27 June 2008
South Africa’s Treasury has welcomed the recommendations of the Banking Enquiry Report compiled by the Competition Commission, saying it was the first step towards increased competition in the country’s retail banking sector.
According to the Treasury, the report is well positioned to inform a policy debate that promotes the objectives of providing accessible, affordable and good quality banking services to all South Africans.
“The primary objective of protecting consumers and promoting growth through ensuring financial system stability still remains key,” said the National Treasury in a statement this week.
“Importantly, it must be recognised that the report in itself does not constitute this debate, but initiates such debate.”
An independent panel was appointed by the Competition Commission last year to question lenders on how they set bank charges and to find ways of making fees simpler and more transparent.
The report, released this week, found that bank charges in South Africa were higher than they would be at competitive levels.
The market structure, because of current information asymmetries and product complexities, means that the banks have the ability to abuse their market power, the inquiry found after its 22 month probe, which included 21 days of public hearings and 101 stakeholder meetings.
A ‘vicious cycle of consumer indebtedness’
The enquiry panel has made 28 recommendations aimed at addressing concerns raised by consumers, small and prospective banks and non-bank stakeholders, covering five key areas.
The areas include penalty fees, automatic teller machine (ATM) fees, access to the national payment system, payment cards and interchange fees, and products and pricing.
Standard, Absa, First National Bank and Nedbank together control more than 90% of the South African banking market, with transactional fee income representing a third of the banks’ total income, or R34.5-billion, in 2006.
It observed that penalty fees for rejected debit orders were too high, contributed to the “vicious cycle of consumer indebtedness” and were levied disproportionately onto lower-income customers.
“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,” the report found. “Additionally, customers are penalised for rejected debit orders by the service provider with whom they have a contract.”
“The inquiry believes it is not the remit of the banks to further penalise their customers.”
It recommended a cap of R5 per rejected debit order, which should be more than adequate to cover processing costs, while also calling for banks to make it easier for their customers to cancel debit order instructions.
The report further advocated the implementation of a direct-charging model, offering full disclosure and transparency at the start of the transaction to allow for more price competition in the provision of ATM services.
With regards to the national payment system, the panel advised that opening access for non-banks and developing an appropriate regulatory scheme would increase competition in the provision of banking services.
“This issue was the focus of nine of the panel’s recommendations and will require legislative amendment,” it noted.
On payment cards and interchange fees, the inquiry found there was potential abuse in the method by which interbank fees were set. It 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.
Bundled products ‘not transparent’
On products and pricing, the inquiry established that bundling, packaging and pricing made choices difficult for customers and weakened price competition.
“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 – creates customer inertia which enforces the banks’ market power,” the report found.
It also advised standardising terminology and creating a switching code and other measures aimed at improving comparability such as a banking fee calculator and marketing generic customer profiles, and setting up a central Financial Intelligence Centre Act repository.
The panel’s recommendations will be sent to the Department of Trade and Industry, the National Treasury and the South African Reserve Bank, so that laws can be changed to implement the proposals.