Up to 50% of the South African banking industry’s revenue comes from bank charges carried by consumers, some of the highest in the world, the Competition Commission has found in a groundbreaking report.
The report, called The National Payment System and Competition in the Banking Sector, was released on Thursday and is a precursor to a public inquiry by the commission into bank charges and access to the payment system.
The study is a consequence of the 2004 Competition in South African Banking report for National Treasury and the South African Reserve Bank, which recommended that the Competition Commission investigate the national payment system as a complex monopoly.
The report found that revenue earned by banks and non-banks directly from payment system activity amounted to almost R31-billion in 2004, or more than 2% of gross domestic product (GDP).
“At present the banking industry earns 38% of its revenue (R29-million) from payment system-related fees,” said the report.
Taken as a whole, the banking industry earned 54% of its income from non-interest activities — such as transactions linked to payments, the report notes.
“Any link that there may be between the operating costs associated with a payment transaction and the charges made by banks in that regard is not transparent,” the report found. “It thus may be the case that bank fees have less to do with the cost of the payment system and more to do with the market power of the big banks in setting fees.”
South African banks have been able to cherry-pick their clients because four of the country’s 22 registered banks — Absa, Nedcor, FirstRand and Standard Bank — control 80% of the market. The power of this dominance enabled them to increase the average service fee charged for current accounts by 29% between 1999 and 2003, the 2004 report found.
The new report details the complexities of the payment system and shows that competition in the banking industry remains inextricably linked to fairness in the National Payment System.
The report found that the banks operate a switching arrangement between themselves known as Bankserv. “Bankserv is the dominant retail payment system operator, clearing more than 90% of the retail volume.”
This means that access to the market by new entrants is heavily controlled and influenced by this network, more specifically the four big banks, which then have carte blanche over charges and profit.
The report suggests that there is little apparent link between the costs directly attributable to transactions (such as the Bankserv processing fee) and the fee the customer is charged by the bank.
“The question of whether the level of bank charges is cost-related and competitive or whether it is a pricing consequence of the dominance of the retail banking sector of the big banks through their account holding needs further investigation,” said the report.
The public inquiry will be held in terms of Section 21 of the Competition Act, which gives the Competition Commission the responsibility of implementing measures to increase market transparency and empowers the commission to inquire into and report to the Minister of Trade and Industry on competition matters.
The report says that retail transactions make up about 90% of volume of the transactions, but only 3% of value.
Cheques account for 13% of non-cash transactions by volume, but 35% by value.
Electronic fund transfers account for 54% of non-cash transactions by volume and 63% by value. Debit cards account for 5% of transactions by volume, but only 0,25% by value.