Few other countries can boast banks whose profits were more fabulous than Brazil’s in 2010. As much of the world’s banks cowered under the threat that consumer and national debts might lead to insolvency, Brazil’s banks boomed. According to the Economist, the sector enjoyed returns on equity of more than 25 percent, and the nation’s biggest private bank, Itaú, reported earnings of $8 billion, 32 percent higher than in 2009.
With all this financial success, why were Brazil’s banks not able to avert a 21-day banking workers strike that just ended today? Could they not have shared a modicum of their success to keep unionized workers in check? Was it stinginess motivated by concerns over stock valuations? A collective action dilemma among the National Federal of Banks? Were union demands simply unreasonable? It is difficult to tell given the shoddy quality of reporting. A more enticing possibility is that banks were happy to put customers in a position where they were forced to develop online, telephone, and banking machine experiences that might ultimately benefit the banks’ bottom line.
Brazilian banks have earned stellar returns over the last decade. As a result, they have become internationally renown for their strength: Itaú now places among the top ten largest banks in the world, and two Brazilian banks placed among the top 12 strongest banks in a famous Bloomberg Markets ranking published earlier this year. Given unprecedented banking prosperity, it would seem odd that Brazil has experienced coordinated strikes by the national bank employee syndicate during the last eight years. This year’s strike involved 36,000 workers; over 9000 branches took part – almost half of the nation’s branches. In 2009 the strike lasted 15 days. This time it lasted 21.
The core demands of union workers don’t appear unreasonable. They sought a 12.8 percent salary adjustment, which, subtracting inflation, means a 5 percent raise on their pay. Base salaries for branch personnel are already relatively low, well below 2000 reais ($1,140). The National Federation of Banks was originally offering 8 percent, or a 1 percent raise. They finally did cede to an upper limit augmentation of 12 percent, and also met demands such as increased profit-sharing and a few workplace-related demands. All-in-all, it seems as though the strike could have been long over before it even started. So why a three-week strike?
Disregard for Customers and Employees
Although the media was quick to associate customer frustrations with the striking workers, the National Federation of Banks may be the guiltier party. They shut consumers off from the services that their deposits pay for – for three weeks. It was their responsibility to work out arrangements with employees before the strike ever had a chance to get off the ground. None of this came out in the Brazilian mainstream media, of course. Brazil’s banks are some of big media’s largest advertisers; and big customers don’t get rough treatment from the Brazilian media. Indeed, coverage of the banking strike was remarkably sparse and superficial.
But blame aside, why again, did the banks act so intransigently?
Hypothesis #1: Inflation-Related Concerns
One possibility is that banks sought to avoid the inflationary effects of giving-in to a salary hike. Not only would banks look like a pushover, they might also flame the fire of generalized wage and price inflation, which is bad for the economy and bad for bank business. But 21 days of playing hard to get is just not reasonable behavior for the banking sector, or a convincing explanation.
Hypothesis #2: Simple Disregard
If anyone from an "advanced economy" has experienced a Brazilian bank, they will know that banks fall into the Latin American institutional norm – they’re frustrating and dismal. Line-ups are long; one can easily wait upwards of 20 minutes in non-peak hours. They’re dismal because banks in Brazil don’t have the tidy, shiny, or homey appearance of North American and most European banks – they’re industrial. Rather than the neat cordons of airports, you’ll often find yellow tape on the floor demarcating where the cattle are supposed to line-up. The lights are all raw fluorescents, and decoration and attention-grabbing ads are scarce. Oh yeah, Brazil’s banks also have insultingly bad hours: they open late – typically around 10 or 11 am – and they shut early, at 4 pm. There is also a strong two-tiered system emerging, as in other parts of the world – VIP “prime” and regular customers – but that is another blog post.
Banks in Brazil also practice extreme usury. As I blogged about just under a year ago, a new bank account I obtained included a line-of-credit I didn’t ask for, and if I hadn’t looked hard at my statement I would have assumed that the sum of my line of credit was part of my bank balance. Very sneaky. That line of credit could be mine… for just 186 percent per annum. Brazil has among the highest interest rates in the world, and many lower-middle class consumers are currently getting crushed under unmanageable debt. A few responses to this debt include: personal defaults and crime, both of which raise the price of credit. Bravo banks and central bankers.
All in all, it seems that the "simple disregard" hypothesis is more an observational lament than a hypothesis.
Hypothesis #3: Strikes Help Bank Profits by Changing Consumer Behavior
A further possibility points to the hypothesis of a decoy. Banks may find that annual strikes drive consumers to the machines, telephones, and online – getting them out of branches – thus moving customers towards habits that are more lucrative for banks. Let’s start close to home: during the strike, my wife Carolina finally arranged online banking options to pay all her major bills.
I’m certain Carol won’t be the only one to save banks a lot of money in reducing branch visits, not to mention improving service fee profit expectations. The Globo newspaper provided a list of suggestions on how to deal with the banking strike about two weeks ago. Unsurprisingly, online, telephone, and bank machine options figured prominently among potential solutions.
So for what it’s worth, there you have it, the conspiracy theory hypothesis: banks may be stingy or suffer collective action dilemmas, but they do not appear reluctant to let customers hang for two or three weeks every year. It ultimately reduces their operating expenses in the long term by getting customers to practice non-branch related banking practices.
Now if only the media would provide some in-depth coverage of these strikes in the first place, we might have a better idea of whether this crazy conspiracy theory holds water.