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.