CHEQUES AND BALANCES
Pick n Pay's boss on how banks are ripping us off
IT is now five years since the Competition Commission’s inquiry into bank charges concluded that transactional and interbank charges in South Africa were higher than they would be at competitive levels, and that “product complexities” meant that the banks had the ability to abuse their market power.
Despite its finding that banks should alter the structure of their fees, this exercise has had very little impact on the way banks do business and brought no relief to either the retail trade or consumers.
At the heart of the concerns are the fees the banks charge to service credit and debit card transactions in retail stores. The rate at which customers are switching from cash to plastic has been dramatic, but it does not appear the banks have acknowledged the economies of scale that should kick in as the volume of such transactions increases.
The dominance of card over cash is bound to grow as a consumer trend — for obvious reasons of security and convenience, and because of the many incentives offered for card use.
At issue is the “merchant service fee” charged by the banks as a commission for the handling of credit and debit card sales. A large portion of this fee consists of interchange fees — those paid by the retailer’s bank to the cardholder’s bank every time a bank card is used. It is worth noting that interchange fees in South Africa are more than double those charged in Europe.
The same is true of debit card interchange fees, which are more than double the European benchmark. Although it is true that debit cards bear a lower fee of about 0.55% (because they draw on existing funds in a bank account rather than expose the bank to the risks attached to credit), the charge remains very high.
In theory, interchange fees purport to share the cost of processing card transactions between buyers and sellers. But, in reality, the interchange fees paid by retailers ultimately end up on consumers’ bills.
There is clearly an impact of such fees on already high bank charges and, ultimately, on retailers’ operating costs. It is particularly concerning that retailers — and thus, ultimately, the customer — should effectively be bearing the costs of the banks’ credit risk, interest-free payment terms, fraud and bad debt.
The Competition Commission report found that although some payment streams may well require interchange, the method by which interbank fees are set is where the potential abuse lies. This abuse, found the report, “contributes to rising shop prices across the board, unfairly punishing lowerincome customers paying with cash”.
South African banks have introduced what they call a “hybrid” card. It is virtually identical to a debit card — and attracts interchange fees of 1.09%, more or less double the normal debit card rate of 0.55%. This is justified by arguing that, unlike debit cards, such cards can be used for online internet purchases. It is not clear why this should be the case, since in other markets normal debit cards can be used for internet transactions.
As increasing numbers of our customers graduate to more sophisticated financial instruments, the greater will be the number of plastic transactions. The result is further pressure on prices in an environment in which the retail sector is already heavily impacted by rapidly rising transport, municipal utility and operating costs.
Finally, there is inherently more risk in handling cash as it travels from the till to the bank vault. So, it seems odd that bank fees for the relatively easy and safe processing of card transactions should be so much higher than the cost of cash.
The issue of card fees has in recent months been the subject of debate in Europe, where regulators have sought to cap charges for debit and credit card payments in the belief that such a step would result in cost savings for retailers and lower prices.
In terms of a proposal adopted in July, charges for debit card payments will be capped at 0.2% and for credit cards at 0.3%. According to the European Union Commission, this new regime could be worth up to à6- billion (about R100-billion) each year in cost savings for retailers, and should translate to lower retail prices for the consumer.
Pointing out that countries with the lowest interchange fees have more competition and lower costs, the EU has said that “interchange fees are just a device to make money”.
Pick n Pay will continue to engage with the banks on this matter, as it is in the national interest that we find ways of reducing bank charges. Since 2011, the Reserve Bank has been reviewing interchange fees. The outcome of this project could potentially have far-reaching implications.
Interchange fees may well represent a convenient and easy source of income for banks and card companies, but they are bad news for the consumer.
Ackerman is chairman of Pick n Pay
Comment on this: write to letters@businesstimes.co.za or SMS us at 33971 www.timeslive.co.za