Bounced debit order cash cow

Banks rake in millions from bounced debit orders.

Banks are raking in between R500 million and R800 million a month from bounced debit orders. That’s a sizeable portion of their non-interest fee income each year for little more than running a piece of computer code.

Fees for bounced debit orders range from R5 for Capitec clients to R150 for Absa and Nedbank clients. The question arises why the fees vary from the reasonable to the ridiculous.

It’s a question bank customers in Australia, New Zealand and the UK started asking several years ago, leading to class action suits against banks in these countries. Class action suits in the UK and Australia failed because courts found the fees for bounced debit orders and other charges reasonable if they formed part of a basket of services. SA’s financial regulations are less prescriptive, so the chances of a class action suit succeeding here are much better, according to financial services legal consultant Leonard Benjamin.

The Competition Commission investigated banking charges years ago and recommended capping bounced debit order fees at R5 per item. “We have no reason to believe that, currently, banks would be unable to recover costs ordinarily incurred in respect of rejected debit orders within such a cap,” the commission said.

“Such a cap should be imposed by regulation. It should apply to both savings and current accounts, and to ordinary as well as early debit orders. Banks, which incur additional expenses or losses in particular cases through their customers’ default in respect of debit orders, can terminate those customers’ accounts and/or sue for damages.”

Benjamin says the banks (besides Capitec) failed to implement the commission’s recommendations because it’s a cash cow. “We know that about 10% of the 33 million debit orders processed each month bounce for various reasons, usually insufficient funds. Customers are then charged sometimes more than R100 for reversing a single bounced debit order transaction. If there are multiple bounces, the fees can run much higher than this. The banks claim these are penalty charges intended to promote more virtuous behaviour by clients, but the effect is to further drive the client into financial difficulty, making it more likely their debit orders will bounce the following month. It’s great business for the banks.”

He estimates fees from bounced debit orders alone range between R6 billion and R10 billion a year for the six largest banks. That’s not counting fees for debit orders processed successfully. Non-interest income for the six largest banks came to about R120 billion last year, so the debit order bounce business isn’t something they’re likely to give up without a fight.

Fees from bounced debit orders range between R6 billion and R10bn a year for six largest banks. Leonard Benjamin Financial services legal consultant