Will commission findings encourage banks to get their act together?
Sick and tired of paying high transaction charges for you banking services? You’re not alone. If we’re lucky we could see some changes in the near future – particularly where ATM transaction fees and rejected debit order penalties are concerned. After yea
The team was established to discover
The team was given very specific terms of reference to guide its investigation. We quote directly from the document: Banking Enquiry – Report to the Competition Commissioner by the Enquiry Panel… The enquiry was established to determine:
- The level and structure of charges made by banks, as well as by other providers of payment services, including: the relation between the costs of providing retail banking and/or payment services and the charges for such services; the process by which charges are set; and the level and scope of existing and potential competition in this regard.
- The feasibility of improving access by non-banks and would-be banks to the national payment system infrastructure, so that they can compete more effectively in providing payment services to consumers.
- Any other aspect relating to the payment system or the above-mentioned charges which could be regarded as anti-competitive.
Long-term objectives to increase transparency and competitions
The stated long-term goal of the enquiry was to “increase transparency and competition in the relevant markets” with a view to establishing whether the Competition Commissioner needed to get further involved in terms of its regulatory powers. To satisfy this requirement the panel was tasked with approaching banks, payment service providers, regulatory authorities and other stakeholders.
The enquiry’s findings won’t surprise too many readers. A panel of financial experts soon concluded that: “The complexity of products and prices (combined with inadequate transparency and disclosure), the cost and difficulty for consumers in switching banks, and the reluctance of the major banks to engage in vigorous price competition with each other that could “spoil” the market for them in the long term – all contribute to producing a situation where the prices charged to consumers for transactional accounts and payment services are probably (although with some exceptions) well above the level that effective competition would allow.” What a perfect summary.
Banks are making it impossible for clients to effectively compare like-for-like products with those offered by other banks. And even if consumers were able to make comparisons the process of moving accounts from one to another is prohibitive. Cost transparency is a major issue in the South African financial services environment at the moment. With all the focus on commissions in the insurance sector and demands for better upfront disclosure from investment products it’s surprising the banks haven’t been brought to task on this point previously.
Rejected debit order charges lambasted
One of the major issues the enquiry panel had was determining how banks set their prices. They acknowledge that “relating fees to costs proved impossible to do with the data voluntarily submitted by the banks – in writing and at the hearings – and it became clear that costs were but one input into the pricing strategy of banks.” We feel the panel is stating the obvious here… Any business bases the price of its end product or service on input costs and a ‘reasonable’ margin for profit. For a bank to process an ATM transaction probably involves negligible costs; but to maintain a network of thousands of ATM’s and keep them stocked with cash is going to cost millions of rand.
The banks are partly to blame for the tough stance the panel took. Once the smoke settled it became quite clear that the panel honed in on the specific areas where they perceived the banks to be making the most obscene profits. And that meant ATM transactions and debit order rejections. The panel was unhappy with the way in which off-use ATM transactions were levied.
But the biggest bugbear in the report was around debit order rejection fees. Banks have been making billions of rand each year from charging penalties when a client has insufficient funds to process a debit or stop order. Because companies usually re-submit bounced debit order transactions the charges quickly mount up. And they’re often more than the debit order that was bounced in the first place. “The panel found it unacceptable that a bank should recover more than the cost incurred in processing the rejection of a debit order!” It will be interesting to see how banks respond to the panel’s proposed R5 maximum charge per rejected debit order...
Some fantastic ideas
In all the report makes 28 recommendations. We love the suggestion that banks create a universal product which can be compared on a like-for-like basis across all product providers. We also welcome suggestions that comparative advertising be allowed – though care should be taken to ensure the first ‘idea’ is properly implemented before this is allowed. And we also like the proposal that switching between banks be made easier. If the banks take these proposals to heart the matter can end here. If not further investigation and regulatory intervention is bound to follow.
There’s one thing we’re sure of. If banks are forced to drop debit order rejections to R5 per occurrence, and alter the per transaction pricing structure on ATM transactions, they’ll simply make up for the ‘loss’ in some other area. And that means the consumer might, once again, be at the receiving end of regulation with an untoward long-term effect. The commission is on record that transparency makes it impossible to tackle the banks on all services and products – so they went for those which are transparent. The message to the banks is clear: If we can see what you’re charging for something we’re going to be able to determine whether or not you’re overcharging! That means banks will simply make future products less transparent than before.
Editor’s thoughts:
Although we enjoy a world class financial system we’ve been paying over the odds for the honour for a number of years. Banks have enjoyed the protection of a fairly anti-competitive environment; each reasonably content with the size of its customer base. Do you think the Competition Commission will be able to bring banking costs down; or will banks simply become more creative in charging fees? Add your comment below, or send it to [email protected]
