then, the client had to adapt to the product. Today, the product has to adapt to the client,” explained Julio E. Mora, corporate services manager for the Consorcio Bantec financial group.

Barriers between customers and the banks in Costa Rica are coming down, agreed John H. Caldwell, assistant general manager of Scotiabank de Costa Rica, a locally incorporated division of Scotiabank Group Canada.

“Today, banks are delivering better service and also making themselves more accessible. Banks are looking to assist customers more with their investment needs, financial planning needs, lending needs. General banking services have also improved – electronic banking services, the ATM network throughout the country, PC banking,” Caldwell said.

Luis Liberman, general manager of Banco Interfin, said the increased competition benefits clients because there are many more options to choose among.

“Clients have easier accessibility to loans, and there are new products, such as leasing, asset-based lending and factoring, that didn’t exist on an institutional basis five years ago. Some of these changes are due to legislative changes, such as private banks being able to offer checking and savings accounts, and changes in pension fund management. Other products, such as leasing and factoring, basically came about because financial entities took advantage of a void that was there.”

“For the first 10 or 15 years after private banks were allowed to operate, the state banks were kind of like sleeping giants. Today, state banks have much better services. To a large extent, this is a response to competition from the private banks,” he added.

Alvaro Saborío, vice president of Banco Cuscatlán de Costa Rica, said Costa Rica’s economy is slowly evolving into a much more sophisticated environment. “Some companies are starting to learn from this environment that there are other ways of doing business and they are starting to ask for different banking products. Fortunately, these products can now be delivered here in Costa Rica,” he said.

Most of the banking services in Costa Rica – checking and savings accounts, home, business and personal loans, debit and credit cards, and even automatic teller machine withdrawals – are available in both U.S. dollars or in colones. At the state-run Banco Nacional, clients can open a savings account in Euros if they desire.

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“The technological aspect, especially with Internet, also has been an important change in Costa Rica’s banking industry. Two key elements that exist today in Costa Rican banking that were not present 30 years ago are a focus on technology and customer service,” Mora said.

Banking Evolution

According to Liberman, when Banco Interfin became a bank in 1992, private banks had a mere one-half of 1% of all the credit in the country.

“We’ve been getting a bigger share of the market year after year,” he said. “Today, five privately owned banks, Banco San Jose, Banex, BCT, Cuscatlán and Interfin, represent about 70% of the business of private banks,” he said.

Saul Weisleder, economic adviser for Banking Association of Costa Rica, said private banks represent 40% or more of the market, quite a change from a decade ago when private banks had a 20% share of the market.

“Today, we have a financial system that is much more complex, much larger, and offers many more services to clients,” Weisleder said.

New legislation gave way to greater activity in the financial sector during the past decade. The market also grew because of changes in the economic model of the country, due to the increase in foreign investment in Costa Rica, as well as the change in production for mainly a national market to an international market, primarily the United States.

“Up until 1995, only state banks could offer savings and checking accounts. If you wanted a savings account, you could only have one in a state bank. That change allowed private banks to compete, or to give some basis to compete, against the state banks,” Caldwell said. Scotiabank established itself in Costa Rica after the new law went into effect.

Citibank Costa Rica, which had been present in the country since 1968 as a representative of Citibank New York, also took advantage of the new banking law to establish itself as a full-fledged bank offering a wide array of modern services to corporations.

Citibank General Manager Víctor M. Balcázar said the law fostered “a huge change in the way the country’s financial system operated. Prior to this law, you weren’t able to get funds from the public; you had to fund everything through your parent company. The fact that you were allowed to offer accounts changed the whole scenario.”

Another fundamental change affecting Costa Rica’s banking industry in the second half of 1990s, according to bank managers, was the strengthening of the system of supervision and control of the country’s financial system.

“The supervision of the banks gets better and better by the day. The General Superintendence of Financial Entities (SUGEF) really has a grip on what is going on in each bank. Some of the investors are realizing this, and starting to move their money from the state banks to the private banks,” Saborío said.

Better Service

As the competition for clients has increased, the amount of services clients are offered also has increased substantially.

“You have the competition of the bigger banks& Scotiabank coming into the country& Citibank becoming very active& In the previous decade it had been practically asleep in the country, or at least it was not doing much. Now it’s a very active and aggressive and a very good bank.

The government-owned banks also became much more aggressive than they were in the past, as far as looking for new business. So, you have the competition of the international banks, on one hand, and the government-owned banks are doing a much better job than they were in the past trying to get clients and provide clients with better services. That has made us all better banks,” Liberman
said.

Banks have recognized the key to getting and maintaining clients is excellent customer service.

“Everybody offers the same thing. If you come up with a good new product, and it is profitable, in three or four months everybody will be offering it. All of the basic products that a client needs are offered by most of the banks. So in the end, it is customer service and rates that sets them apart,” Saborío said.

“Right now, the basic difference between a government-owned bank and a private bank is the guarantee of the government on deposits at the government-owned banks, that the private banks do not have. I would say some of the depositors still prefer the government-owned banks because of that situation. Private banks are competing with customer service and personalized attention to the customers. Sometimes the state banks are a little slow on that end, so that is our big advantage,” he added.

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Too Many Banks

There seems to be a general consensus in Costa Rica’s financial sector that there are more banks than necessary in the country.

“The market is too small for the number of banks that exist. Competition is tough, among both state and private banks. The smaller ones are being taken over by larger ones,” Saborío said. For example, five years ago there were around 25 private banks; today there are only about 15.

Balcázar agreed. “In comparison with many other markets, the financial sector in Costa Rica is competed by many institutions. What we are seeing right now is a consolidation, and I think this consolidation will continue. The competitive environment in Costa Rica is tough. Many banks will merge and form alliances as the market continues to evolve. We are facing larger and stronger banking institutions.”

“A lot of banks are merging into larger ones, especially local ones. That will reduce the offer of banks, and fortunately produce a reduction in costs because there will be less competitors on the market,” Saborío said.

In one of the latest acquisitions, Banco Banex absorbed the branch offices, teller machines and customers of Bancrecen during the second quarter of 2003. Although consolidation is likely to continue, “that doesn’t mean there won’t be smaller banks who serve niche markets. They serve an important function for clients,” Liberman said.

Proposed Changes

Private banks would like to see legislative changes that would place the private banks on an even basis with the government-owned banks.

“We are hoping that eventually we will be able do business on the same basis as the state banks. For example, if a private bank wishes to offer savings and checking accounts, it is required, essentially, to deposit a secondary reserve of 17% with the state banks, at a reduced rate of interest,” Caldwell said.

Private banks would like to see this 17% secondary deposit requirement eliminated completely so they can be more competitive, according to Balcázar, Caldwell and Liberman.

Weisleder, who was a congressman at the time the law was passed, said the 17% requirement was a political compromise. “No one really thought we could open the market to private banking institutions, but we did. Of course, we had to make concessions.” The 17% “special contribution” was one of those concessions, he explained.

The Legislative Assembly currently is reviewing various legislative projects, the most important of which, according to Weisleder, is one that seeks to reform the Organic Law of the Banking System.

“It’s a far-reaching project. One of the main points is that it seeks to simplify aspects of the operation of the state banks, in things that make their operations difficult, such as the acquisition of goods and services. State banks are subject to a series of regulations and laws that make it difficult for them to operate. For example, if a state bank needs to acquire a new computer system, above a certain cost, the process of acquisition is very complex. That delays the process considerably, and that affects competitiveness. The proposed legislation would simplify that,” Weisleder said.

Another change proposed by the private banking industry has to do with deposit guarantees. Currently, the government insures only deposits with state banks.

“Having the guarantee of the government tends to favor the state banks. We would like to see a deposit guarantee system in the industry,” Caldwell said.

Liberman said private banks are fighting to create something similar to the FDIC in the United States. “I really think it’s necessary,” he said. Weisleder agreed. “The idea is that this will bring more stability to the system, and create more confidence in the private banks. We need to obtain more equal operating conditions among financial institutions and resolve a series of issues that affect competitiveness,” he said.

The future of banking in Costa Rica promises to be quite interesting, according to Liberman. “I think there will be a heck of a lot more competition… Banks will have to be more creative to keep their clients. It will be an interesting time. We will have to keep on our toes,” he said.

© Copyright 2003 Auriana Koutnik. All rights reserved.

A former reporter for United Press International in Los Angeles, Auriana Koutnik now lives and works in Costa Rica as an independent journalist. Her freelance articles and photographs have appeared in more than a dozen newspapers and magazines in the United States and Costa Rica, including the Los Angeles Times, Green Bay Press-Gazette, Rapid City Journal, Econews, People Weekly, The Tico Times, Costa Rica Traveler, Costa Rica Outdoors, Business Costa Rica and others. She can be contacted by e-mail at: koutnik@racsa.co.cr

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Andrew Makarik

to@welovecostarica.com

Andrew Makarik is the main editor of WeLoveCostaRica, a fan of this sunny country. He is also a loving husband and a has a lovely daughter. By being a devoted family man and the biggest Costa Rica fan, he wants to make more people feel at home there. WeLoveCostaRica unites people and helps them find new home or a new travel destination. This website is a friendly community where everyone can find not only information, but also new friends and travel pals. Andrew is also passionate about IT and programming, so he himself maintains a friendly atmosphere in this cozy environment of WeLoveCostaRica.com.