Banking inquiry reveals shocking fees

‘WE have come to the conclusion that generally banks in South Africa operate not as a cartel but rather as oligopolists that maximise their profits by avoiding outright price competition…’

This was the finding of a recent inquiry into the South African banking sector.An oligopoly is an economic situation where a few big firms offer slightly different products but never compete on prices so as not to ruin their market. The study further goes on to say that ‘it is by differentiated product offerings and complicated pricing structures that banks ensure the high profitability of their services.’The study was done over a period of 22 months and included 101 public hearings.As most major South African banks with the exception of ABSA are also operational in Namibia, similar pricing and competition structures will apply here.Speaking at a talk held at the BoN on the findings of the inquiry, Deputy Reserve Bank Governor Adam Hartmann said the Competition Act of 2003 should perhaps be looked at to give the BoN more powers of regulation over the sector. Dr Penelope Hawkins of FEASibility, the company that carried out the study, said there are three major areas of concern in the banking sector.The first is the penalties banks charged for unfulfilled debit orders.She said banks make up to 10 per cent of their total revenue from these fees, which are incurred when there is not enough money in an account to fulfil a customer’s debit order. This is often not the customer’s fault but can be due to a late salary payment, for example. Banks charge between R21 and R70 for these rejected transactions, and Hawkins said these charges are in no way connected to any service the bank offers. Because banks can try and process these debit orders as often as they like after the agreed debit date, one customer might incur numerous fines. Similarly on the cost of ATM fees, Hawkins said: ‘If you ask the banks what it costs them to process ATM services, they cannot tell you.’ This discrepancy seems to pervade the sector, as prices for services are often arbitrary with ‘very little reference to cost’ according to Hawkins. She advocated the use of a direct payment system for ATM services, where customers are informed of the cost of withdrawing from an ATM while they are making the transaction. This would include withdrawals from another bank’s ATM and would cut out the complicated and expensive inter-bank arrangements covering ATM services currently. Hawkins said the increased participation of non-banking entities, for example investment houses or retailers, in the financial sector would also increase competition.Currently regulations prevent these entities from getting involved in financial services. She urged Namibia to follow suit in launching an inquiry into the local banking sector.Hawkins quoted declining figures in bank customers in Namibia, which she said suggests the Namibian public is becoming disillusioned with the banking industry.She said an inquiry could address some of these reservations and restore confidence.Similar to the South African situation, she called the local banking sector ‘profitable and highly concentrated’. The inquiry in South Africa has already led to numerous changes in the banking laws there, Hawkins said. She said these changes would inevitably make their way to Namibia ‘by a process of osmosis’ due to the close relationship between the two countries.