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.
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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.
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By GlobalDataThe 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
