The Competition Commission Enquiry Panel has concluded that transactional and interbank charges (bank charges) in South Africa are higher than what 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 panel says in its report released on Wednesday.

The enquiry, held from August 2006 to June 2008, was initiated to examine the level and structure of bank charges and access to the retail banking sector in South Africa.

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.

The information gathered by the enquiry paints a picture of a complex and sophisticated banking system involving the big four banks, who together control over 90 percent of the retail market for personal transaction accounts.

In 2006 transactional fee income represented one-third of the banks' total income, or R34.5-billion. The enquiry's remit did not include interest charges or corporate and business banking.

The enquiry's remit did not include interest charges or corporate and business banking.

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 first area of concern relates to high penalty fees charged for rejected debit orders. The enquiry found that these fees, as high as R110 per rejected transaction, were too high and contributed to the vicious cycle of consumer indebtedness; they are also 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.

It is not the remit of the banks to further penalise their customers

The enquiry believes it is not the remit of the banks to further penalise their customers. Therefore, the panel recommends a cap of five rand per rejected debit order, which should be more than adequate to cover processing costs. A second recommendation would require banks to adopt a system that will make it easier for customers to cancel debit order instructions directly at their bank.

Five of the 28 recommendations address the current ATM pricing model which is applied to transactions where a customer of one bank uses the ATM of another bank. ATMs are the primary method of accessing banking services, particularly in rural areas. 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 — is problematic under the Competition Act. The report advocates 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.

Opening access for non-banks to the national payment system (the clearing and settlement infrastructure) and developing an appropriate regulatory scheme will 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.

The current system makes it difficult for potentially innovative competitors to enter the market. The enquiry recommends amending the National Payment System Act and broadening the regulatory regime to open the market to suitably qualified participants. The panel would like to see objective criteria applied across the board to all players to gain access to clearing houses. It also proposes the establishment of a Payment System Ombud to ensure fairness.

The enquiry 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 found that while some payment streams may well require interchange, the method by which interbank fees are set – at the maximum level merchants are willing to bear – is where the potential abuse lies. This abuse contributes to rising shop prices across the board, unfairly punishing lower-income customers paying with cash.

In this regard the enquiry recommends 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 address 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 – creates customer inertia which enforces the banks' market power.

Central Fica repository

Recommendations to counteract their market power include 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 are aimed at improving comparability. Setting up a central Fica repository is also recommended.

"This concludes the work of the Enquiry Panel, for which we are grateful," said Competition Commissioner Shan Ramburuth. "The transparent, inclusive way in which the process was run sensitised all stakeholders to issues requiring attention.

"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 is released, the Competition Commission in consultation with the dti and National Treasury will map a way forward.

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