Absa bank stands to be the biggest loser should the Competition Commission start an investigation into banking fees in South Africa, and this could have implications for Barclays if the deal goes ahead.
The Falkena report, issued last year and which analysed competition in local banking, has called for increased competition but it is unlikely the Barclays deal will start a price-cutting war.
According to Rob Nagel, equities head at African Harvest, if Barclays does acquire Absa it will be business as usual as it would be the biggest loser if bank fees had to be cut. Absa is the largest retail bank with seven million customers. According to the report, Absa derives 67% of non-interest income from transaction costs.
Nagel says that while other banks such as FNB have had to be innovative with product offerings to attract Absa customers, Absa is in the enviable position of having substantial market share and therefore it would not be in its interest to have banking fees reduced.
If the commission finds reason to investigate banking fees, however, Absa may have no option but to start trimming back on fees to retail customers. This would have a negative impact on Barclays, which would have paid a fair value for its stake in Absa.
According to Shan Ramburuth, acting commissioner for the commission, research is being conducted into the banking sector. “The banking sector has been identified by the commission as one of the economically sensitive areas that needs further research. Once the research has been completed, we will decide whether or not to begin an investigation.”
This research will complement the Falkena report, which found that banking in South Africa needs to be more competitive and that local banks charge fees on more transactions than other international banks and, in general, charge higher fees.
As it stands, should Barclays be successful in its bid to acquire 60% of Absa, it will literally be smiling all the way to the bank by capitalising on the higher fees paid by retail clients in South Africa compared to its United Kingdom market, where, on average, banking fees are lower.
Unlike South African banks, which charge fees on every transaction, Barclays only charges on duplicate statements and returned cheques. Although bouncing a cheque will set you back a hefty £30 (R360), Barclays UK customers do not pay fees on their cheque accounts as long as they maintain a credit balance. Should customers go into unauthorised overdrafts they pay a £25 penalty and are charged a hefty 27,5% interest rate.
While Barclays will be coining it on South African bank charges, it will also benefit from the domination of the big four in terms of deposit takings. In the UK the big four only account for about 19% of savings accounts, whereas in South Africa the big four account for 80% of deposits. This translates into a more profitable business with the return on equity for South African banks of 30% compared to the UK’s 25%, according to the report.
But Nagel warns that, should the banks be forced to cut fees, this may come at the cost of customer service. “In the UK the banking model is driven by corporate banking and the retail customer comes second. My impression is that the service levels and channel of delivery in the UK are not as high as here. If fees are cut we will get less service delivery.”
Nagel also argues that, when comparing South Africa with the UK, we are looking at two different markets. In the UK the level of sophistication and income of the average customer is higher than in South Africa. There is, therefore, less spend on educating the consumer and fewer bank accounts sitting at break-even levels. “If you look at a bank like Investec, which only targets the high end of the market, their fees are substantially lower because their customers are more profitable.”
This does not, however, explain why, according to the report, the operating costs of a bank account have fallen from just more than R1 850 a year in 1998 to below R1 600 a year. Yet, during the same period, the average service fees for a current account holder doubled.