Banks Face Financial Burden While FinTechs Stay Exempt

Banking

The Hungarian banking sector is still subject to a sectoral tax. While local banks are doing much better today than at the beginning of the previous decade, right after the global financial crisis, some worry the burdens they bear might limit their competition against foreign-based FinTechs.

Ádám Fischer

When Hungary introduced its extraordinary bank levy as a temporary measure for three years in 2010, uncertainty ran through the local bank sector. Financial institutions feared the tax would wipe out profits.

The government at the time argued that banks had long profited from their business in Hungary; now it was time to share the burden. What initially started out as temporary measure was made permanent in 2013, and is still present today, albeit at a lower rate.

“The extraordinary tax is still a significant burden on banks. When introduced, it was based on the banks’ assets held in 2009. Therefore, it did not consider changes in the size of the banks, nor did it consider the difference in the profitability of the banks. The latter issue still exists: the bank tax must be paid without considering a given bank’s profitability,” Ádám Fischer, head of legal services at Niveus Consulting Group tells the Budapest Business Journal.

As to the tax base, in 2013, the bank levy was amended and is now based on the banks’ assets held two years prior to the subject year. This means that the tax is now more proportional to the actual (and not the past) size of a given bank.

“It also means, that due to the expansion of the banks’ activities in the past decade, the total amount of the bank tax paid has also increased,” Fisher says.

The Budapest Business Journal was interested to learn how local banks see the tax environment, and how related levies affect their operations. The banks that answered directed us towards the Hungarian Banking Association and it was duly approached for a statement. By the time we went to print, however, we had not received a response.

“We do not prepare any statistics on the profitability of the bank sector,” Fisher of Niveus says about how it may be affected by the tax environment. “Based on the public news, the bank sector is in a pretty good shape right now, with profits exceeding the pre-crisis amount. This does not mean that the first years in the past decade were easy, but it seems that the banks mainly survived this period,” he adds.

Another sectoral tax levied on banks is the so-called transactional duty, which needs to be paid for each transfer and cash withdrawal. The amount is a certain percentage of the transaction, although the amount is capped per transaction.  

Driven to Cash

“The transactional duty is said to be one of the reasons why people are using so much cash in Hungary. Banks have lobbied for a long time to reduce the transactional duty,” Fisher says.

The significant reduction of transactional duty on contactless card payments as opposed to normal card payments has worked as an incentive: banks started promoting contactless bank cards, which are often considered more advanced and safer. Today, Hungary is a leader in such cardholder numbers in the region.

“As of March 2, real-time bank transfers were introduced in Hungary. Together with that it is now, theoretically, possible to transfer an amount to someone based on other identifiers (e.g. mobile phone number), so you do not need to remember anyone’s bank account number. This can promote bank transfers instead of cash payments even between individuals,” Fisher says.  

Such services are similar to those that mobile app-based FinTech solutions such as Revolut or TransferWise offer: users can transfer money to other users by only knowing their mobile phone number.

Banks in Hungary today also offer the possibility to request payments from others, not only to transfer money to someone else. Clients can use bank transfers to split up bills at the end of a dinner for example simply by including everyone’s mobile phone number to the app.  

“However, as long as there is a percentage-based fee on these types of transfers, people will tend to use cash (or foreign FinTech companies such as Revolut) to facilitate these payments,” Fisher warns.

Banking Lobby

“Banks have been, as far as we know, lobbying to change the transactional duty to a yearly tax instead of a tax payable per transaction, so they could offer better fees for small transfers. This would be in the state’s interest in our opinion, because it could reduce cash payments and would further reduce the possibility of tax evasion, together with a number of other measures introduced by the government,” Fisher says.

Hungarian banks also face certain regulatory fees that cannot be considered as taxes, but still pose a financial burden for local operators. Such fees include a supervisory fee payable to the National Bank of Hungary, as well as fees paid to the National Deposit Insurance Fund.

“We consider the most important issue is to reform or eliminate transfer tax to support bank sector instead of the cash payments. To reduce the government’s tax losses, it could increase the transactional tax on cash withdrawals, further supporting the bank sector,” Fisher says about possible improvements to the sector’s levies.

A reform of the sectorial taxes levied on banks, however, goes beyond offering banks tax relief. It could help them stay in competition against the increasing number of FinTech firms.  

“Although FinTech services target different activities than banks, and have their pros and cons, currently due to the high tax burden on Hungarian banks, people tend to use FinTech companies’ services where there is no actual need for that,” Fisher argues.

Ostensibly, the only way to help Hungarian banks stay competitive with U.K.- or Baltic-based FinTech companies is to lower the fees they have to pay to the state.  

“This would also be in the interest of the Hungarian government, because keeping the payments in the hands of Hungarian banks increase the likelihood that taxes will be paid here,” Fisher concludes.

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