South Africa’s banks charged more than R1-billion in penalty fees in 2006, which the Competition Commission says has to change. Recommendations by the Commission’s banking enquiry panel to cap penalty fees at R5 for bounced debit orders went down like a lead balloon with the four major banks this week.
It was also clear that a review of the debit order system is required for banks and consumers to understand where the responsibility lies. Although most of the panel’s recommendations were welcomed by banks, the price of the cap will be hotly debated. The enquiry proposed direct fees on ATM withdrawals, replacing the Saswich arrangement aimed at making the costs of ATM withdrawals more transparent, but this was welcomed by banks.
In the press conference held by the Competition Commission to discuss the findings and recommendations of the banking enquiry panel, head of the enquiry, Judge Thabani Jali, said that banks charged R1-billion in penalty fees in 2006, with R24-million in returned payments. This, Jali said, created an opportunity for abuse. Panel member Oupa Bodibe said that while the panel had no issue with penalty fees for someone who wrote a cheque knowing that funds were not available, debit orders were not always intentionally unpaid, especially in the case where an employee is paid late in the month.
Banks charge between R28 and R35 per returned debit order on their mass-market offerings. Rob Shuter, managing director of Nedbank Retail, said that while Nedbank is not opposed in principle to the cap, he is not sure how the panel arrived at the figure of R5. This echoed the view of the other three banks. Shuter said that the example of a customer being paid late was a situation where the bank could consider leniency, but this is different from someone continuously not meeting their contractual agreement.
Galia Durbach, chief executive of core banking at FNB, said the bank would have to look at the recommendation. “We are not sure how those costs and risks were assessed.” Durbach said the risk is that if there is no disincentive to people not meeting debit order payments, it could affect customer behaviour and therefore the overall profile of the bank’s book. Durbach said that penalty fees are included in the overall cost structure of a product and dramatically reducing these costs might have a negative impact on other fees.
Louis von Zeuner, executive director of Absa, said that while penalty fees have never been a part of its pricing structure, it has already heavily reduced penalty fees from R100 to R30. All the banks offer one or two penalty-free returned debit orders on their Mzansi accounts.
Sim Tshabalala of Standard Bank said he was concerned about price regulation implied in the cap. “It is a slippery slope and a worry that regulation seems to be a solution.” But this also raises the question about the debit order environment.
If anyone has ever tried to cancel a debit order they would know how complicated it can be. In its recommendations the panel asked for banks to put systems in place that will enable customers to cancel any direct debit instruction at any time by phone, internet or over the counter at a branch. But this could put banks in a difficult situation. Tshabalala said that banks will find themselves in huge conflict between customers and beneficiaries. “There is a contractual obligation between the customer and merchant and we are now being asked to be a conduit between the two”.
But Von Zeuner felt strongly that the debit order system needs to be tightened. He argued that service providers have been allowed into the debit order system too easily and that he would prefer to see the system used by top-end companies as an exclusive channel rather than as a tool by merchants and service providers to sell whatever they wish. “We need to ensure the integrity of users so that it does not get us into this situation.”
Last year Absa proactively ended its debit order services to Platinum Africa, a cellphone contract provider that has received many complaints about erroneous debit orders. Perhaps by making returned debit orders no longer a lucrative income for banks we could see more moves towards improving the debit order payment system.
All four banks said that they would be happy to move to direct ATM fees, but issues such as rural customers possibly paying more if cross subsidisation by urban users was removed would have to be considered before implementation. There was a mixed response to the panel’s recommendation that access to the payment system be widened to include qualified non-banks. Tshabalala said this would have to be done in a way that did not affect the integrity of the banking system.
But it is good news for companies such as ATM Solutions, who would be able to provide clearance and settlement services without having to be a fully fledged bank. Steven Kark, founder of ATM Solutions, said that expansion of access to suitably qualified non-bank participants will lead to increased competition and innovation, which will benefit the consumer. “It will be a less onerous process to participate in the payment system.”
Overall the banks felt that their recommendations to the commission had been considered and that the outcome will be positive for consumers.
A hub for banks
The panel has encouraged the national treasury to pursue a central Financial Intelligence Centre Act (Fica) information hub with the banking industry. In their submissions, the banks stated that the Fica process prevented people from easily switching bank accounts.
In its submission Nedbank proposed a centralised repository where all Fica information would be held so that customers would not have to “re-Fica” every time they moved bank accounts. This year FNB launched a R66-a-month bank account, which will actually lose money until it achieves critical mass.
FNB said that Fica was the major hurdle to achieving critical mass because of the fact that people did not want to undergo the Fica process. Galia Durbach of FNB said it would support any measure that would make Fica a quicker and easier process. It would also bring economies of scale, which would reduce costs and have a positive effect on banking fees.
But banks will first have to get their own systems in place. Some banks require customers to fill in Fica documents between divisions. This would need to be streamlined before a central hub for the financial industry could be achieved.