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June 30, 2008updated 04 Apr 2017 1:14pm

Enquiry lambasts South Africa’ Big Four

South Africas big four banks have the ability to abuse their market power, the countrys national payment system should be opened to non-banks, and the banks excessive fees contribute to a vicious cycle of consumer indebtedness, according to the long-awaited report by South Africas Competition Commission. After a 22-month-long enquiry, comprising 21 days of public hearings and 101 stakeholder meetings, the commission has finally reported and if its 28 recommendations are adopted, South African banks fees and commission income are set to take a hit. According to the commission, the big four Standard Bank, Barclays-controlled Absa, Nedbank and FirstRand control over 90 percent of the market for personal transaction accounts with fiscal 2006 transactional fee income representing one-third of the banks total income, or ZAR34.5 billion ($4.4 billion).

By Douglas Blakey

South Africa’s big four banks have the ability to abuse their market power, the country’s national payment system should be opened to non-banks, and the banks’ excessive fees contribute to a vicious cycle of consumer indebtedness, according to the long-awaited report by South Africa’s Competition Commission.

After a 22-month-long enquiry, comprising 21 days of public hearings and 101 stakeholder meetings, the commission has finally reported – and if its 28 recommendations are adopted, South African banks’ fees and commission income are set to take a hit.

According to the commission, the big four – Standard Bank, Barclays-controlled Absa, Nedbank and FirstRand – control over 90 percent of the market for personal transaction accounts with fiscal 2006 transactional fee income representing one-third of the banks’ total income, or ZAR34.5 billion ($4.4 billion).

The commission’s remit covered five key areas: penalty fees, ATM fees, South Africa’s payment system, cards and interchange fees, and products and pricing. The report specifically excluded interest charges, deposits, and corporate and business banking.

On penalty fees, the commission concluded that consumer fees are much higher than the costs associated with processing a rejected transaction and “are also levied disproportionately onto lower-income customers”.

It recommended a cap of ZAR5 per rejected debit order, which should be more than adequate to cover processing costs. A second recommendation would require banks to adopt a system which will make it easier for customers to cancel debit order instructions more directly at their bank.

The panel’s recommendations were, however, broadly welcomed by two of the country’s largest retail banks, Standard Bank and Nedbank. “I welcome the report. If all the recommendations or even if only some of them are implemented then consumers will benefit,” said Standard Bank’s chief executive, Sim Tshabalala, in an interview with RBI. “It will obviously cost us and we will take a hit but I am not at liberty to say how big that hit will be.”

At Nedbank, managing director of retail, Rob Shuter, told RBI: “Nedbank supports most of the recommendations that have been made by the Banking Enquiry Panel and believes consumers will be better off. We believe that, on the whole, the recommendations, many of which are in line with the recommendations made by Nedbank during the enquiry process, are fair and balanced.”

He acknowledged consumers often experienced “tremendous frustration when attempting to cancel debit orders,” and said banks “would need to work through the systems and legal challenges involved in the current process for cancelling debit orders at the request of a customer”.

But as regards to capping penalty fees, Shuter gave a cautious response. “[It is] an area that still needs to be explored,” he said. “Our penalty fees are already the lowest in the industry.”

The most controversial proposal

According to Tshabalala, the move to cap penalty fees is the “most controversial proposal in several respects”.

He added: “It is objectionable as there is a case to be made for charging on legal, administrative and economic grounds… There is a breach of contract and we are entitled to recover a fee for services rendered and whether price control is appropriate in these circumstances is something that needs to be debated further.”

Five of the report’s recommendations relate to ATM fees, with the commission calling for the implementation of a direct-charging model, “offering full disclosure and transparency at the start of [an ATM] transaction, in order to allow for more price competition in the provision of ATM services”.

“We believe the fees that consumers pay should be simple to understand and should remain stable so that everyone knows upfront what they are going to be charged when they use an ATM,” stated Shuter at Nedbank.

Nine of the panel’s recommendations concern opening up the country’s payment system to enable non-banks access to the bank-owned network, a proposal which would certainly find favour with the mobile payment industry and retailers. According to the commission, the current system makes it difficult for potentially innovative competitors to enter the market.

“More players in the national payments system will increase competition and retailers and other types of institutions will benefit. It was one of the proposals Standard made to the commission which has been accepted,” said Tshabalala.

The report also called for the establishment of a Payment System Ombudsman to ensure fairness.

Interchange fees for card use should, said the panel, “be subject to an independent, objective and transparent regulatory process”. It found that while some payment streams may well require interchange, “the method by which interbank fees are set – at the maximum level merchants are willing to bear – is where the potential abuse lies”.

A further nine proposals related to products and pricing, with the commission concerned that customers have difficulty making price comparisons.

“Bundling, packaging and pricing make choice difficult and weaken price competition. The panel found the complexity of products and prices, inadequate transparency and disclosure, and the costs associated with switching – combined with the reluctance of banks to price compete – creates customer inertia which enforces the banks’ market power.”

Standardisation of banking terminology

Further changes proposed by the commission include standardisation of banking terminology, and a bank switching code to aid account mobility. It also suggested the development of a banking fee ‘calculator’ to give consumers the ability to check if their current bank account offers them the best possible value, the opportunity to compare products and to shop for a better deal.

A period of consultation involving the commission, the government and the banking sector will follow. If the banks fail to make major changes to improve price competition and transparency, the commission could seek to impose standardised accounts, an option the banks would not welcome.

Looking ahead, nevertheless, Tshabalala is upbeat.

“The debate about fees has been painful at times but extremely helpful and it was the right thing to have a proper discussion,” he said. “While I do not want to show our hand to competitors, we will find a way to generate the right return for our shareholders.”

Douglas Blakey

Standard Bank – transaction account fees,

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