The Competition Commission released a 44-page executive summary of the Banking Enquiry Report at a press conference in Pretoria on 25th June. The full report runs to 588 pages, but will only be released (in a sanitised form) once the banks have had a chance to remove confidential information or to waive their confidentiality claims. The Enquiry was conducted on behalf of the Commission by a Panel chaired by Judge Jali, assisted by a Technical Team, and primarily addressed bank charges, access to the payments system, and interchange. 267 submissions were received, 151 from stakeholders. There were 21 days of hearings during the two-year Enquiry.
The executive summary of the report contains "findings" and a set of 28 "recommendations", for implementation by the Commission, the South African Reserve Bank (SARB), National Treasury, the banks themselves, the payment card associations, and bodies such as the Payments Association of South Africa (PASA), the Banking Association and the Banking Ombudsman. Some of the recommendations call for immediate action, while others require action over the next one to three years. While there is no unequivocal recommendation for the Commission to initiate complaint proceedings, it is not clear whether the Commission should consider initiating investigations into interchange in the EFT and EDO (early debit order) payment streams, or whether the Commission should first establish whether interchange in these payment streams is really necessary.
Recommendations of the Report
Capping of penalty fees
The first recommendation is the only one for explicit price regulation: the capping of the penalty fee on dishonoured debit orders to "approximately" R5 per item. Throughout the Enquiry, the Panel challenged the cost basis of penalty fees, and took the view that the banks should not use penalty fees to "teach their customers manners". The cap would have to be imposed by the SARB or according to the Consumer Protection Act once it is passed.
- The penalty cap sounds good for consumers but would mean
that the banks would not only lose a significant source of
revenue, but would face higher incidences of dishonoured
items, as consumer behaviour is driven by costs. Compliant
customers would have to bear relatively more of banks'
- A penalty cap was not mooted at any time during the
Enquiry and the level seems not only arbitrary, but very low
in comparison to, for example the UK, where there is a cap of
GBP12 (about R190).
Cancellation of debit orders
The second recommendation is that customers must be able to cancel debit orders at any time by telephone, internet or over the counter.
- This also seems appealing at first glance but is surely
open to abuse by consumers wishing to avoid their obligations
in underlying contracts with creditors.
Abolition of ATM carriage fees
The third recommendation is for ATM interchange (carriage fees) to be abolished in favour of the direct charge system, whereby customers are charged for ATM transactions by the ATM provider rather than by their own banks, although their own banks will also charge them processing fees.
- The direct model was proposed by FNB and has found some
support among the banks. It should promote more competition
on ATM withdrawal fees.
- The fifth recommendation is for no price discrimination
among ATM customers of other card issuers, in order to
prevent strategic, exclusionary pricing targeted against
- The seventh recommendation is that in time, the direct
charge model should be extended to mini-ATMs and cash-back at
point of sale.
Regulation of interchange
Recommendation eight is for the establishment of an independent regulatory process for the determination of interchange, where the SARB is proposed as the appropriate regulator.
- The banks largely agreed with this approach during the
Enquiry, but the recommendation includes the stipulation that
the regulator should begin by establishing the validity of
interchange in each payment stream, whereas it seemed the
Enquiry had already established the legitimacy and necessity
of interchange, at least for credit, debit and hybrid
Payment card scheme rules
Recommendations 9 to 11 are for changes to the card schemes' rules. Acquirers should not be required to be deposit-taking institutions, nor should acquiring be restricted to institutions that issue scheme cards. The card schemes should withdraw their prohibitions on "pure" cash-back at POS (without any other transaction being undertaken), and to eliminate their "honour all products" rules.
- The banks (and the SARB) might be worried that non-bank
acquiring would lead to disintermediation, but pure cash-back
ought not to be a problem for banks to implement. The card
associations would presumably prefer to keep their honour all
products rule, because it forces merchants to accept the more
costly credit cards, even if they would prefer only to accept
Electronic funds transfers and early debit orders
Recommendations 12 to 14 concern interchange on EFT and EDO transactions, where the Panel has not yet recognised the necessity for interchange. The recommendations are not clear, but they seem to contemplate investigations by the Commission into collusive practices in respect of EFT interchange, and excessive pricing in respect of EDO interchange. Alternatively, they envisage the determination of interchange in the EFT and EDO streams being included in the proposed regulatory process.
- Concerning EFT, it is odd that although the Panel
acknowledges the two-sided nature of the market, nevertheless
it sees no need to reconcile the demand/supply imbalance on
either side by means of an interchange payment.
- Concerning EDO, the suggestion of an investigation by the
Commission into excessive pricing is surprising, especially
since the Panel did not establish that any bank holds market
power or is dominant in any market, never mind
"super-dominant" as required by the Competition
Tribunal in its Harmony/Mittal decision.
Access to the payments system
Access to the payments system by non-bank participants is covered by recommendations 13 to 19, and here the Panel relies on securing the co-operation of the SARB to revise the National Payments System (NPS) Act and to establish a payments system Ombud. The Panel also recommends that the entry of new participants be decided by the CEO of the payments association, rather than by incumbent members.
- The proposals here are rather vague and dependent upon
the SARB for action that is not clearly spelt out.
Measures to increase price transparency and comparability and to ease switching
Recommendations 20 to 28 of the Report concern the disclosure of product and price information, the use of standardised and plain language terminology, the encouragement of consumers to switch to more cost-effective options, the establishment of standard customer profiles to facilitate comparative shopping, the easing of the law against comparative advertising, the establishment of a centralised fee calculator, a central FICA info hub, and a switching code, and the expansion of the Banking Ombudsman's duties to include enforcement and monitoring of compliance with the codes of conduct for information disclosure and switching.
- Although the cost of switching was addressed during the
Enquiry, the adoption of standardised language was not
discussed in any detail. More importantly, the risk of
collusive conduct and the stifling of innovation resulting
from standard customer profiles and standard basic banking
products were raised by the banks and acknowledged by the
Panel during the Enquiry, but seem to have found their way
into the recommendations all the same.
- The proposal for a central FICA hub seems sensible, but
like so many of the Panel's recommendations, will cost
money to establish, money that will be paid by the banks and
recovered from customers, and money that might constrain the
ability of the banks to reduce their charges in total.
The full Report of the Banking Enquiry is yet to be published, and only then can the implementation of the Recommendations begin, which itself will be a process that will take at least three more years to complete. Apart from the reduced penalty fees (charges that many customers will never pay), it is difficult to see how the recommendations will lead to a reduction in bank charges, particularly considering the additional, costly measures proposed, including codes of conduct, switching codes, standardised products, additional disclosure, fee calculators, an additional Ombud, interchange forums, and completely revised ATM charging systems. Banks – and ultimately consumers – will have to bear these costs.
It remains to be seen how hard the Commission and the SARB will push for the implementation of the various recommendations, and to what extent the banks will be willing participants in complying with selected proposals, many of which seem to rely upon assertions rather than "findings" of market power and dominance.