The Competition Commission inquiry into banking costs and charges has been a South African first. Until now banks have operated largely as a cosy cartel, but since the commission first started asking questions, better banking models have been suggested. The new ideas include:
Direct charging model for ATMs
ATM fees, especially the fee charged when a customer uses another bank’s ATM, have come under fire.
Banks have used the so-called Saswitch charges — or premium fees — as penalty charges. They do not reflect the true cost of the transaction, which is much lower.
Some banks have proposed a direct charging model that the commission’s technical team seems to favour. In this model the bank that owns the ATM can charge the customer directly and the customer’s bank will charge an administrative fee for settling.
The ATM screen will need to indicate clearly what the fee would amount to before the transaction could take place, allowing the customer to shop around. So, for example, a Nedbank ATM might reflect a charge of R10, while the Absa machine next door might charge R8. This would encourage competition and transparency.
Absa stands to make the most money because it has the largest ATM footprint, but Absa itself says this could prejudice people living in rural areas. There is a cross-subsidisation of ATM fees from urban to rural areas. Lower volumes and higher transport costs make rural ATMs more expensive to administer and, therefore, using the direct charging model would mean a far higher ATM fee.
It will have a negative effect on smaller banks that do not have a wide ATM network and that have agreements with larger banks where a premium fee is not charged.
Interchange
This is the fee that merchants pay a customer’s bank when they use their credit or debit cards.
The technical team is concerned about the fee level and the banks that set the rate. The banks appear comfortable with the idea of an independent third party to assess the pricing structure to ensure it is equitable.
Walter Volker, head of payment systems at Absa, says a new system will be expensive and cautions the industry to take a long-term view and not to recoup the investment immediately from consumers.
Comparing accounts
The technical team suggests the establishment of an easily comparable bank account system. At present trying to compare banking packages is enough to give one a migraine. The banks have stated categorically that a single bank offering would be impractical and would stifle innovation.
The problem with a ”one product fits all” approach is that banks tend to focus on different segments of the market. For example, FNB’s pricing encourages electronic and cellphone banking and might not compare favourably for someone who wants a cheque account.
Sixty percent of Absa’s customers draw less than R400 from an ATM, so it uses ad valorem pricing, making lower withdrawals more affordable. But higher-value withdrawals might be more expensive compared with another bank.
The banks have suggested a common calculator based on several profiles. For example, an independent third party would compile five different profiles of customers and their banking patterns.
A customer could choose the profile closest to his/her own banking behaviour and see which bank has the best offering. Absa’s request for comparative advertising has been seen positively and the banks are looking to develop common banking terminology.
Reducing red tape
While banks are under pressure to reduce fees, the government has introduced regulations that have cost the industry billions of rands which do not include ongoing costs such as the extra time needed to open an account.
Nedbank has proposed a centralised Financial Intelligence Centre Act (Fica) repository. Its retail managing director, Rob Shuter, argues that one of the biggest impediments to changing bank accounts is the Fica process.
Nedbank wants an independently-held centralised repository that stores all Fica documentation electronically. Once a customer has done the Fica work, the information is stored in the repository and on moving to another bank, the client would not have to go through the whole process again. This would reduce customer frustration and increase the ease with which bank accounts could be changed. Banks would save money and could lower fees.
Keith McIvor, Absa’s head of pricing and products, says the banks are not allowed to outsource the responsibility of Fica. While it is likely the banks would support the initiative, it would require negotiations with the authorities.
Weeks says while this falls outside the issues of competition, it would be a positive move in lowering the cost to customers who might want to switch bank accounts.
What have we learned?
- Prices are coming down because of competition and innovation. The fact that Nedbank lost market share because of its high fees and had to slash fees to turn around the business has made consumers more price sensitive. Banks have come under pressure to change.
- Electronic banking has brought efficiencies, which, as FNB demonstrated, slash the cost of banking by more than 70%.
- If middle- to upper-income earners complain about high banking charges, they should speak to their bank about better packages and change their banking behaviour. With bundled options and capped fees, a savvy customer can reduce his/her banking fees.
- Consumers should shop around now and not wait for the regulator to ease the fee burden.
- Regulators have a habit of strangling us in red tape. The banks in turn should focus on educating their customers and be proactive in recommending better banking products that suit customer needs.
- The introduction of a comparative calculator and comparative advertising will help simplify the process. The commission has shown banks that they are being watched.
- Banking costs eat up a substantial portion of the budgets of poor households, many of which do not have access to electronic channels and cellphone banking. The reliance of this market on cash transactions means the industry needs to become more innovative in how it provides solutions — for example, establishing more cash-back arrangements that allow customers to draw money at retailers and the roll-out of more mini-ATMs.
- The Financial Sector Charter has ensured that a bank or ATM is in reasonable distance of most of the population.
- We need to find ways either to reduce the cost of cash transactions or move people away from cash.
The banking inquiry panel
Thabani Jali is a former deputy judge president of the High Court of South Africa and a judge of the Competition Appeal Court. Jali is executive chairperson of PricewaterhouseCoopers. In 2005 he headed the commission of inquiry into corruption, maladministration, violence and intimidation in the department of correctional services.
Oupa Bodibe is the executive director of Naledi. From 1996 to 1997 he was national general secretary of the South African Students Congress. Until recently he served as coordinator in the secretariat of Cosatu. He holds a post-graduate diploma in economics from the University of London.
Hixonia Nyasulu is an entrepreneur who started her consultancy in 1984 after working for Unilever for six years. She is the executive chairperson of Ayavuna Women’s Investments, which works to acquire quality assets for the economic empowerment of women. She was a director of the Development Bank of Southern Africa for nine years and until 2005 served as a deputy chairperson of Nedbank. She is a member of the advisory board of JPMorgan SA.
Rob Petersen is a senior counsel and member of the Cape Bar. He has provided legal advice to the Competition Commission over the past two years and has appeared in several matters in the Competition Tribunal and the Competition Appeal Court.