National Treasury welcomes banking report

In a statement the treasury said the report was the first step towards achieving greater competition in the retail banking sector.

“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.

“Importantly, it must be recognised that the report in itself does not constitute this debate, but initiates such debate,” said the National Treasury in a statement.

Charges higher than competitive levels

On Wednesday the Competitions Commissions Banking Enquiry report 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.

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.

Standard, Absa, FirstRand Ltd's First National Bank and Nedbank Group Ltd together control more than 90% of the South African banking market.

Transactions fees = a third of bank income

Transactional fee income represented a third of the banks' total income, or R34.5 billion, in 2006, the inquiry noted after its 22 month probe, which included 21 days of public hearings and 101 stakeholder meetings.

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 where of the penalty fees; automatic teller machine (ATM) fees; access to the national payment system; payment cards and interchange fees; and products and pricing.

Penalty fees too high

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.

"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.

It also suggested that banks make it easier for customers to cancel debit order instructions directly at their banks.

Push for transparency

It 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.

Interbank fees subject to abuse

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.

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."

Need for Financial Intelligence Centre Act

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 (Fica) repository.

Implementation of proposal

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.

Meanwhile, the South African Reserve Bank said it would consider implementing some of the recommendations.

In a statement the Reserve Bank said it would study the executive summary of the Banking Enquiry Report, which was released on Wednesday, as well as the full report when it became public.

"Subsequent to such comprehensive review and analysis, and after consulting all relevant stakeholders, the Bank, through its normal processes, will initiate any course of action it may deem appropriate in the light of its conclusions," the Reserve Bank said.

Article published courtesy of BuaNews