SOUTH AFRICA: BANK FEES UNDER FIRE

UNCLAS SECTION 01 OF 03 PRETORIA 002665 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EFIN EINV PGOV SF SUBJECT: SOUTH AFRICA: BANK FEES UNDER FIRE PRETORIA 00002665 001.2 OF 003 (U) This cable is Sensitive But Unclassified. Not for Internet distribution. ¶1. (SBU) Summary. As the result of a recent report, South Africa's Competition Commission launched a public inquiry into the amount of income the banking industry generates from transaction fees. The banking industry earned R29 billion ($4.1 billion) in transaction fee revenue and an estimated R10 billion ($1.4 billion) in profit in 2004 -- translating into a remarkable 35% profit margin. The report focused on high fees and access to the National Payment System (NPS), South Africa's financial transaction clearing house. The inquiry could lead to a formal investigation under South Africa's Competition Act. This report follows a 2004 report that suggested the "big four" banks could be operating a complex monopoly of the NPS. Bank fees charged for the most common transactions, electronic funds transfer (EFT) and checks, ranked among the highest. The report raised more questions than answers and puts the banks under pressure to respond. The banks will most likely give a little, instead of being forced into radical reform. End Summary. Banking Fees Under Fire -------------- ¶2. (U) A recent report submitted to the Competition Commission put South African banks under fire for generating substantial income from transaction fees. At issue is the amounts banks charge for transactions and the transparency of how the banking industry determines these fees. In 2004, banking fees processed through the National Payments System (NPS) generated R29 billion ($4.1 billion) in revenue, comprising 38% of total banking industry revenue and 2% of South Africa's GDP (Note: Non-banks generated an additional R2 billion in revenue from the NPS. End Note.) This transaction-fee based revenue stream translated into an estimated banking industry profit of R10 billion ($1.4 billion) -- nearly a 35% profit margin. In all, the banking industry generated over half (54%) of its income from non-interest activities. This report solidified previous findings concluding that South African banks charge excessive bank fees and derive significant profits from transactions fees in comparison to international standards. ¶3. (U) As a result of this report, South Africa's Competition Commission launched a public inquiry into bank fees and the barriers financial institutions face in accessing the NPS, South Africa's clearing house for all transactions. The Commission's authority is derived from Section 21 of the Competition Act, which assigns it the responsibility to increase market transparency and to report to the Trade and Industry Minister on competition matters. Through the inquiry, the Commission seeks comment from all stakeholders, including banks and banking regulators. Thus far, the NPS costs and corresponding pricing structure have been difficult to assess as they involve indirect costs and rely upon unpublished data. Another Flare Up For Banks -------------- ¶4. (U) Two years after a study revealed the lack of competition in South Africa's banking industry, its high banking fees have taken center stage once again. In April, Feasibility Ltd. issued its 250-page report investigating bank fees and the NPS. The Competition Commission contracted Feasibility to prepare its report entitled, "The National Payment System and Competition in the Banking Sector" ("NPS Report"). This report follows up on 2004's "Competition in South African Banking" report commissioned by National Treasury and the South African Reserve Bank. The 2004 report recommended that the Commission take a closer look at the NPS operating as a complex monopoly since the "big four" banks -- Absa, Nedcor, First National Bank, and Standard Bank -- control the system and about 85% of South Africa's market share. ¶5. (U) The NPS Report raised a number of concerns that should be investigated further, centering around two main themes -- transaction fee amounts and garnering access to the NPS. While the report determined that the NPS is an efficient and advanced payment system, it also concluded that there was "little apparent link" between the costs of transactions and the transaction fees charged. Fee determination appears to be left to the market power of the big banks. Bankserv, the PRETORIA 00002665 002.2 OF 003 dominant retail payment operator that is 93% owned by the big banks, clears more than 90% of the retail volume through the NPS. In a typical merchant or ATM transaction, Bankserv earns only 1% to 2% of the total fees paid by consumers and merchants, with the banks involved in the transaction raking in nearly all of the profits. For example, the typical ATM withdrawal fee is R10 ($1.40) for the first R100 ($14.30) not made at one's home bank. In this situation, Bankserv would earn R0.13, while the acquiring and issuing banks would earn R3.90 and R5.97, respectively. Bankserv's charges do not appear to correlate to the high mark up banks charge. ¶6. (U) Moreover, the pricing of NPS transactions fall outside the parameters of any regulator. Historically, the fees have been negotiated collectively by those who participate in the system, while bilateral negotiation could yield more competitive pricing. The current process lacks transparency and creates high barriers for potential new entrants. Small banks that enter the market typically must pay one-time costs that are not proportionally less than the big banks (i.e., R1.5 million ($210,000) vs. R 2.7 million ($390,000)). NPS access costs small banks about 4% of their revenue, compared to the estimated 1% to 2% for big banks. Additionally, the legislation that does regulate this arena pertains only to the banks, while non-banks requiring access the NPS are unregulated. Which Fees are Burning Down the NPS Clearing House? -------------- -------------- ¶7. (U) The value of transactions processed through the NPS totals four times the value of South Africa's GDP. Electronic Funds Transfers (EFTs) comprise over half of the number of NPS transactions, followed by ATMs, checks, credit cards, and debit cards. EFTs and checks account for nearly all of the value of transactions. Credit and debit card usage has increased in recent years, but still remains low by international standards. See the table below for a summary of payment types processed through the NPS: Payment Type Volume Value -------------- -------------- -------------- EFTs 54% 63% ATMs 17% 1% Checks 13% 35% Credit Cards 10% 1% Debit Cards 5%