As bank customers we are able to shop around for the best banking package, and the banks have been fairly aggressive in offering cheaper banking options. However, there is an additional fee over which we have no control. It provides a large but conveniently indeterminate revenue fee for the banks and faces no competition.
It is called interchange and is the fee one bank will charge another bank for providing services to its customers. This generates billions of rands of revenue for the banks. This fee is non-negotiable for the client, who pays the fee either directly through Saswitch charges (the additional transaction fee a customer pays for using the ATM of another bank) or electronic payment fees, and the merchant, who is charged an interchange fee in the case of credit and debit cards. The merchant builds this cost into the goods and services provided, so the consumer ultimately picks up the bill.
Unlike other banking fees, there has been no competition between the banks as to what interchange fee is charged. All banks charge merchants 1,7% of the value of the transaction for processing a credit card and 0,55% for a debit card. Although the banks will not confirm this, it seems the Saswitch fee is set at R3,25 plus 65c per R100 across the industry.
This smacks more of collusion than pricing based on an individual bank’s cost base. Banks with larger ATM and merchant networks benefit from the revenue generated from the interchange fee, while smaller newcomers, such as cellphone-based banking facility Wizzit, receive no revenue — it simply becomes a major cost burden for their customers. They are in no position to negotiate a better rate for their customers.
Considering the impact this fee has on the cost of doing business in South Africa, it is amazing that the banks claim they are unable to calculate the amount of revenue interchange provides, nor what the services they charge for actually cost them. What we do know is that interchange is a significant part of the total fee revenue, which is between R18billion and R31billion a year, depending on who you talk to.
Without being able to calculate interchange costs and revenue, how do shareholders know if the banks are covering their costs? How can consumers be sure they are not being skinned alive? With a complete lack of competition and a complexity that baffles even the experts, interchange has drawn the ire of the banking commission, smaller banks and retailers, and is currently the major focus of the banking commission hearings headed by Judge Thabani Jali.
Over the past week, submissions to the banking commission have raised some interesting debates around interchange. FNB proposed that all Saswitch fees be cut; the majority of this fee goes to interchange costs. However, Standard Bank contended that this would be to its detriment as it has the largest ATM network in South Africa and would not be suitably compensated for providing these services to other banks’ customers. Standard Bank made the logical suggestion that the interchange fee be based on the cost it incurs as determined by an independent expert and the South African Reserve Bank. This would seem to be a basic business principle — calculate your charges based on your costs — but one the banks have steered away from. This is possibly because the actual costs are difficult to calculate because of the capital invested in the networks, but more likely it is because they are making extraordinary profits from interchange, and the complexity of the process allows them to claim ignorance.
To understand the extent of the excess profits, Jali should be asking why retailers such as Pick ‘n Pay are able to provide ATM services in the form of cash back (drawing cash at a till point using a debit card) at a fraction of the price of using an ATM machine. Like the banks, it is providing a service for another bank’s customer, yet, according to Pick ‘n Pay finance director Dennis Cope, it only charges 65c. The rest of the fee is charged by the customer’s bank. Compare this to what a bank charges its own customers to use its ATM network. These fees range from R3 to R20, depending on the bank and the amount withdrawn. Moreover, Pick ‘n Pay does not receive any interchange fee from other banks for their customers use of the Pick ‘n Pay infrastructure, which was developed more than 17 years ago. Rather than receiving an interchange fee, the retailer pays an interchange fee of 0,55% per transaction on a debit card. If a similar arrangement to Saswitch was followed, Pick ‘n Pay should receive R3,25 plus 65c per R100 for providing a service to another bank’s customer.
According to Cope, the 6Â 000 Pick ‘n Pay checkout points will soon provide full ATM services, such as balance enquiries. Some banks — usually those with smaller networks, such as FNB — encourage cash back transactions by charging a flat fee of R1,75 for a till point withdrawal, of which a healthy chunk still goes to the bank. Others include an incremental scale, so the higher the value of the withdrawal, the more you pay. Surely this makes no difference as the banks are not carrying the costs of dispensing the cash?
It seems that if retailers can do banking this cheaply, then excessive profits are being made by the banks somewhere in the complicated banking payments system.