R/€ = 14.49
R/$ = 10.50
Au 1294.90 $/oz
Pt 1407.50 $/oz
Jun 25, 2008
SA’s bank charges too high, inquiry findsBack
MasterCard|South Africa|Bank|Bank Charges|Business Banking|Retail Banking Sector|Retail Market|Competition Commission|Shan Ramburuth|Disclosure|The Costs|Transparency|ATM
© Reuse this South Africa’s bank charges were higher than what they would be at competitive levels, the Competition Commission said on Wednesday, following the completion of an inquiry into the level and structure of bank charges and access to the retail banking sector.
The banking enquiry panel, which was established in August 2006, has found that the current market structure, because of current information asymmetries and product complexities, meant that South African banks had the ability to abuse their market power.
The commission said in a statement that the information gathered by the enquiry had painted a “complex and sophisticated” banking system involving the four big banks, which controlled over 90% of the retail market for personal transactions.
It stated that, in 2006, transactional fee income had represented one-third of banks’ total income, or R34,5-billion. The enquiry’s remit did not include interest charges or corporate and business banking.
The panel made 28 recommendations aimed at addressing concerns raised by consumers, small and prospective banks and nonbank stakeholders.
The first area of concern related to the high penalty fees charged for rejected debit orders. The enquiry has found that these fees – sometimes as high as R110 a transaction – were too high and that they contributed to the “vicious cycle” of consumer indebtedness.
“Penalty fees on rejected debit orders contribute significantly to the earnings of the banks and are much higher than the cost associated with processing the transaction. Additionally, customers are penalised for rejected debit orders by the service provider with whom they have a contract,” it said.
The enquiry believed that banks do not have to further penalise their customers and recommended a cap of R5,00 per rejected debit order. This should be “more than adequate” to cover processing costs.
A second recommendation was that banks adopt a system which would make it easier for customers to cancel debit order instructions directy at their bank.
Five of the 28 recommendations addressed the current ATM pricing model, which was applied to transactions where a customer of one bank used the ATM of another bank.
The enquiry found that the way in which banks set the carriage fee – payable between banks when a customer uses the ATM of another bank – was problematic under the Competition Act. The report advocated the implementation of a direct-charging model, offering full disclosure and transparency at the start of the transaction, in order to allow for more price competition in the provision of ATM services.
The report also stated that opening access for nonbanks to the national payment system and developing an appropriate regulatory scheme would increase competition in the provision of banking services.
“The current system makes it difficult for potentially innovative competitors to enter the market,” it stated, adding that it recommended amending the National Payment System Act and broadening the regulatory regime to open the market to suitably qualified participants.
The panel said it was presented with concerns around the existence and level of current interbank arrangements and the costs associated with branded payment cards (Visa or MasterCard). It has found that, while some payment streams might well require interchange, the method by which interbank fees were set – at the maximum level merchants were willing to bear – was where the potential abuse was.
“This abuse contributes to rising shop prices across the board, unfairly punishing lower-income customers paying with cash,” it stated.
The enquiry recommended that interbank fee setting be subject to an independent, objective and transparent regulatory process and that certain rules established by MasterCard and Visa be abolished.
Nine recommendations addressed the difficulty consumers face while making product and price comparisons. Bundling, packaging and pricing make choice difficult and weaken price competition. The panel found that the complexity of products and prices, inadequate transparency and disclosure and the costs associated with switching – combined with the reluctance of banks to price compete – created customer inertia that enforced the banks’ market power.
Recommendations to counteract their market power included amending the Banking Association’s Code of Banking Practice to develop a minimum set of standards for disclosure of product and price information, standardisation of terminology as well as a Switching Code. Other recommendations, such as a banking fee calculator and marketing generic customer profiles were aimed at improving comparability. Setting up a central FICA repository was also recommended.
“This concludes the work of the enquiry panel, for which we are grateful,” said Competition Commissioner Shan Ramburuth.
“The banking sector is ripe for innovation on the back of new business processes and technologies. Already we are seeing responses consistent with the direction of this report, which can fuel this dynamism. We look forward to the continued co-operation of the banks to find solutions to these complex matters.”
Once the full, 600-page report was released, the Competition Commission in consultation with the Department of Trade and Industry and National Treasury would map a way forward.
The enquiry was held from August 2006 to June 2008. During these 22 months, the panel and the technical team held 21 days of public hearings in three cities and conducted 101 stakeholder meetings.
The views of a range of interested parties including banks, consumer groups, small and prospective banks, non-banks and regulators were canvassed during this process.
Edited by: Mariaan Webb© Reuse this Comment Guidelines
Recent Research Reports
Steel 2014: A review of South Africa's steel sector (PDF Report)
Creamer Media’s Steel 2014 report provides an overview of the global steel industry and particularly of South Africa’s steel sector over the past year, including details of production and consumption, as well as the country's primary carbon steel and stainless...
Projects in Progress 2014 - First Edition (PDF Report)
This publication contains insight into progress at the delayed Medupi and Kusile coal-fired projects, in Mpumalanga and Limpopo respectively, as well as at the Ingula pumped-storage scheme, which is under construction on the border between the Free State and...
Automotive 2014: A review of South Africa's automotive sector (PDF Report)
The report provides insight into the business environment, the key participants in the sector, local construction demand, geographic diversification, competition within the sector, corporate activity, skills, safety, environmental considerations and the challenges...
Construction 2014: A review of South Africa's construction sector (PDF Report)
Construction data released during 2013 hints at a halt to the decline in the industry during the last few years, with some commentators averring that the industry could be poised for recovery. However, others have urged caution, noting that the prospects for a...
Electricity 2014: A Review of South Africa's Electricity Sector (PDF Report)
This report provides an overview of the state of electricity generation and transmission in South Africa and examines electricity planning, investment in generation capacity, electricity tariffs, the role of independent power producers and demand-focused initiatives,...
Defence 2013: A review of South Africa's defence industry (PDF Report)
Creamer Media’s 2013 Defence Report examines South Africa’s defence industry, with particular focus on the key players in the sector, the innovations that have come out of the defence sector, local and export demand, South Africa’s controversial...
This Week's Magazine
The Electronic Systems Laboratory (ESL) of the Department of Electrical and Electronic Engineering at Stellenbosch University is strongly reaffirming its position as one of South Africa’s leading centres for satellite technology and expertise. It is currently...
The world’s lowest-cost diesel-electric locomotive is not made in China, but in Pretoria, at RRL Grindrod Locomotives’ newly upgraded 30 000 m2 plant. The company’s locomotive pricing is “more competitive than any other original-equipment manufacturer (OEM)...
The South African Defence Review 2012, released to the public at the end of last month (despite the year given in its title) recommends the creation of the post of Chief Defence Scientist. This official would be responsible for the management of defence technology...
AltX-listed engineering technology company Ansys has been awarded an R188-million contract by Transnet to supply integrated dashboard display systems to the freight rail utility’s locomotives. Black-owned and controlled Ansys developed the bespoke integrated system...
South Africa’s sole nuclear power station Koeberg, which is located in the Western Cape, breached a major operations milestone on April 4, which marked the thirtieth anniversary of Unit 1 having been connected to the grid. Eskom, which operates the two-unit plant,...