South African banks last year earned R8,7-billion from bank charges. One bank increased its charges by up to 67% last month. Surely South African regulators should follow the United Kingdom’s example in cracking down on high bank charges. Phillip Inman reports from London
British high street banks are under the cosh once again. After years of stinging criticism from consumer groups concerning poor service and overcharging, the banks now face a government investigation which will scrutinise the root causes of high bank charges.
The man in charge of the investigation, Don Cruickshank, says he will leave aside nitty-gritty claims from customers fed up with their treatment by particular banks. Instead, he wants to examine widespread practices that work to restrict competition.
His review will take in the bundling of building insurance with mortgages which obscure the real cost of individual products.
It will also consider whether the domination of the credit card market by Visa and Mastercard is harming competition, whether the payment systems for cheques and other transactions can be described as competitive, and if small businesses are restricted from shopping around by restrictive practices.
Cruickshank is likely to be a tough adversary for the banks. He has a strong track record as an aggressive regulator from his days as telecoms ombudsman, preventing British Telecom from entering markets such as cable television, where it might have killed off the competition.
His curriculum vitae also reveals a stint as general manager of Richard Branson’s Virgin Group and head of the Scottish health service, all giving him a wide-ranging business background.
His paymaster, Chancellor Gordon Brown, is the man who gave Cruickshank the brief to consider the wider picture. Brown wants to know how the Barclays and NatWests of this world rack up billions of pounds in profits.
Is it because they are fabulously efficient businesses providing a range of services demanded by customers? Or does it stem from their ability to dominate the scene and charge huge mark-ups on their products?
Brown must suspect the latter is true, or he wouldn’t be sponsoring an investigation.
His approach to the problem is not to slap a windfall tax on all bank profits and walk away with the cash.
Rather, he wants to end some of the restrictive practices that are at the heart of keeping charges to customers high. At the back of his mind must be the fact that bank shareholders demand profits today rather than investment in the very core parts of their networks.
Ripping out 20-year-old systems that process transactions is expensive. And why do it, ask senior bank executives, when the banks are just a cosy club sharing the same payment networks?
In short, there is a suspicion in the British Treasury that banks in the United Kingdom have allowed time to stand still; that far from being innovators, giving their customers a fast, cheap and transparent service, they enjoy the fruits of a protective world free from outside competition except in very limited areas.
The banks have recently shown resistance against lowering their unsecured loan rates despite a series of cuts in interest rates since last September.
Mortgages linked to insurance products have also been a long-standing bugbear, making it harder for consumers to work out the real cost benefits of going with one mortgage company rather than another.
The review will run in parallel with the investigation by the Office of Fair Trading into the major supermarkets. Like the big banks, they are accused of using their dominant position to impose huge mark-ups on goods and strangle innovation.
Bank share prices slumped when the UK government launched its review, but quickly recovered when traders realised Cruickshank will not be reporting his findings until the end of this year.
And even if he meets his deadline, any proposals for reform will take a long time to filter through into cheaper, simpler products.
Greater regulation of banking products is possible, but – except in the area of mortgages which have so far escaped close scrutiny by financial watchdogs – this is unlikely. Instead, specific issues will be taken up with the big banks behind the scenes, pushing them towards the innovative practices seen in the United States and other countries.
In the meantime, big British banks, which have largely failed to compete abroad, will continue to dominate the financial scene and continue to face accusations of milking their captive audience.