Lack of transparency in bank charges

20 April 2006 Angelo Coppola

The South Africa Competition Commission will undertake a public enquiry into bank charges and the national payment network, following research that shows that competition in the banking industry remains inextricably linked to fairness in the National payment System (NPS).

The next stage will be a list of specific issues in the next two months that the Competition Commission wishes to investigate. Banks and the public will then have an opportunity to respond and on the banking industry front, explain how they operate.

According to the acting commissioner Shan Ramburuth says that its likely that the next stage could well be a formal investigation or use the advocacy function to force changes to legislation and regulation. Its likely to be a combination of both.

Ramburuth says that the concerns relate specifically to bank charges and access to the NPS. In terms of bank charges Ramburuth would like know how banks get to their charges, when compared to their costs in terms of the inter-bank transfers for example.

This investigation is in line with international trends as consumer activists worldwide are complaining about high bank charges and ownership and control of national payment systems.

According to Dr Penelope Hawkins the research author there were some insights that came out of the 250 page report. Hawkins says that they interviewed 38 bankers and institutions, and used the web, although the majority of banks were loath to disclose bank charges, due to competitive concerns.

Among her findings were several interesting gems.

The banking sector makes R29bn per annum or 38% of fees, related to the NPS, and the relationship between costs and fees are not transparent. It thus shows that the banks are making in the region of R10bn in profits directly attributable to the NPS fees when based on a cost to income ratio that the banks declare.

Hawkins does admit that the banks may challenge the R10bn profit figure but its unlikely as they jealously guard their information.

For consumers who believe that cash is king, heres a wakeup call. The fees for transactions through bank accounts, using any payment method are: the switching fee; the interchange fee; the merchant fee; and the customer fee.

The report finds that there is no apparent link between the actual switching cost and the fees that customers pay.

For example:
For a R100 transaction, the customer pays R2.33, while the interchange fee is 55c; the Banserv charge is 9c, and the merchant fee to the acquiring bank is R2.50, or 2.5% per R100.

The total income to the bank comes to R4.83, while it pays out 55c or 9c. It also appears that Bankserv earns 2%of the revenue generated by the transaction.

The issue around the ownership of the switching system Bankserv - also came under scrutiny, as the major banks own the system and some of the smaller players feel disempowered.

It also appears that all the participants in the system find their involvement profitable. There is also only one participant in the system that that operates on a cost recovery basis - SARB. However, according to Hawkins Bankserv is supposed to operate on a cost recovery basis, but it is common cause that the switch is profitable.

Interestingly enough there is no market conduct regulation in the banking industry and the NPS, and again there was no transparency. In terms of payment streams banks will tell you that cheque processing is the most expensive means. Not true according to Hawkins findings.

Hawkins says that it appears that there is a measure of cross subsidization which is worrying as its inefficient. Cheque payment processing fees are averaged out at 0.2% while other bank ATM transactions could be as high as 4.5%. The eft transaction fees appear to be the lowest, although they do represent the highest average value.

In terms of the other players, legislation and regulation has been focused on the banks, and consequently there is a regulatory gap and lack of rules for non banks, such as easypay, for example, or a micro lender, which will require an overall strategy.

Turning to the payment pricing issue, Hawkins says that the pricing arrangement for each payment stream falls outside the remit of the regulations.

An ATM example - consider an ATM in a remote place, and the other bank pays the acquiring bank a fee an interchange fee, or the Saswitch fee. This has been considered very high internationally, and in some countries they have been regulated.

There is a dispute with MasterCard and Visa in the UK at the moment, and the eurozone is also concerned. In Australia for example they have regulated the interchange fees.

Consider for a moment that using someone elses ATM would cost you the consumer R10 for the first R100. The actual cost is R3.90 and Bankserv earns 13c.

You can download the full report at If you have any comments on the research report you can email them to [email protected].

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