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Banks still refuse to re­lent on fees – four years down the line

Finweek English Edition - - Cover - 2008 FIN­WEEK BANK CHARGES RE­PORT BRUCE WHIT­FIELD

ABSA has emerged as South Africa’s most ex­pen­sive bank in the 2008 Fin­week Bank Charges Re­port. In our fourth an­nual in­ves­ti­ga­tion into like-for-like charges, Absa – the group with the coun­try’s big­gest re­tail bank­ing foot­print – also saw the big­gest year-on-year in­crease in fees.

How­ever, it’s not alone. Bank charges rose – in some cases by more than 20% – de­spite the grow­ing threat of reg­u­la­tory in­ter­ven­tion and a pub­lic com­mit­ment by the bank­ing sec­tor to tackle charges and keep in­creases to a min­i­mum.

Our in­ves­ti­ga­tion re­in­forces the find­ings of our three pre­vi­ous stud­ies and sup­ports sev­eral key con­clu­sions of the Com­pe­ti­tion Com­mis­sion-spon­sored Jali re­port. It re­mains dif­fi­cult, time-con­sum­ing and con­fus­ing to com­pare like-for-like charges across dif­fer­ent bank­ing in­sti­tu­tions. There’s also no way to at­tribute a cost of trans­ac­tion rel­a­tive to the price charged for ser­vices. De­spite prom­ises of greater trans­parency in the years since we be­gan our an­nual in­ves­ti­ga­tions, the world of bank charges re­mains as murky and dif­fi­cult to nav­i­gate as ever.

There are lit­er­ally hun­dreds of per­mu­ta­tions and no sin­gle, ac­ces­si­ble, ac­cu­rate com­par­i­son mech­a­nism for a like-for-like com­par­i­son of fees. Even us­ing tech­no­log­i­cally so­phis­ti­cated com­par­i­son web­sites pro­vides no guar­an­tee of suc­cess, as many of the as­sump­tions re­quired to in­put data need a level of in­ter­pre­ta­tion. The pub­licly avail­able in­for­ma­tion pro­vided by the banks in some cases ei­ther con­tra­dicts data re­ceived from an­other area of the bank or is in­suf­fi­cient to make an ap­pro­pri­ate choice.

The Jali in­ves­ti­ga­tion ear­lier this year cleared the banks of col­lu­sive be­hav­iour and made no men­tion of their abus­ing their mar­ket dom­i­nance. While it set no spe­cific time­frames for changes de­manded by the in­ves­ti­ga­tion, it did lay out 28 rec­om­men­da­tions on re­me­dial ac­tion for banks to take with re­gard to charges.

“The reg­u­la­tory en­vi­ron­ment is de­cid­edly un­pleas­ant at the mo­ment,” says Sim Tsha­bal­ala, CEO of Stan­dard Bank South Africa, who cau­tioned the 28 rec­om­men­da­tions would take “some ef­fort” to im­ple­ment. He warned it would take time to al­ter SA’s ATM net­works to charge con­sumers di­rectly and cau­tioned there was broad in­dus­try dis­agree­ment in the bank­ing sec­tor over the pro­posed R5 stan­dard fee for re­turned debit or­ders. “Those fees are le­git­i­mate and con­tracted,” Tsha­bal­ala says, in­di­cat­ing that bank­ing sec­tor play­ers are pre­pared to dig in their heels on rec­om­men­da­tions they find un­rea­son­able.

For the first time since the small banks cri­sis of 2001, SA ma­jor fi­nan­cial in­sti­tu­tions are be­gin­ning to feel the squeeze. Three banks – Stan­dard, Absa and Ned­bank – have pub­lished re­sults to end-June. All have shown in­creases in non-in­ter­est rev­enue (NIR). A large pro­por­tion of NIR is made up of bank charges. Stan­dard, Absa and Ned­bank to­gether gen­er­ated more than R25bn in NIR in the first six months of 2008.

Stan­dard grew its NIR by 28%, Absa 23,5% and Ned­bank 4%. It in­di­cates, in part, a rise in vol­umes as the banks have ac­quired new clients but it also sug­gests mar­gin growth through fee in­creases.

Banks ar­gue their fees are fair. South Africans en­joy un­prece­dented ac­cess to fi­nan­cial ser­vices in Africa. Se­cur­ing cash is costly, with more than 300 ATM bomb­ings, nu­mer­ous bank rob­beries and cash heists driv­ing up the cost of pro­tect­ing money. In terms of SA’s Fi­nan­cial Sec­tor Char­ter, they’re obliged to pro­vide ac­cess to bank­ing ser­vices in even re­mote ar­eas. How­ever, clients are bay­ing for a bet­ter deal.

Ac­cord­ing to the Fin­week com­mis­sioned re­search car­ried out by char­tered ac­coun­tants at Hor­wath Foren­sics, Absa is SA’s most ex­pen­sive bank for clients who use its fixed price pack­age op­tions, as well as for those who pay for each in­di­vid­ual in­ter­ac­tion with the bank on the pay-as-you-use (PAYU) ba­sis. That’s a big change for a bank that pre­vi­ously re­garded it­self as a lower-cost provider of fi­nan­cial ser­vices.

Ac­cord­ing to our method­ol­ogy, which has been con­sis­tently ap­plied since the an­nual in­ves­ti­ga­tion was in­au­gu­rated four years ago, last year Absa im­ple­mented the big­gest an­nual price in­creases of any bank since 2005.

But the ac­co­lade for the big­gest price in­creases over four years goes to Stan­dard Bank. Since 2005 the monthly cost of Stan­dard’s pack­age op­tion has risen an as­tro­nom­i­cal 60%: from be­ing the cheap­est at R198,40 in our 2005 re­port, it would now cost our fic­tional Fin­week fam­ily R317,05/month to trans­act us­ing the bank’s pack­age op­tions.

Our re­searchers found, in gen­eral, mem­bers of staff are trained to de­fault to the pack­age op­tion rather than in­ter­ro­gate in­di­vid­ual clients on their bank­ing needs.

Be­cause of the way our fic­tional fam­ily car­ries out its bank­ing ac­tiv­i­ties, it doesn’t fall neatly into any of the pack­ages of­fered by the banks, which means they’re pe­nalised for op­er­at­ing out­side the pa­ram­e­ters of the pack­ages on of­fer. While pack­age op­tions may ap­pear at­trac­tive as an op­tion for fee­wary con­sumers, they should carry a warn­ing la­bel on the con­se­quences of stray­ing out­side their tightly de­fined pa­ram­e­ters.

We ex­pect the banks – es­pe­cially Absa, which has emerged least favourably from our re­search – to chal­lenge our find­ings and re­search method­ol­ogy. How­ever, we do point out that Absa last year used the Fin­week find­ings in its na­tional mar­ket­ing cam­paigns when it emerged as be­ing the cheap­est of SA’s Big Four banks on the PAYU ba­sis. That im­plies the group ac­cepts the va­lid­ity of our find­ings.

“I’m con­fi­dent that we’re spot on with the fee struc­tures, based on our anal­y­sis of the pub­lic in­for­ma­tion we gleaned from the branches and our nu­mer­ous call cen­tre in­ter­ac­tions that we had with each of the banks,” says Ter­ence Hatzk­il­son, di­rec­tor at Hor­wath Foren­sics. “There was a lot of con­fu­sion when it came to whether our credit and garage cards were linked to the cheque ac­counts or were stand-alone. Some banks of­fer re­lated dis­counts while oth­ers do not. It was tough to get the right an­swers – not only for us but also for the call cen­tres.”

Our fic­tional fam­ily could bank more

dili­gently – if they ap­plied their minds they could prob­a­bly carry out their bank­ing more cheaply. They draw cash over the counter, use cheques and are yet to dis­cover the ben­e­fits of cell­phone bank­ing or use the In­ter­net ef­fi­ciently. In the in­ter­ests of con­sis­tency and to en­able us to com­pare fees over the past four years, we’ve kept our fam­ily ig­no­rant of the pos­si­bil­i­ties open to them.

Things have also be­come more com­pli­cated since the in­tro­duc­tion of the Na­tion- al Credit Act (NCA). Any­one with credit prod­ucts prior to the NCA is re­garded as a usury cus­tomer; any­one open­ing their first ac­count since 1 June 2007 is called an NCA client, with dif­fer­ent fees. That leads to some con­fu­sion.

“We re­ceived lots of con­flict­ing in­for­ma­tion from the call cen­tres as to what fees we were li­able for as a usury client,” says Ryan Sacks, co-re­searcher and di­rec­tor at Hor­wath Foren­sics. “The con­fu­sion cen­tred on ad­min fees for mort­gages. We had to dou­ble and triple check with the call cen­tres with re­gard to the ap­pli­ca­ble charges on mort­gage ad­min fees, which as far as we could work out are charged by all the banks for all clients be­fore and af­ter the NCA.”

Hor­wath Foren­sics vis­ited two branches of each of the Big Four banks. They chose to con­cen­trate their ac­tiv­i­ties on af­flu­ent Sand­ton, where branches at Ben­more and Sand-

ton City were vis­ited, as well as at Maponya Mall in Soweto. They sent our mys­tery shop­per – “Fred” – to two branches of each of the Big Four in an ef­fort to as­sess what a fixed num­ber of trans­ac­tions at each of the banks would cost.

They spent 40 hours – an av­er­age of 10 hours per bank – col­lect­ing in­for­ma­tion, in­ter­view­ing client ser­vice con­sul­tants, con­sult­ing bank lit­er­a­ture and web­sites to cal­cu­late the quan­tum of SA’s bank charges. The study was com­pre­hen­sive and, we sub­mit, more thor­ough than the vast ma­jor­ity of clients would do. There was also no in­ter­ac­tion with bank head of­fice pric­ing spe­cial­ists this year, to en­sure the num­bers Hor­wath de­rived were as or­ganic as pos­si­ble.

The pric­ing of in­di­vid­ual bank trans­ac­tions re­mains con­sid­er­ably higher than the ag­gre­gate fee for pack­age op­tions. That en­cour­ages clients to use one-size-fits-all op­tions – re­gard­less of whether it’s in their best in­ter­ests to do so or not. Rather than as­sess and ad­vise clients on their in­di­vid­ual needs, banks’ staff

de­fault to of­fer­ing pack­age op­tions to their clients. It may be a pru­dent use of in­ter­nal re­sources be­cause branch staff do need to deal with large num­bers of face-to-face en­quiries.

Both the Ben­more and Maponya con­sul­tants rec­om­mended the pricey “Plat­inum Pack­age” to Fred, based on his in­come rather than the vol­ume of trans­ac­tions he car­ried out. The Plat­inum of­fer­ing has a more ex­pen­sive monthly pric­ing fee than the gold prod­uct. Fred found ser­vice at the Maponya Mall branch of Absa poor. Just two client con­sul­tants were avail­able – one of whom was “on lunch”, with no vis­i­ble back-up.

The gold pack­age costs R139/month, with 35 free trans­ac­tions. Ev­ery trans­ac­tion af­ter that costs R10 and the “free” bun­dle ex­cludes fees on Saswitch, branch with­drawals or cheques. The plat­inum of­fer­ing comes in at R169/month for un­lim­ited trans­ac­tions, again ex­clud­ing Saswitch, branch counter trans­ac­tions and cheques.

How­ever, our re­searchers chose the gold pack­age, as it worked out cheaper based on vol­ume. That im­plies the con­sul­tants didn’t con­sider the specifics of our re­searchers’ re­quire­ments but rather de­faulted to a more ex­pen­sive, sta­tus-ori­en­tated op­tion.

Apart from Ned­bank – which was forced to cut its fees over the past four years due to the threat of a client re­volt when we first ex­posed the 162% gap be­tween its pack­aged op­tions and Stan­dard Bank’s in 2005 – FNB has grown its monthly charges least over four years.

FNB’s an­nual in­crease in 2008 was just 4%. Our fam­ily, had it banked with FNB, would be pay­ing 12% more than it did in 2005 on the PAYU sys­tem and just 38c more on the pack­age op­tion.

FNB also fi­nally ap­pears to have re­solved its in­ter­nal com­mu­ni­ca­tions is­sue re­gard­ing its debit card trans­ac­tions. While branch and call cen­tre staff had rec­om­mended to our mys­tery shop­per in pre­vi­ous years that he take up a gold cheque card, pric­ing spe­cial­ists at head­quar­ters were push­ing the cheaper Visa Elec­tron of­fer­ing. The Elec­tron of­fer­ing does have lim­i­ta­tions com­pared to the tra­di­tional, more costly, prod­ucts.

Fred de­scribed ser­vice lev­els at FNB’s Ben­more branch as

“un­sat­is­fac­tory”. He was left to find his own way around the branch, which de­layed ser­vice. Fred had just five min­utes with a con­sul­tant, whose knowl­edge of pric­ing he de­scribed as “dis­ap­point­ing”. The con­sul­tant asked for no per­sonal in­for­ma­tion on ei­ther salary seg­ment or trans­ac­tion his­tory but de­faulted sim­ply to: “Most peo­ple nowa­days are choos­ing the elec­tronic pack­aged op­tion.”

Fred had a bet­ter ex­pe­ri­ence at Maponya Mall, which gave a more de­tailed com­par­i­son of fees and charges.

Ned­bank has moved ag­gres­sively to ad­dress pric­ing in its re­tail bank­ing di­vi­sion and has cut its fees. It’s also worked hard over re­cent years to shake its elite im­age. Our fam­ily would pay around 13% less this year on the PAYU ba­sis than it did in 2005, and around 47% less on the pack­age op­tions.

Ned­bank didn’t have a choice. Four years ago its pric­ing was way out of kil­ter with its peer group but the bank is now sec­ond to FNB on PAYU and cheap­est in terms of its new-gen­er­a­tion pack­age of­fer­ings. Re­cent SA Re­serve Bank DI-900 re­turns show that even though cut­ting its fees and dra­mat­i­cally grow­ing its re­tail bank­ing pres­ence, Ned­bank is still strug­gling to take mar­ket share from its peers. Its share of the credit card mar­ket is flat be­low 13%, it has a smaller slice of the over­draft mar­ket than it did 12 months ago, its mort­gage mar­ket share has grown by one tenth of one per­cent, while in­stal­ment fi­nance – the part of the bank­ing sec­tor cur­rently strug­gling the most – has grown from 20,9% to 21,6%.

Fred found the con­sul­tant at Ned­bank’s Ben­more branch surly and inat­ten­tive. He failed to in­ter­ro­gate Fred’s bank­ing be­hav­iour or en­quire about the sorts of prod­ucts and ser­vices he might need. Un­like con­sul­tants from the other three banks, Fred was told he’d need to fa­cil­i­tate the switch­ing of debit or­ders from his ex­ist­ing bank to any new ac­count he opened at Ned­bank. But ser­vice lev­els at Maponya Mall were much bet­ter and as­sisted switch­ing was of­fered.

Stan­dard Bank, which in 2005 emerged as the cheap­est by a long way on its pack­age of­fer­ings, has by Hor­wath’s cal­cu­la­tions seen the big­gest in­crease in fees since then.

Ac­cord­ing to our re­searchers, Stan­dard Bank in­creased its pack­aged op­tion charges to our fam­ily by 22% year-on-year from 2007 to 2008.

Fred de­scribed ser­vice at Stan­dard’s Sand­ton City branch as “ex­cel­lent”. Ques­tions were asked about salary brack­ets and the num­ber of trans­ac­tions re­quired. The re­searchers found a dis­crep­ancy be­tween dif­fer­ent Stan­dard Bank brochures for 2008, de­scrib­ing petrol card trans­ac­tions at R3,05 and R2,90. Hor­wath used the higher charge in its cal­cu­la­tions.

While Sand­ton City re­ceived the high­est ac­co­lade of any branch in the study, the Maponya Mall ex­pe­ri­ence was de­cid­edly more pedes­trian. The Maponya Mall con­sul­tant con­tra­dicted Sand­ton City’s more help­ful approach on debit or­ders, stat­ing that Stan­dard Bank didn’t of­fer a switch­ing ser­vice for new clients. Putting as many clients as pos­si­ble into the pack­age op­tions serves many pur­poses. Banks are as­sured of a min­i­mum an­nu­ity in­come from each client, know­ing there’s up­side should a client bank out­side the con- straints of the prod­uct of­fer­ing to which they sign up. It’s also eas­ier for har­ried staff to drive cus­tomers to the de­fault op­tion, as it re­quires less ex­pla­na­tion than break­ing down the myr­iad of pric­ing op­tions avail­able.

Most clients wary of pay­ing high fees and on the ad­vice of branch staff, de­fault to the pack­age op­tion. There’s lit­tle or no ad­vice on how to re­duce charges be­yond the rec­om­men­da­tion of switch­ing to pack­aged op­tions. In many cases clients are sold pack­ages by har­ried and over­stretched branch staff who have time con­straints or in­suf­fi­cient skills to ad­vise clients on the minu­tiae of the com­plex web of fees and charges levied by the banks.

Sim Tsha­bal­ala

Ter­ence Hatzk­il­son

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