Bankserv is a lucrative business with an annual turnover of about R200-million — which is why global electronic payments companies would love to get their hands on it. First Data’s mooted offer this week was evidence of this.
Ownership of Bankserv would provide the new owner with a guaranteed income stream from about 20-billion banking transactions a year.
Bankserv acts as the clearing house for South Africa’s banks, including cheque clearances, electronic funds transfers and ATM transactions. It is owned by the big four banks, which have a 92% stake in the company and are its major users.
This has created a possible conflict of interest, which the Competition Commission might want to see cleared up with a stricter division between shareholders, management and users.
So although Bankserv has declined many offers before, it might be time for it to consider a courtship from a provider like First Data.
But what would this mean for bank customers and would we be giving away a national asset to a global company?
Walter Volker, head of payment systems at Absa and director at Bankserv, says that before any company can buy Bankserv, it would have to undergo stringent risk assessment by the Reserve Bank to ensure it is financially sound. The banks view Bankserv primarily as a utility and not a profit-making business.
Currently, Bankserv makes about R40-million a year in profits, the majority of which is used to improve technology. About R12-million is paid to the banks as dividends.
So far, the big four banks have not considered any offers seriously and would be loath to commercialise the utility as long as they remained the primary customers.
However, the dynamics are changing, with more banks and non-banks, such as retailers, entering the arena, and it would become an issue if the big four banks started to make money out of other users.
Add this to the need to separate owners and users and the commercialisation of Bankserv looks like a distinct possibility. Apparently not all of the banks agree that commercialisation would be a good idea.
Bankserv management, however, would like to have the opportunity to expand and grow the business through commercialisation, which would allow it to attract new talent.
It would follow global trends, which have seen the merging of payment operators internationally to achieve greater economies of scale.
As it is, Bankserv faces the risk of being overly reliant on its existing offerings. If, for example, cheques became obsolete, it would have a major impact on profits. Commercialisation would allow it to widen its product and customer base.
Volker says Absa is comfortable in principle with commercialisation, but it would like to see the core business ring-fenced so that profits cannot be used to cross-subsidise new business ventures, allowing Bankserv to undercut other technology players. He says this would be an abuse of Bankserv’s privileged position as the primary clearing house.
There are concerns, too, that management would become too focused on new development and acquiring new customers — to the extent that the core business would be neglected.
If the infrastructure for ATMs and electronic payments went down it would lead to a systemic risk in the banking industry.
A buyer would want a return on capital and to make a profit for its shareholders.
What would happen to fees once Bankserv moved from a pure utility to a profit-making business? Surely fees would start to increase, resulting in higher banking costs for customers? The separation of roles, as suggested by the Competition Commission, could, ironically, increase banking fees.
Volker says, however, that this is unlikely to happen because there are other payment system operators already competing, such as Visa and Mastercard. Already, some banks — like Investec — use Visa to switch all their card transactions.
If Bankserv became too expensive, banks would move their business. Two banks could link up and switch directly if they found the move more cost-efficient. As the major banks would no longer benefit from Bankserv profits, they would view it simply as a cost they needed to control.
Banks could sign up with a processor in the United Kingdom, for example. In fact this is an increasing threat to Bankserv and one of the reasons it would want to commercialise, so that it could extend its operations into the rest of Africa or tie up with another global operator, like First Data, for greater economies of scale.
It is unlikely, however, that we will see any decisions coming from Bankserv or its shareholders until the Competition Commission report has been issued. Any final decisions would have to be approved by the Reserve Bank, which would have to be satisfied that the risks are contained.