Report to the Competition Commissioner by the Enquiry ... · The Banking Enquiry was established by...

Report to the Competition Commissionerby the Enquiry Panel

Executive Overview

June 2008

CC Cover.indd 1 6/20/08 9:07:43 AM

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Table of Contents

� Thesetting 3

2 Thebankingindustryandthescopeofthereport 7

3 Concernedstakeholders 9

• Consumers 10

• Smallbanksandprospectivebanks 12

• Non-bankstakeholders 13

• ConcernsasaframeworkfortheEnquiry 15

4 Theconcernsofconsumers 17

• Bankfeesandcharges 18

• Productandpricingcomplexity,disclosureandswitching 21

5 Theconcernofsmallbanksandprospectivebanks 23

• Accesstothepaymentsystemandthesetting

ofinterbankfees 24

• Restrictionsontheissuingandacquiringofbranded

paymentcards 24

• Paymentsystemgovernance 25

6 Concernsofnon-bankstakeholders 27

• Innovationandthedeliveryofimprovedservices 28

• Exclusionfromclearingandsettlementactivity

andregulation 29

• Thesettingofinterchangeasitaffectscardpayments 30

7 RecommendationsoftheEnquiry 35

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�The setting


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TheBankingEnquirywasestablishedbytheCompetitionCommission inAugust

2006 in terms of Section 21 of the Competition Act No.89 of 1998 to examine

certainaspectsofcompetitioninretailbankinginSouthAfrica.TheEnquiryfollows

twoearlierreports(the2004TaskGroupreportintoCompetitioninSouthAfrican

banking–alsoknownastheFalkena III report–andthe2006FEASibility report

intoCompetitioninbankingandthenationalpaymentsystem)whichalsoexamined

competitionintheretailbankingindustry.UnliketheEnquiry,neitheroftheearlier

reports had the benefit of requesting detailed submissions from banks and other

stakeholders. Such submissions, together with the hearing process involved,

allowedtheEnquirytoexaminemattersinmoredepth.Theprocessalsoallowed

the Enquiry to develop and refine recommendations as more information came to

light.

The Competition Commissioner officially announced the establishment of the Enquiry

on the 4th August 2006, and released the document titled Composition of the

EnquiryandTermsofReference.ThePanel,thusappointedbytheCommissioner,

subsequentlyreleasedtheEnquiryProgramme.Thesubjectmatterandobjectsof

theTermsofReferenceoftheEnquiryarerepeatedhereforeaseofreference:

5. The subject matter of the enquiry will be:

(a) the level and structure of charges made by banks, as well

as by other providers of payment services, including:

(i) the relation between the costs of providing

retail banking and/or payment services and the

charges for such services;

(ii) the process by which charges are set; and

(iii) the level and scope of existing and potential

competition in this regard;

(b) the feasibility of improving access by non-banks

and would-be banks to the national payment system

infrastructure, so that they can compete more effectively

in providing payment services to consumers;

(c) any other aspect relating to the payment system or the

above-mentioned charges which could be regarded

as anti-competitive.

6. The objects of this enquiry are, in connection with the subject matter

stated above:

(a) to increase transparency and competition in the relevant

markets;


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(b) to ascertain whether there are grounds upon which

the Competition Commissioner should initiate, and

the Commission consequently use its powers to

investigate, any specific complaints of contraventions of

the Competition Act;

(c) to engage with the banks, other providers of payment

services, the appropriate regulatory authorities and

other stakeholders in order to ascertain the extent to

which, consistent with the soundness of the banking

and payments system, there could realistically be

improvements in the conditions affecting competition in

the relevant markets, including increased access to the

national payments infrastructure;

(d) to enable the Commission to report to the Minister

and make recommendations on any matter needing

legislative or regulatory attention.

TheEnquiryPanelconsistedofMrThabaniJali(Chairperson),MrsHixoniaNyasulu,

MrOupaBodibe,andAdvRobPetersenSC.TheTechnicalstaffandconsultants

whorenderedsupporttothePanelwereMrKeithWeeks,DrPenelopeHawkins,

MissJanaLouw,MrStephenChisadza,MissVaniaCardoso,MrVincentMotshwane,

MrHenryShaw,MrKeithSmithandDrChrisTorr.MrCharlesFrankwasappointed

EnquiryManagerandwasassistedbyMissKamogeloSeleka.

The Enquiry programme consisted of five consecutive stages. Stage one (August to

endOctober2006)allowedforinitialgeneralsubmissionsbythebanks,thepublic

aswellasallotherstakeholders,andmarkedthebeginningofanalysisandresearch.

Stage two, which commenced in November 2006, accommodated the first round

of public hearings in several cities. Stage three allowed for further research and

culminated in specific questionnaires prepared by the Technical Team, calling for

detailedsubmissionsofdatafromvariousparties,inparticularthemajorbanks.This

stagelasteduntilMarch2007.Thefourthstageinvolvedfurtherhearingsbetween

April and July 2007. The final stage, analysis and report writing, began thereafter.

ThesubmissionofthisreporttotheCompetitionCommissionerrepresentstheend

oftheEnquiry.

During thecourseof theEnquiry, therewere21daysofpublichearingsand the

Technicalteamheld101stakeholderengagements.


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2The banking industry and the scope of

the report


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Thebankingindustryisimportantbothintermsofitscontributiontotheeconomy

and in the way it touches the lives of South Africans. At the end of 2006, the

banking industry’s revenue accounted for around 6 per cent of GDP or R106.9

billion(BSD,2006).Thisiscalculatedbytakingbanks’interestincome(earnedfrom

takingdepositsandthereaftermakingloans)togetherwiththeirnon-interestincome

(earnedfromallotheractivities,includingpaymentservices).

Therangeofactivitiesundertakenbybankstypicallyincludes:

• Takingdepositsandextendingloans

• Facilitating transactions and providing payment, clearing and settlement

services

• Providing a variety of financial products and related services.

Whilstall theserolesare important, theremitof theEnquiryprimarily focusedon

exploringcompetitionintheprovisionoftransactionaccountsandrelatedpayment

services to individual retail customers of the banks. For this reason, it did not

examinethegenerationofinterestincomebythebanks,andhenceissilentonthe

level and occurrence of interest charges. Business and corporate banking were

alsoexcludedfromtheanalysis.Insteadthereportfocusesontransaction-based

activitiesthatarederivedfromtheabilityofbankstoopenaccounts,takedeposits,

extendloansandfacilitatetransactions.

The focus on transaction-based, or payment, services has meant that fees and

charges on such services have come under close scrutiny. Transactional fee

incomeamounted toR34.5billion,or roughlya thirdofbanks’ income in2006.

WiththefocusoftheEnquiryonretailbanking,datafromthefourbigbanks(Absa,

Standard,FNBandNedbank)suggeststhatthefeesandchargesfacingindividuals

onpersonaltransactionaccounts(PTAs)alonegeneratedaroundR11billion.This

excludesthefeeschargedtosmallbusinessesandlargecorporations,whichwere

notthesubjectofthisEnquiry.


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3Concerned stakeholders


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The reports of 2004 and 2006 alerted the Commission to concerns regarding

competition in the national payments system, and in particular the concerns of

smallbanks,prospectivebanksandnon-bankplayers.Moreover,theCommission

hadalsobeenmadeawareofwidespreadpublic concern regarding the level of

chargesmadebybanksandotherprovidersofpaymentservicestoconsumers.

Theconcernsofthreegroups–consumers,small(andprospective)banksandnon-

bankplayers–becamethefocusofattentionoftheEnquiry.

Consumers

Some267 submissions to theEnquirywere received from individual consumers

of banking services. A number were received from consumer groups, including:

theFinancialSectorCampaignCoalition (includingCOSATUand theSACP), the

Benchmark Foundation, the Bank Pensioners Society, the Black Sash, Savings

andCreditCo-operativesLeague,theSouthAfricanNationalConsumerUnion,the

EthekwiniCivicForumandthe1860PioneersFoundation.

Keythemes in thesesubmissionswerethe leveland incidenceofbankcharges,

with some consumers submitting their individual bank statements as evidence

ofthereasonsfortheircomplaints. Inseveralcases,claimsweremadethatfees

were unjustly applied (a matter within the remit of the Ombudsman for Banking

Services).Inothercases,theapplicationoffeeswaschallengedasthesefeeswere

notadequatelydisclosedtoconsumersinadvance.Severalsubmissionsindicated

how those least able to afford penalty fees for returned debit orders (dishonour

fees),forexample,seemedmost likelytobechargedsuchfees.Ofthefeesthat

werelistedasbeingunacceptablyhighatthehearingswerefeesforcashdeposits,

off-usATMtransactionsandpenaltyfees.ThePanelheardfromtheNationalCredit

RegulatorandtheFinancialSectorCharterCoalitionthattheapplicationofpenalty

fees (especially dishonour fees) could result in a significant decline of the funds

available in anaveragecustomer’saccount, therebycreatinga viciouscycle the

consumerisunabletocontrol.

Itwasalsoobservedthatthoseproductssupposedlyofferingthecheapestoptions

forconsumers,didnotalwaysprovetobeso.Forexample,asMrRowlinsonof

Wizzit pointed out, under the Mzansi pricing structure, several banks offer the first

fewtransactionspermonthatafairlylowrate,butpenalisesubsequenttransactions

bychargingmoreforthemthanwouldbetypicallychargedonotheraccounts.The

limitedavailabilityofcash-backatthepointofsale(availableattwoofthelargest

retailers),which isconsiderablycheaperthantheMzansimoneytransferproduct

availablefromthebigfourbanksandPostbank,wasofferedasanotherexample.


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Arisingfromtheconcernsregardingtheleveloffeesandcharges,wasthethemeofa

lackofappropriatedisclosureofinformationandconsumereducation.Hencelinked

torequeststoexaminetheleveloffeeswastherequestforimprovedtransparency

andcommunicationwithcustomers.MrMahlanguoftheFinancialSectorCharter

Coalition spoke of the need for banks to spend individual time with customers

explainingtheiroptionsandtheapplicationoffees,andalsocalledformandatory

educationofconsumers.

ItwasapparenttothePanelthatthelegacyofthediscriminatorylawsandpracticesof

thepastremainsachallengefortheSouthAfricanbankingsector.TheSouthAfrican

banking landscape continues to reflect the fact that the majority of South Africans

only enjoy limited access to adequate banking facilities with poor communities

being neglected. Such communities endure further financial hardship of incurring

transportationcoststoaccessbankingservicesoutsidetheircommunities–often

for relatively simple and inexpensive payment transactions. This disparity was

starklyhighlightedincasestudiespresentedbyMrPaulusandMrKholisileofthe

FinancialSectorCharterCoalitionontheneighbouringcommunitiesofAlexandra

andSandton. Itwassubmitted that therearesome59bankbranchesservicing

130,000peopleinSandtonasopposedtooneformalbankbranchserving175,000

peopleinAlexandra.Othersimilarinstances(involvingforexamplethetownshipof

MohlakengoutsideMogaleCity)broughthomethemessageofunderprovisionof

financial services in the townships.

Anumberofsubmissionspointedoutthattheaffordabilityofbankaccountswas

affectednotonlybytheleveloffees,butalsobytheassociatedcostsofreachinga

branchorATM.Itwassuggestedthatcertaincategoriesofaccountsshouldcarry

nobankcharges.TheFinancialSectorCharterCoalitionandtheBlackSashfelt,

respectively,thatatleastlow-incomeworkersandsocialgrantrecipientsshouldbe

abletoenjoyfreebanking.

Someoftheconsumerconcernsaboutaccesstoservicesfalloutsidethetermsof

referenceoftheEnquiry.Thebankingsectorisurgedtoexaminethepresentations

made by members of the public and the various consumer and civil society

organisationsthatappearedbeforethePanel.Suchpresentationshighlightedthe

problemsofhighbankcharges,transparencyanddisclosureofinformation,andthe

lackofaccesstobasicfacilitiesthatpoorerSouthAfricansexperienceinthecourse

oftheirdailylives.


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Small banks and prospective banks

In retail banking generally, the four major banks together have well over 90 per

centofthemarket.Thesubmissionsandhearingsrevealedthatsmallbanksand

those institutions thatsawthemselvesasprospectiveparticipants in thenational

paymentssystemhadanumberofconcerns.

Suchconcernsincludedthecostsofentrytothepaymentsystemanditsdifferent

streams,andoncein, inadequaterepresentationinvariousinstitutionalstructures

andthedisadvantagesofbeingasmallplayerinbilateralnegotiationsofinterbank

fees.

Registeredbanks includesomesmallbanks,whichhavealreadymet thecriteria

forobtainingabanklicense.However,onceregistered,theystillneedtomeetthe

requirementsandtheassociatedstart-upcostsofbecomingaclearingbank(with

accesstotheclearingandsettlementinfrastructureofthepaymentsystem),should

theywanttobecomepartofthepaymentssystem.Thecostsofentrytothesystem

rangefromcapitalcostsassociatedwithITsystems,acquiringinfrastructuresuch

aspointof saledevicesandATMs,and initiation fees for the following:SAMOS

(theSouthAfricanReserveBank’ssettlementsystem);thePaymentsAssociationof

SouthAfrica(PASA);Bankserv(thedominantswitchoftheretailpaymentstreams);

and should they want to issue debit or credit cards, VISA and/or MasterCard.

There would also be usage or transaction fees which would typically be higher

per transaction forasmallerentity than fora larger incumbent,given the latter’s

considerablygreatervolumes.Moreover,smallerbankswouldalsoneedtoemploy

skilledpersonneltomanageandoperatetheirpaymentscapability.

Currently,theprospectiveentranttothepaymentstreamneedstoobtainpermission

fromeachoftheincumbentstoparticipateinsuchstreams(referredtohereasthe

technicalstage).Theentrantalsoneeds(asthingscurrentlystand)tonegotiatean

interbankfeeforacceptingandprocessingpaymentinstructionswitheachexisting

member–referredtoasthecommercialstage.Concernswithboththetechnical

andcommercialstageswerebroughttotheattentionoftheEnquiry.

In the technical stage, the delays resulting from the existing participants testing

andapprovingthe interoperabilityof thesystemsofnewentrantswereraisedas

aconcern.Inthecaseofthecommercialarrangements,therulesrequirebilateral

negotiationswith each incumbent.AsMrStassenofCapitecBankput it at the

hearings,“forasmallplayer,youhavegotverylittle,ifany,negotiatingability”.Such

bilateral negotiationsmayalso takemanymonths toconclude.Where interbank


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feeshavebeenuniformlysetforalltheparticipantsinthepaymentstream,thereis

noneedforbilateralnegotiations,buttherearepossiblecompetitiveconcerns,and

thenewentrantsimplyhastoacceptthegivenrates.

Smaller institutions, such as Mercantile Bank and Capitec Bank, expressed a

preference formultilateralsettingof interbank fees,whichare independentlyand

transparentlyoverseen. Such interbank fees shouldcover theprocessingcosts

–andshouldbeaspriceneutralaspossible–andnotbethemainfactorbehindthe

acceptanceofanewproductorpaymentmechanism.Thebigbanksalsogenerally

favouredmultilateralsettingofinterbankfees.

Thecostsassociatedwithissuingandacquiringbrandedpaymentcards(VISAor

MasterCard)werealsoregardedasonerousbythesmallerplayers.Someofthecosts

associatedwithbrandedpaymentcardsarefairlyobvious.Thereareinternational

membershipfees,payableinUSDollars,aswellasvariousentryconditionsandon-

goingtransactionfees.Buttherealissueseemstobeparticipationofbanksinboth

cardassociationsinordertoachieveaccesstomerchantacquiring(i.e.theservice

ofaccepting,processing,clearingandsettlingcardpayment transactionsonthe

merchant’sorretailer’sside).

Oneoftheotherconcernsraisedbysmallerparticipantsofthepaymentsystem–

suchasIthalaLimitedandMercantileBank–wastheirapparentlackofrepresentation

atdecision-makinglevelsofvariouskeyentities.Forexample,thebigfourbanks

dominatedecision-makingatPASAandBankserv,andsubsequentlytheclearing

housesandtheircommercialassociations(suchastheAssociationofBankCard

Issuers).Smallerparticipantsarerepresented(together)byasinglevotewhilethe

biggerplayerseachhavetheirown.

Non-bank stakeholders

Thenon-bankstakeholdersinthepaymentssystemareadiversegroupofinstitutions,

and include retailers,micro-lenders,bureauxandsystemoperatorswhoprovide

servicesinrelationtotheprocessingofpayments.Theybroughtvariousconcerns

totheattentionoftheEnquiry.

Theargumentsof theretailerscentredaroundthecostsof thepayment industry

andhowthesewerepassedontotheconsumer.Theyobjectedtothesettingof

interbankrates–suchasinterchangefeesforcreditcards–andtherequirementfor

cardpaymentstobeprocessedviaasingleacquiringbank,aswellasthroughthe

centralpaymentsswitch–Bankserv.


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Infact,makinguseofmorethanoneacquirer–“multipleacquiring”–iscurrently

permittedtoalimitedextent.Thecurrentrulesarethatmerchantsarepermittedto

appointanacquirerforeachofthecardbrandsandtypes,namelyVisa,MasterCard,

VisaElectron,Maestro,DinersClubandAmericanExpress.Informationsuppliedto

theEnquirysuggests that the largest retailers, suchasPicknPayandShoprite

Checkers, have two acquirers for payment cards. To the extent that multiple

acquiringtakesplace,thisanswerstheconcernraisedbyretailersthatprocessing

allcardpaymentsthroughasingleacquiringbankcreatesunacceptableriskinthe

eventthatonebank’ssystemsfail.Shouldthathappen,theretailerwouldbeableto

processitscardpaymentsthroughanotheracquirer.

However,thebigretailersalsocalledforsortingatsourcewheretheretailerwould

havearelationshipwitheachoftheexistingissuingbanks(oratleastallofthebig

banks).ThisprocesswouldlargelyobviatetheneedforswitchingthroughBankserv.

The key benefit of the widespread adoption of sorting at source set out by its

proponents appears to be potential cost reduction. For example, the sorting at

sourcemodelwouldallownon-banksgreaternegotiatingpowerwithregardtobank

processingfees–astherewillbeanabilitytoplayoneacquiringbankoffagainst

another.Moreover,thebigretailersmaintainedthattheycouldsortcardpayments

foreachbankthroughtheirownsystems–whichcouldfurtherreducetheircosts.

PicknPayacknowledged in thehearings that therewouldprobablynotbeany

benefit for smaller merchants, however, as they would not have the negotiating

powerofthelargerretailers.TheEnquirywasnotpersuadedthatthereismeritin

promotingsortingatsource (asdistinct from themore limitedmultipleacquiring)

fromthepointofviewofcompetitionpolicy.

Sofarasinterchangeisconcerned,retailerspointedoutthattheinterbankfeesfor

creditcardssetbythebanksincludedchargeswhichshouldnotbepassedonto

the merchant, and ultimately the consumer. These charges include amounts for

the“interest-free”period–enjoyedbythosewhoeffectivelypaytheentireamount

outstandingontheircreditcardseverymonth–aswellasthepaymentguarantee

to the merchant. It was observed by Net1’s Dr Belamont that the advantage of

the interest free period is enjoyed by only the minority of credit card users and

yetitscostisspreadtoalltheretailer’scustomers–eventhosewhopayincash

– as these costs are reflected in the store’s prices. Retailers – as expressed by

MrCopeofPicknPay–feltthatpaymentcardinterchangeshouldcoveronlythe

processingcostsoftheissuingbank.Itwasstatedthat,shouldtheinterchangefee

be reduced, customers could benefit from lower store prices. SARPIF – the South

AfricanRetailersPayments IssuesForum–alsopointedout that theprocessby

whichtheinterchangefeesweresetremainedopaqueandthatSARPIFhadbeen

deniedinputintotheprocess.


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Non-banks–suchasnon-bankcreditproviders,bureauxandsystemoperators–

highlighted the uneven playing fields that they experienced in the payments system.

TheirdisadvantagewasexpressedbyMicroFinanceSouthAfrica’sMrSeymouras

beingonthe“wrong-sideofthepaymentfence”.

Aconcernwasraisedthatthepaymentsystem,whilebeinghighlysophisticated,

didnotactuallycaterfortheneedsof“themasses”or“secondeconomy”interms

ofappropriateaccessandcosts.Intheviewofnon-bankproviders,thishampered

theprovisionofbasicbankingservices.Non-banks–(suchasMicroFinanceSouth

AfricaandtheCommercialIndependentBureauAssociation)expressedfrustration

in having an inferior status in the payments system – essentially neither being

recognisedaspotentiallyinnovativeparticipantsnorhavingadequaterepresentation

atdecision-makingstructures.

The frustration arises in part because, while non-banks compete directly with

banksincertainrespects,suchasextendingcreditandprovidingcertainpayment

collectionservicestobusinesses,theyhavetorelyonthebanks(theircompetitors)

to process their payment instructions and enable them to fulfil their mandate to their

clients.Thiswasexpressedbysomeasavulnerability,giventhegate-keepingrole

tothepaymentssystemthatthebanksplay.Non-banksareeffectivelyatthemercy

ofthepricingdecisionsmadebytheircompetitors–thebanks.Hencetherewasan

appeal to improve the access of appropriately qualified non-banks to entities such as

Bankserv–byeliminatingormakingmoretransparentthegate-keepingconditions

andbyafairerandmoretransparentapproachtopricingforsuchaccess.

Concerns as a framework for the Enquiry

Notalltheconcernsraisedbythedifferentgroupscouldbeaddressed.Somewere

clearly beyond the remit of the Enquiry. Others could not be examined in sufficient

depth because evidence was not forthcoming. The Enquiry has also avoided

proposing changes which, while superficially attractive or “popular”, could ultimately

domoreharmthangood.

Nonetheless,theconcernsprovidedaframeworkfortheEnquiry’sactivities.They

providedusefulinsightswithwhichtotestthesubmissionsandviewspresentedby

the banks and other stakeholders. These concerns were influential in guiding the

line of questioning of the Panel, and the identification of key issues to be considered

duringthecourseoftheEnquiry.


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TheEnquirywascarriedoutoversome22months,duringwhichtimeanumber

ofchanges inthebanking industryandpaymentsarenaoccurred– forexample:

bothBankservandPASAreviewedtheirdecision-makingstructures;amendments

totheNPSActwerepublished;somebanksreducedtheirfeesoncertainaccounts,

andothersreducedthenumberoffees.TheimplementationoftheNationalCredit

Actmadesomefeecategoriesillegalorobsolete.Nonetheless,thishardlyleftthe

Enquirybereftofmatterstoconsider,aswillbeapparentfromthereport. 4Bank Enquiry Doc.indd 16 6/20/08 9:04:13 AM

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4The concerns of consumers


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Bank fees and charges

TheEnquiryundertooktosee if therewasarelationshipbetweenbankfeesand

costs,and if so, if it couldbe reasonablyconcluded that feeswere– ingeneral

–toohigh.Relatingfeestocostsprovedimpossibletodowiththedatavoluntarily

submitted by the banks – in writing and at the hearings – and it became clear

that costs were but one input into the pricing strategy of banks. Prices also reflect

the structure of the industry and the market power of the major banks, as well

as barriers to entry and difficulties of achieving economies of scale which prevent

eveninnovativenewbanksfromcompetingwiththeincumbentsinanybutsmall

niches.

Thecomplexityofproductsandprices (combinedwith inadequate transparency

and disclosure), the cost and difficulty for consumers in switching banks, and the

reluctanceofthemajorbankstoengageinvigorouspricecompetitionwitheach

other that could “spoil” the market for them in the long term – all contribute to

producing a situation where the prices charged to consumers for transactional

accountsandpaymentservicesareprobably(althoughwithsomeexceptions)well

abovethelevelthateffectivecompetitionwouldallow.

Withoutbeing able topindown the relationshipbetweencosts andprices, and

because there is complex cross-subsidisation between multiple products and

servicesinthebankingindustry,ithasbeenimpossibletoidentifyalltheparticular

instanceswherethe levelofpriceschargedbybankswouldconstituteanabuse

thatwarrants(orcouldbeeffectivelyaddressedby)interventiononthepartofthe

competitionorregulatoryauthorities.

However, thereareexceptionswhichare thesubjectof recommendationsof the

Enquiry.Theserelatetopenaltyfeesandoff-usATMtransactions.Consumershave

pointedoutthatsuchfeesappearclearlytobetoohighandsetarbitrarily,andthat

these fees contribute significantly to their total bank charges. Moreover, such fees

arenotalwaysadequatelydisclosedand fallmostheavilyon those leastable to

affordthem.

In the case of penalty fees, both the level and the volume of the fees charged

forrejecteddebitordersbythemajorbanksprovidedgroundsforgravedisquiet.

Payment by debit order is routinely required nowadays for all manner of regular

serviceswhichhavebecomeanessentialpartofeveryday life.Relianceondebit

ordersiswidespreadthroughouttheretailmarketservedbybanks,anditisespecially

notableinthelowerincomemarkets.Debitorderfacilitieshavealsorecentlybeen

addedtothebasicMzansiaccountofferings.


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ThedatasubmittedtotheEnquiry indicatedthattheaveragerateatwhichdebit

ordersarerejected,anddishonourfeesareapplied,isroughlytwiceashighforbasic

savingsortransmissionaccountsasforallPTAstakentogether.Inotherwords,in

accountstypicallyheldbylowerincomecustomers,arelativelyhighproportionof

debit orders presented for payment are dishonoured for insufficient funds. Where

detaileddatahasbeenprovided,indicationsarethatasmuchorevenmorerevenue

isearnedbybanks from rejecteddebitorderson theseaccounts than from the

processingofsuccessfuldebitorders.

Manyordinarybankcustomersarenot inaposition topad theirbankaccounts

with funds thataresurplus to their immediateneeds.Whensalarypaymentsare

delayed,thiscausesthedebitorders–whichtheyhavesignedingoodfaith–to

be rejected for insufficient funds. It is not a matter of neglect, or irresponsibility,

butofcircumstancesbeyondtheircontrol.Yetthepenaltyfeeisappliedperdebit

order item,sothatacustomermayfacemultiplepenaltiestoaddtotheprimary

misfortuneofgettingpaidlate.Customersonlowincomes,withtightcreditmargins,

can readily find themselves lacking sufficient funds without having had any intention

ofdefaultingontheirpaymentsorofbreachingtheirundertakingstothebank.

ThePanelfoundthatitisnoanswerforbankstosaythat,onapplication,theymight

reversethepenaltyfee inadeservingcase.Verymanyconsumers–even if they

wereassuredofthepossibleindulgence–wouldsufferinsilenceratherthanmuster

the confidence, or find the time, to challenge the penalty when it appears on their

account.

ThePanel found itunacceptable thatabankshould recovermore than thecost

incurredinprocessingtherejectionofadebitorder.Ontheevidenceavailabletothe

Enquiry,therewasnoreasontobelievethat,currently,bankswouldbeunablefully

torecovertheircostsordinarilyincurredinrespectofrejecteddebitorders(including

afairreturnonoutlays)bymeansofafeecappedatR5perdishonoureditem.The

Panelhasthereforerecommendedthatacapofapproximatelythatamountshould

beimposed,subjecttoperiodicreview.

ThisistheonlyinstanceinwhichthePanelhasfounditappropriateatthisstage

torecommenddirectpriceregulation.Anumberofothermeasuresareproposed,

however,whicharedesignedtobringdownpricesthatarecurrentlybeingsustained

atuncompetitive levels. (Inthecaseof interbank interchangefees–notstrictlya

“price”–amethodofestablishingapplicablelevelsunderregulatorysupervisionis

recommended.)


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AsregardsATMtransactions,cashwithdrawalsmadeatATMsareacommonactivity

formostbankcustomers.In2006,around1billionATMtransactionsweremade

throughthenetwork,generatinggrossrevenuesinexcessofR4billionforthebanks.

TheEnquirycametotheconclusionthatpricingarrangementsbetweenbanksfor

useofthesharednetworkhaveservedtosheltertheprovisionofATMservicesfrom

effectivepricecompetition,andthatthissituationneedstobechanged.

Inparticular, theEnquiry concerned itselfwith thepricingarrangements that are

currentlyinplacewhenacustomerofonebankusestheATMofanotherbank,also

knownas“off-us”transactions.Whileonly15percentofATMtransactionsareof

thiskind,theanalysisoftheEnquiryshowsthattheyhavebeenundulyrestricted

andthatthepricingarrangementsinrespectofthemhavehad–andcontinueto

have–repercussionsforallcashwithdrawaltransactionsmadeatanATM.

Theconsumeristypicallychargedasubstantiallyhigherfeeforoff-ustransactions,

and(foranaverage-sizedcashwithdrawal)asubstantialpartofthisfeeisretained

bytheissuingbankalthoughithasnotprovidedthecashdispensingservice.Thefee

thatispaidbytheissuingbanktotheATMserviceproviderforanATMtransaction

isgenerallyreferredtoasacarriagefee.Currentlythecarriageisafeemultilaterally

agreed upon between banks. The Enquiry found that not only is carriage itself

shelteredfromcompetitiveforces,theconsumerisnotfreetoshoparoundforATM

servicesand–becauseoftheinterbankarrangements–istreatedasbelongingto

theissuingbankforallATMtransactions.Accordingly,theATMservicesthatbanks

offertotheircustomersareshelteredfromcompetition.

Ifthecarriagefeeisabolishedandthecashproviderinsteadchargestheconsumer

directlyforthecashdispensingservice–i.e.ifthedirectchargingmodelisadopted

– price competition can become more effective. For the direct charging model,

thecarriage feewouldbe replacedbyadirectcharge,setbyeachATMservice

provider.Insteadofrecoveringcostsfromtheissuingbankthroughacarriagefee,

theATMserviceproviderwouldberecoveringcostsdirectlyfromthecustomer(who

usesthepaymentcard).Thecardissuer(whileitcouldchargeitsownprocessing

feeaswithothercardtransactions)wouldmerelyremittotheATMserviceprovider

the amount of the customer’s withdrawal along with the ATM service provider’s

directcharge.

Suchamovewouldalsoprovidean idealopportunity forbetter feedisclosureat

theATM,priortothetransactiontakingplace,withthecustomerinformedastothe

off-us fee, prior to confirming the transaction. If the fee were deemed too expensive,

thecustomercouldcancelthetransactionwithoutbeingcharged.Transparencyin


2�

ATM charges and disclosure of information – prior to confirmation of a transaction

takingplace–wasraisedatthehearings.

ItbecameapparenttothePanelthatthepricinginnovationsdevelopedbythebanks

over theyears–suchasadvaloremfeestructuresandbundlingof transactions

–thataresaidtobedesignedtoreducebankfeesandcharges,typicallyapplyonly

toproductsreservedformiddletohigherincomeindividuals.Therecommendation

is that the benefits of these features also be made available to the lower income

individuals.

Product and pricing complexity, disclosure and switching

Bothcustomersandprospectivecustomersarefacedwithabewilderingarrayof

differentbankingproductsandbundles.However,ascameacrosspowerfullyatthe

hearings, many consumers do not understand the differences of the benefits of one

productoveranother, letaloneonebankoveranother.While the incumbent full-

servicebanksallappeartoofferthesamesetofaccount-holdingandtransaction

facilities, these facilities are bundled, packaged and priced differently. This

complicateschoices forconsumersandweakenspricecompetition.Topromote

competition, there is a need for simplified offerings that can readily be compared, in

bothpriceandcontent.

Such simplification would begin to address the information asymmetries (inequality

ofinformation)inthemarketforpersonaltransactionaccounts.Suchasymmetries

arise not only from the complexity already described, but also from inadequate

transparencyanddisclosureinrespectofthefeaturesandpricingoftransactional

banking products. Each bank uses its own terminology and nomenclature to

describe its products and related product features and fees. This makes it very

difficult for consumers to understand, assess and compare the different offerings of

thebanks.

Asaconsequence,thegreatmajorityofconsumersdonotactivelyinvestigatewhat

theyarepayinginbankfees,nordotheyrespondreadilytochangesinpricesby

seekingoutanalternativeprovider.TheEnquirybelievesthatanumberofstepscan

betaken–undertheauspicesoftheBankingAssociationandtheOmbudsmanfor

BankingServices–whichwillhelpaddressthesemattersofcomplexityandweak

disclosure.


22

TheEnquiryfoundthatthecosttocustomersofswitchingbanks(includingthesearch

costs in finding an alternative) are generally enough to create a significant degree of

customercaptivityandsoconferonbanksanappreciabledegreeofmarketpower.

TheEnquiryconcludedthat,onthebasisoftheseswitchingcostsalone,banksare

or will have been in a position to impose a small but significant lasting increase in

priceaboveacompetitivelevelwithoutlosingtoomanycustomers,andthattheir

current prices probably reflect the exercise of this power in the past. Customers

would have to find an alternative bank which is substantially cheaper than their own

andlikelytoremainso,inordertojustifytheexpenditureoftime,effortandmoney

inswitching.

To switching costs must be added the search costs of finding a suitable substitute.

Inadditiontoproblemsoftransparencyanddisclosure,thegreatestobstaclefaced

by consumers in the search process lies in the difficulty of making meaningful

comparisonsacross theproductofferingsof thebanks.Theevidencepresented

suggeststhattheoverridingreasonconsumersdonotmakechoicesprimarilyon

thebasisofpriceisthatthecostandeffortrequiredtomakesuchadetermination

withanyaccuracy is simplyprohibitive for thegreatmajorityof consumers.This

reinforcescustomerinertiawhenitcomestochangingbanksandaccentuatesthe

degree of market power that banks have. Inertia is not difficult to account for, even

thoughexpressionsofdiscontentabound.Consumers– inparticular thosewho

dependonarangeofbankingandpaymentservicesprovidedbythefull-service

banks–havelittlereasontoconcludethattheywouldbesubstantiallybetteroffby

switching.Thisiscertainlynotbecausepricesareatakeenlycompetitivelevel.

Inorder to reduce theobstaclespresently retardingpricecompetition, thePanel

hasmadeanumberofrecommendationsdesignedtofacilitatepriceandproduct

comparisons, and reduce the time and effort required for consumers to switch

banks.


23

5The concerns of small banks and prospective banks


24

Access to the payment system and the setting of interbank fees

Understandably,aprospectiveentranttothepaymentsystemhastomeettechnical

requirementsandhas tomakecommercialarrangements for itsparticipation.As

itstands,participationinanypaymentclearinghouse(PCH),suchasthroughthe

use of ATMs or cards, requires written permission from each incumbent, confirming

thatthewould-beentranthasmetthenecessarytechnicalrequirements.Whilein

principleobjectionstoprovidingsuchletterscanonlybeonthebasisofpossible

risks introduced, there may be frustrating months of delay before an incumbent

producessuchaletter,afterhavingtestedtheinteroperabilityofthenewentrant’s

systems.

ThePanelhassuggestedthatamodelliketheLINKATMnetworkintheUKrepresents

animprovedmodelforentry.InthecaseofLINK,objectivecriteriaforentryareset,

andtheChiefExecutivegrantsaccessonthebasisofthesecriteria.

Asforthecommercialarrangements,thePaneldidnotconsiderthatamultiplicity

ofinterchangelevelsbilaterallynegotiatedbetweenthevariousparticipantsineach

relevantpaymentstreamwouldofferasatisfactorywayforward.Stakeholders,large

and small, made it clear that bilateral negotiation of interchange is complicated,

ineffective and logistically fraught with problems. Indeed, bilateral interbank

arrangementsinthisspherearemorelikelytoresultintheenhancementandabuseof

marketpowerbythebigbanksthanwouldauniformlevelofinterchangeapplicable

toallissuingandacquiringparticipantsintheparticularpaymentstream.

ThePanelproposedthattheproblemofinterchange-settingandthedangerofits

abusebeaddressedbywayofanewstatutoryarrangement,whichwouldensure

the setting of interchange by a transparent and objective process involving the

participationofallstakeholdersandanindependentthirdparty.

Restrictions on the issuing and acquiring of branded payment cards

Discriminationbetweenlargeandsmallbanksisalsoafeatureofaccesstopayment

services such as acquiring credit and debit card transactions. Both Visa and

MasterCardhavestrictrulesandregulationsregardingtheeligibilityandparticipation

of institutionsas issuersandacquirers intheircardschemes.Thesearecarefully

evaluatedinthereport.Therearealsopracticesoftheschemeswhichhavecreated


25

unnecessarybarrierstoacquiringbysmallerplayers.Thisaspect,too,isdealtwith

indetail.

ThePanelhascometotheconclusionthatthecardschemesneed–bothformally

andinpractice–toabandonrestrictionswhichlimitacquiringtoissuers.

Payment system governance

During the course of the Enquiry, both Bankserv and PASA made changes to

theirBoardstructure.InthecaseofBankserv,independentdirectorscannowbe

appointed.InthecaseofPASA,theproposedstructuresgivemoreprominenceto

thesmallerbanks.

ThePanelbelievesthatanOmbudtopaymentsystemparticipants,orprospective

participants, should be established. The Ombud could assess whether or not

applicationshavebeen fairlydealtwithandwhetherornot theyhavebeen fairly

treated in termsofaccess, thepricingofsuchaccess,and the time required to

obtain it. Included in the remit of such an Ombud would be the entire ambit of

thepaymentarena,whichwouldincludeaccesstotheinfrastructureofBankserv

(ortherelevantPCHoperator),accesstosettlementaccounts,theprocessingof

membershipofPASA,andtheprocessingofPCHapplications.

ThosewithcomplaintsaboutBankserv’sfeestructure–asraisedinthehearings

–appeartobereasonablyhappywiththerecentchangesthathavebeenmade.

Nonetheless, the Enquiry has recommended that the Competition Commission,

together with the Payment System Ombud, keeps Bankserv’s pricing practices

underobservation–givenitscurrentdominantpositionintheindustry.


26


27

6The concerns of non-bank

stakeholders


2�

ItappearstotheEnquirythattheregulationoftheSouthAfricanpaymentsystemby

theSouthAfricanReserveBank(SARB)undercurrentlegislationhasfallenbehind

bestinternationalpractice.Thisconclusionstemsfromevidencethatregulationis

failingtoadequatelyaddressthechangesinpaymentservicesprovisionwhichare

resulting from technologicaladvances,newpaymentstreamsand the increasing

provisionofpayment-relatedservicesbynon-banks.

WhiletheSouthAfricanpaymentsystemistechnicallyadvanced,thesamecannotbe

saidofouraccessandregulatoryregime.Clearingandsettlementremainsrestricted

to the narrow category of “clearing banks” irrespective of the payment stream

involved.This regulatoryconservatism,whichprevailseven though theexclusion

of suitably qualified non-banks from low-value (or retail) payment streams has been

showntobeunnecessaryforthemaintenanceofstabilityandeffectivemanagement

ofrisk,hasseriousimplicationsforcompetitionandneedstobereconsideredinthe

lightofmoreadvanced regulatorypractices takingholdelsewhere.Forexample,

theregulatoryauthoritiesinboththeEuropeandAustraliahaverecentlydeveloped

access regimes which permit suitably qualified non-banks to participate fully in the

paymentsystem.

Innovation and the delivery of improved services

TheexistingregulatoryregimefortheNationalPaymentSystemdoesnotappear

to have met the needs of South African consumers as far as competitive and

technicallyinnovativepaymentservicesareconcerned.Theoldapproachoflargely

ignoring non-bank activities hasbegun to shift.But persistence in the view that

onlyclearingbanksmayparticipateinclearingandsettlementisnotanapproach

thatwillbestserveSouthAfrica’sinterest.TheEnquiryisconvincedoftheneedfor

a revisionof the regulatoryapproachand for thedevelopmentofanappropriate

regulatory regime forpayment systemactivitywhich is functionally-based, rather

thaninstitutionally-based,soastoensurequalityofaccess.Thoseparticipatingin

paymentactivityshouldbeadequatelyregulated,regardlessofwhetherornotthey

areclearingbanks.

Therestrictionofparticipationtoclearingbanksmeansthatintroductionofpayment

instructionsintothesystembyanon-clearingbankoranon-bankmustbeunderthe

auspicesofaclearingbank.Thisalsoimpliesthattogainacceptance,aninnovative

idea must first be adopted by a clearing bank that will in turn take the innovation to

thePCH.Thismayinvolveanumberofhurdles,includingthattogainacceptance,

both the clearing bank first approached, and the other clearing banks, will need to


2�

beconvincedthatsuchaninnovationwillnotunderminerevenuesfromtheirexisting

businesslines.Thenthesuccessfulinnovatoristiedtothetermsandconditionsof

the clearing bank which has adopted the idea and typically gets locked into an

arrangementfromwhichtherearehighrisksofswitching.

The current arrangement is thus likely to stifle or delay innovation as incumbent

clearingbanksmayadoptaconservativeandobstructiveapproachtoinnovation.

Theymayindeedrejectviableinnovationsoutofhandortakeanundulylongtime

toapproveanychangefromtheirownprevailingbusinessmodels.

Thecurrentregulatoryarrangementalsoentailsriskinsofarastheregulatedentities

orclearingbanksdonotthemselveshavethemechanismsormotivationtomonitor

thetransactionsintroducedbythoseactingundertheirauspices.Theprinciplethat

theentitythatintroducesthetransactionshouldberesponsibleforanyassociated

risk issound.Butthisfailswhenthebankintroducingthetransactiondoesso in

nameonlyandisnotequippedtoregulatethe“sponsored”entity.

Thereneedstobeclearandobjectivecriteria for thesubmission,evaluationand

acceptanceofinnovations,alongwithchangestotheaccessregime.

Exclusion from clearing and settlement activity and regulation

Thereiscurrentlynoaccessregimeforpaymentsystemparticipantsotherthanone

inwhich,onceabankisregisteredasadeposit-taker,itcanpotentiallybecomea

clearingbankandmemberofPASA.

Whiletheoversightdomainembracestheentirepaymentvaluechainandincludes

non-banks,thesupervisionofnon-bankshasbeenpiecemealanddoesnotprovide

forsatisfactoryaccesstoclearingandsettlement.

Becausenon-banksarenotcateredforasmembersofPASA,theyareexcluded

fromhavinganeffectivevoice.

Along with changes to allow suitably qualified non-banks to participate directly, under

effectiveregulatorysupervision,inclearingandsettlementactivitiesinappropriate

low-valuepaymentstreams,thePanelbelievesthatPASAmembershipshouldbe

extendedtonon-banks.Thisdoesnotnecessarilyrequireallmemberstoparticipate

onthesamefooting.AmorenuancedmembershipofPASA(asforexampleexistsin


30

theAustralianequivalent)willpointthewaytoimprovedgovernance,asthecurrent

(andcurrentlyproposed)governancestructuresaredominatedbythebiggestbanks

whichhavethegreatestvolumeandvalues.

Inanenvironmentwherebothbankandnon-bankmembersofpaymentclearing

housescanbemembersofPASA’shighestauthority– itsCouncil–governance

concernsassociatedwithclearingbanksregulatingnon-bankcompetitorswilltend

tofallaway.

The setting of interchange as it affects card payments

Interchange,andthewayinterchangelevelsareset,becameanimportantfocusof

theEnquiry.

Wheneverapaymentcardisusedtobuygoodsorservices,orotherwisetoeffect

apayment,twoindependentdemandshavetobematched.Thisappliestoboth

three-partyandfour-partyschemes.Justasaweddingrequirestwopeopletosay

“Ido”,apaymentbypaymentcardrequiresoneperson(thepayer)tochooseto

usethecardasthemeansofpayment,andanotherperson(thepayee,usuallya

merchant)voluntarilytoacceptit.Ifthecosttotheoneortotheother–thecharge

leviedfortheuseoracceptanceofthecardrespectively–issuchastodetereither

ofthem,thenthecardwillnotcometobeusedtoeffectpayment.Whetherornot

aparticulartransactionwillfallawaywillalsodependonwhetherornotthereisa

substitutemeansofpayment(cash,forexample)acceptabletobothparties.The

theoryoftwo-sidedmarketsisdiscussedextensivelyinthereport.

Inthecaseofaclosedorthree-partycardpaymentscheme,theschemeowneritself

mustbeabletomatchthetwoindependentdemands,bywayofitsownpricingofits

issuingservicetocardholdersontheonehand,andbywayofitsacquiringservice

tomerchantson theother.Theschemeowner’s issuingandacquiringcostsare

aggregatedinitsownhands,andsoareitsissuingandacquiringrevenues.Within

theconstraintssetbyitsaggregateactualandpotentialcosts,andbyitsaggregate

actual and potential revenues, it can maximise output (and profit) in terms of card

usagebycross-subsidisingtheonesideofthebusinesswiththehelpoftheother.It

can,forexample,pricebelowcostontheissuingside(i.e.initspricetocardholders)

totheextentthatitcanrecovertheshortfallbypricingabovecostontheacquiring

side(i.e.initspricetomerchants).Thedifferentpriceelasticitiesofdemandrelative

tocostonthedifferentsidesofthemarketforitscardpaymentservicescanthusbe


3�

reconciledbywayofabalancingexercise,performedbythesinglesuppliermatching

twosuppliesinawaythatbringsintoeffectivecorrespondencethetwoindependent

demands.Cardholders,forexample,maybeveryresponsivetochangesinprice

–meaningthatdemandonthe issuingsidewouldbemorepriceelastic.Onthe

otherhand,merchantsmaybefarlessresponsivetochangesinprice–indicating

thatdemandontheacquiringsideispriceinelastic.

Inthecardschemeswhichdominate(MasterCardandVISA–alsoknownasfour-

partyschemes),aspecialbalancingmechanismhasbeenshowntobenecessaryin

principle.Thebalancingexercise–totheextentneededtomatchthetwoindependent

demandswitheachotherandthetwoindependentsupplieswiththem–canonly

beperformedeffectivelybyatransferofrevenuebetweenthetwosuppliers.Inthe

viewofthePanel,interchangeinthepaymentcardstreamis,atleastinprinciple,

areasonablynecessary,andthuslegitimate,meansofbringingthisbalanceabout.

TheEnquiryseesthetruenatureofinterchangeasameansofrevenueallocation

between financial institutions participating in a card scheme, rather than as a price

foraservicebyonesuchparticipanttoanother.

In theviewof thePanel, thenecessityof interchange inprincipleasabalancing

mechanism(andthus its legitimacy inprinciplealso)doesnotserveto justifythe

methodologiescurrentlyemployedbythecardschemes,andbytheirparticipating

banks,inarrivingattheactuallevelsofinterchangeapplicabletothevarioustypes

ofpaymentcardtransactions.

Interchangeentersinvisiblyintothemerchantservicechargesleviedbyacquirers.As

a common component in acquirers’ costs, it sets a floor for their merchant service

chargeswhichcannotbecompetedaway.Inturn,itentersinvisiblyintoconsumer

prices.Ifinterchangeisnecessary,ithasnonethelessthenatureofanecessaryevil

—andshouldbekeptaslowasreasonablypossible.Infact,astheEnquiryshows,

theart in interchangesettinghasbeen for theschemesandtheirparticipants to

assessthemaximumlevelofinterchangewhichmerchantsarelikelyatanytimeto

bewillingtobearbywayofmerchantservicecharges.

Asasubsidyfromtheacquiringtotheissuingside,interchangeobviouslyfacilitates

cardissuing.Competitionbetweenschemesforissuershastheparadoxicaltendency

todriveinterchangeupwardsratherthandownwards.Where,asinSouthAfrica,the

majorissuersarealsothemajoracquirers,theinterestsinmaximisinginterchange

are generally far more powerful than any influence that might tend to bring it down.

Whereinterchangehascomedown,thelikelihoodisthatissuingcostshavecome

downevenfaster,orsomeimmediatepurposeofovercomingmerchantresistanceto


32

cardacceptancehasbeentheaim.Thebargainingpoweroflargemerchantsallows

themtonegotiatemorefavourablemerchantservicecharges.Thiscan,however,

notbeseenasaneffectiveconstraintonthelevelofinterchangefeessetbetween

participatingbanks.Thetrueconstraintoninterchange,andonmerchantservice

charges,isultimatelythe“competition”ofincreasinglyarchaicsubstitutemeansof

payment(suchascashandcheques).Littlecomfortcanbetakenfromthis.

Moreover,by including increditcard interchangeacontributionby themerchant

totheissuer’scostsofextendingcredit,thecurrentinterchangeapproachesofthe

schemesandtheirparticipatingbanksservetoprivilegethislineofbusinessover

competingformsofcreditextension.

Higherratesofinterchangeforcreditcardscomparedwithdebitcardscanbeseen

to“subsidise”theissuingofcreditcardsandhashelpedmaketheformercheaper

forthecardholdertouse,whilethepotential fordebitcardstoreplacecashand

chequeshasprobablybeenretarded.Atthesametime,totheextentthatthelevel

ofcreditcardinterchangecausesmerchantservicechargesforsuchtransactions

toexceeddebitcardmerchantservicechargesandthemerchants’costsofcash,

anyresultingadditiontoconsumerpriceswouldimplythatpoorerconsumersareto

thisextentbeingobligedtosubsidisetherich.

Inshort,itdoesnotfollowfromthenecessityofinterchangethattheactualsetting

ofinterchangeisfreefromthedangerofabuse.Transparencyandobjectivity,and

the resulting confidence on the part of both suppliers and consumers, are crucial to

thesettingofappropriatelevelsofinterchangeinthedifferentpaymentstreamsin

whichitisshowntobenecessary.

Submissions made by banks, taken together with subsequent exploratory

consultationswiththem, indicatedthatallwouldfavouroracceptachangefrom

thepresentmethodsofsettingdomesticlevelsofinterchange,toanindependent,

objective and transparent regulated process. The understanding was that such

regulationwouldbebasedonatransparentapproach:

• withobjectivecriteriabeingestablished foreach relevantpaymentstream

through a participatory process and justified in public

• withtheresultingappropriatelevelsofinterchange,whereapplicable,being

independentlyassessedonthebasisofauditeddata

• with the integrity of the process being verified under regulatory oversight

• withthelevelsofinterchangesodeterminedbeingthereafterenforced.


33

TheEnquiryhas recommended that thenecessary regulatoryschemebedrawn

upandimplementedsoastoenablethischangetobeeffectedandenforcedas

soonaspracticable.Amongretailersconsulted,therewasunanimoussupportfor

safeguardsagainstexcessiveinterchange,althoughnotnecessarilyagreementon

themeansofachievingthis.

Interchangealsoexistsby interbankarrangement inotherpaymentstreams.The

Panel’srecommendationsincludebringingthesettingofinterchangeinsuchother

streams–whereinterchangecanbeshowntobenecessary–underessentiallythe

sameindependent,objectiveandtransparentprocess.


34


35

7Recommendations of the Enquiry


36

TherecommendationsoftheEnquiryareexplainedindetailinthevariouschapters

ofthereport.Theyareoutlinedhereforconvenience;howeverfurtherdetailshould

besoughtfromthereportitself.

ThePaneloftheBankingEnquirymakesthefollowingrecommendations:

� Acapshouldbeimposedonthepriceofprocessingrejecteddebitorders

atapproximatelyR5perdishonoureditem.Suchacapshouldbeimposed

byregulation.Itshouldapplybothtosavingsandcurrentaccounts,andto

ordinaryaswellasearlydebitorders.Bankswhichincuradditionalexpenses

or losses in particular cases through their customers’ default in respect

of debit orders can terminate those customers’ accounts and/or sue for

damages.Whethersuchpriceregulationshouldbeimposedusingexisting

regulatorypowersoftheSARB,orbywayofsection9(1)of theSaleand

ServiceMattersAct25of1964(asamended),orbyotherexistingorspecial

legislation,isamatteronwhichthePaneldoesnotconsideritselfbestplaced

toexpressanopinion.IntheviewofthePanel,ifthenecessaryregulatory

intervention is not forthcoming within a reasonable time, the Competition

Commissioner,inconsultationwiththeNationalTreasuryandSARB,should

recommendtotheMinisterofTradeandIndustrythatheconsiderdirecting

the Consumer Affairs Committee established under the Consumer Affairs

(UnfairBusinessPractices)Act71of1988(asamended)toconductafull-

scaleinvestigationintodishonourfeesinrespectofdebitorderschargedby

thefourmajorbanks(Absa,Standard,FNBandNedbank).Shouldthelatter

Actbereplacedby theenactmentof theConsumerProtectionBill,2007,

nowbeforeParliament,thenthenecessaryinvestigationcouldbeinitiatedor

continuedasmaybeappropriateunderthenewAct.

2 Systemsshouldbeputinplacebythebanks,whichwillenablecustomersto

cancelanydirectdebitinstructionatanytimebyphone,internet,oroverthe

counter at a branch (subject to written confirmation by the customer where

necessary).Thiswouldnotalterthecustomer‘scontractualobligationtothe

creditorinrespectofpaymentarrangements.

3 Thecurrentinterbankpricingsystemofcarriageshouldbereplacedwitha

modelofdirectchargingintheATMstreamassoonaspossible,whereby

each ATM service provider sets its own charge for the cash-dispensing

servicetothecustomer.

4 In thecontextof thedirect chargingmodel, thenecessarycompensation


37

to thecard issuer in respectof itsownprocessingand relatedservice to

itscustomerforanoff-usATMtransactionshouldbeobtainedthroughthe

issuerlevyingitsownchargedirectlyonitscustomer.

5 Thechangetoadirectchargingmodelshouldbeaccompaniedbyaregulatory

prohibition–whetherbywayofPCHclearingrulesorotherwise–againstany

ATMserviceproviderdiscriminatinginpricebetweencustomersusingcards

issued by other firms. This addresses the concern voiced by smaller banks

thataswitchtoadirectchargingapproachintheATMstreamcouldallow

largerplayerstoprice-discriminateagainsttheircustomerstothedetriment

ofcompetitioninthelongerterm.Itappearstobecommonplacethatwhere

direct charging (as opposed to surcharging) is adopted elsewhere in the

world,sucharuleofnon-discriminationonthebasisofissuerholds.

6 IfachangetoadirectchargingmodelforATMtransactionsisnotadopted

bythebankswithinareasonabletime,thenitwouldbeappropriateforthe

CompetitionCommissioner tobegina formal investigation intowhetheror

notthecontinuingpracticesofthebanksregardinginterbankcarriagefees

contravenesection4oftheCompetitionAct.

7 TheCompetitionCommissionshouldrevisitthequestionofdirectchargingfor

mini-ATMsandcash-backatpointofsale(POS)onceadequateexperience

hasbeenobtainedofdirectcharginginATMservices.

� Anindependent,objectiveandtransparentregulatoryprocessfordetermining

interchangeinthepaymentcardandotherrelevantpaymentstreamsshould

beputintoeffectandenforcedassoonaspracticable.Theprocessenvisaged

wouldinvolvetheestablishmentofan“InterchangeForum”,withinwhichthere

would be a specific sub-forum for each payment stream where interchange

is tobesubject to regulation.The regulatorof thepaymentsystem– the

SARB–wouldappeartohavetheauthorityundersection10(1)(c)ofitsown

enablingActtodeviseandimplementthenecessaryrulesandprocedures.

Suchaprocess,undercompulsoryregulation,wouldbeginbyestablishing

thevalidityof interchange ineachcase,and theappropriatenessofeach

costcomponentforsuchaninterchange.Thiswouldallow,forexample,the

interrogationofwhetherthecostoftheinterestfreeperiodoncreditcards

shouldbepartofthecreditcardinterchangefee.

� Itisacceptedthatpaymentcardschemesmaylegitimatelyrestrictacquiring

licences to regulated and supervised financial institutions (as provided, for


3�

example,inMasterCardrules).However,certainrulesandpracticesfurther

restricting the participation of duly qualified institutions as acquirers in the

paymentcardschemesshouldbeabolished.Iftheschemesdonotvoluntarily

–bothformallyandinpractice–abandontheserestrictionsforthwith,thenthe

mattershouldbeaddressedeitherbytheinitiationofformalcomplaintsand

investigationsbytheCompetitionCommission,orbyregulatoryintervention,

orbyboth.Therulesinquestioninclude:

a Visa’sgeneralinternationalrequirementthatacquirersbeauthorised

to takedeposits is, inour view, too restrictive in theSouthAfrican

context(andindeedislikelyincreasinglytobechallengedaroundthe

world).

However, ifaproperregulatoryandsupervisoryframeworkfornon-

bankacquirerswereestablishedhere,schemescould–intermsof

theirownrulesrequiringcompliancewithlocallaws–bebroughtinto

linewherenecessary.Toensurethis,theregulatoryandsupervisory

frameworkwouldhavetoobligetherelevantcardschemestoaccept

as eligible, without discrimination, those banks and non-banks

meetingthedomesticrequirements.ThePanelhasinmindaprovision

comparabletosection6A(3)oftheNationalPaymentSystemAct,78

of1998asamended,buttailoredforthepurpose.

b Therulesorpracticeofrestrictingacquiringtoinstitutionswhichissue

scheme cards, and indeed which issue them on a significant scale,

inourviewareclearlyrestrictiveofcompetitionontheacquiringside.

Such restrictions on acquiring have no legitimate basis. Acquiring

shouldnotbelimitedtoissuers.

�0 The card schemes should be requested by the Competition Commission

formally and forthwith to withdraw their prohibitions on pure cash-back

atPOS,at least to theextent thatsuch transactionsarepermittedunder

domestic law. Failing satisfactory responses in that regard, the Panel

recommendsregulatorymeasurestocorrectthesituationdecisively.Ifsuch

measures are not forthcoming, then the Commissioner should consider

initiatingacomplaintandinvestigatingtherelevantschemerulesforpossible

contraventionoftheCompetitionActasprohibitedrestrictivepractices.

�� Thereshouldbenointerferencewiththecardschemes’currentrulesagainst

merchants“surcharging”customerswhousepaymentcards.ThePanelalso


3�

acceptsthelegitimacyofthe“honourallcards”rule(inthenarrowsenseof

alltheparticularscheme’scardsofthesametype).However,the“honourall

products”ruleshouldbeeliminated.TheVisaandMasterCardschemerules

differsomewhatinthisregard,asisanalysedinthereport.Generally,there

shouldbenorequirementthatamerchantchoosingtoacceptascheme’s

cardofonetype(sayaPIN-baseddebitcard)alsobeobligedtoacceptthe

scheme’scardsofothertypes(saycreditcardsandchequeorhybridcards).

Eliminatingthe“honourallproductsrule”shouldfacilitatetheacceptanceof

debitcards,by freeingmerchants’acceptanceof thesecards frombeing

tied to the acceptance of more expensive cards. If the withdrawal of the

“honourallproducts” rulecannotbenegotiatedonavoluntarybasiswith

theschemesconcerned,thenthePanelrecommendsaregulationorother

appropriate statutory intervention to prohibit it. If this is not forthcoming

within a reasonable time, they would recommend that the Commissioner

giveconsiderationtoinitiatingandinvestigatingacomplaintorcomplaintsof

possiblecontraventionsoftheCompetitionActthroughtheapplicationofthe

“honourallproducts”rule.

�2 IntheviewofthePanel,eventhoughEFTdebittransactionsmeetthebasic

criterionofa two-sidedmarket, theactualnecessityof interchange in this

paymentstreamhasnotbeendemonstrated.ThePanelisnotinaposition

tosayconclusively,onthebasisoftheinformationvoluntarilysubmittedto

them, that it hasbeenprovednot tobenecessary.Considerationshould

thereforebegivenbytheCompetitionCommissionertoinitiatingacomplaint

with reference to section 4(1)(b), and alternatively section 4(1)(a) of the

CompetitionAct,inorderformallytoinvestigateapossiblecontraventionor

contraventionsarisingfromthepastandcurrentinterbankarrangementsin

respectofinterchangeinthisstream.

�3 If interchange is tobe levied in future in relation toEFTtransactions, then

itoughttobeincludedwithintheregulatedprocesswhichtheEnquiryhas

recommendedforinterchangegenerally,andsobesubjecttotheparticipatory

proceduresinvolvedinarrivingatandimplementinganappropriatelevelof

interchange. The first step would be to establish whether the interchange in

thestreamconcernedisnecessaryatall.

�4 The interchange fees applicable to early debit order (EDO) transactions

should also be brought within the transparent and objective regulatory

scheme proposed for payment cards and other payment streams. Once


40

againestablishingthenecessityofinterchangefortheEDOstreamswould

befundamentaltotheprocess.Thatexercisewillalsohelpclarifytheextent

to which banks’ pricing to users in these streams is in excess of costs,

and whether a specific investigation into excessive pricing, either under the

CompetitionActorconsumerprotectionlegislation,iswarranted.

�5 An access regime that includes non-bank providers of payment services

shouldbedevelopedsoas toallow for theirparticipation,undereffective

regulation and supervision, in both clearing and settlement activities in

appropriate low-value or retail payment streams. There are international

precedents–suchasthosefromAustraliaandtheEuropeanUnion–that

suggestthatanaccessregimeofthissortcanbedesignedthatdoesnot

threatenthesystemicstability.

�6 TheNationalPaymentSystemActshouldberevised.Thiswouldallowfornon-

bankstobeclearingand(even)settlementparticipants,andhencemembers

ofPASA.Itwouldallowfordifferenttypesofparticipantsandmembership

of payment clearing houses. Once the NPS Act has been redrafted, the

associatedSARBandPASApositionpapersanddirectiveswouldalsohave

tobe revised.Obvious examples are theBankModelspositionpaper, to

accommodatetherealitiesofPostbankandIthalaLimitedandthee-money

positionpaper,aswellasthedirectivesonsystemoperatorsandthirdparty

providers.

�7 The membership and governance of PASA should be revised so as to

include qualified non-bank participants. PASA is the delegated self-regulatory

authorityofthepaymentssystem.Thisposition,togetherwiththeprofessed

viewoftheNPSDthattheirremitandthatofPASAasthepaymentsystem

managementbodyextendsthroughoutpaymentsystemactivity,meansthat

PASAmembershipshouldbeextendedtoparticipatingnon-banks.

�� AsystemshouldbeintroducedwherebytheChiefExecutiveofPASA,rather

than the incumbent members of a PCH, takes the final decision regarding

theentryofnewparticipants.

�� APaymentSystemOmbudshouldbeestablished.Thisentitywouldplaythe

roleofanOmbudtopaymentsystemparticipants,orprospectiveparticipants.

TheOmbudcouldassesswhetherornotapplicationshavebeenfairlydealt

with andwhetheror not theyhavebeen fairly treated in termsof access


4�

and thepricingof suchaccess. Included in the remitof suchanOmbud

wouldbetheentireambitofthepaymentarena,whichwouldincludeaccess

to the infrastructureofBankserv,or the relevantPCHoperator,access to

settlementaccounts,processingofmembershipofPASAandprocessingof

PCHapplications.

20 TheBankingAssociation shoulddevelopa set ofminimumstandards for

thedisclosureofproductandpriceinformationbybankstobeincludedin

the Banking Association Code of Banking Practice. Such a code should

be set up after consultation with the Ombudsman for Banking Services,

consumerprotectionagenciesandorganisations,theregulatoryauthorities,

theCompetitionCommissionandother relevantbodies.Thecodeshould

include matters related to: standardisation of terminology (and a “plain

language” requirement); communication and provision of information to

clients;arequirementforatleastcertainminimuminformationtobeincluded

in bank statements; a summary and breakdown of charges and interest

(bothdebitandcredit)oneveryaccount;advancenoticeofnewcharges

andalteredcharges;andaregularrightsremindertocustomers.

2� Together with improving transparency, standardising terminology and

educating customers, the Banking Association should encourage the

appropriateapplicationofpricinginitiativesaimedatreducingthefeeburden

oncustomers.Suchinitiativesincludeadvalorempricing,bandedfeeoptions

andappropriatelybundledpackages.Theywerehighlightedby thebanks

during the course of the Enquiry as being beneficial to customers, but do not

appeartobegenerallyofferedtolower-incomecustomersoronentrylevel

accounts.

TheMzansi initiative,which ismakingconsiderableprogress in extending

bankingservicestothepreviouslyunbanked,alsoneedsconstantscrutiny

toensurethatthestructureofitsbundlingandpricingistrulypro-poor.

Considerationshouldalsobegiventoensuringthatrecipientsofsocialgrants

arenotdisadvantagedbythecostofreceivingandaccessingtheirgrants

thoughbankaccounts.

22 Customer profiles should be drawn up and publicised to facilitate comparative

shopping.Bankscouldthenrevealintheirownadvertisingandinformation

whether, how and to what extent they accommodate these profiles, and

their respective prices in that regard. A “profile” is a typical combination of


42

customerneeds.Forthispurpose,theBankingAssociationshould initiate

and support an independent process to establish a limited number of profiles

thatwouldapplytovarioustypicalcustomersofallbanksinthemiddlemarket

segments,wherepricecompetitioncurrentlyappearsmostrestrained.This

willnotbeasimpletask,asbanksapplydifferentcriteriawhendecidingon

the segmentation of their product market. The profiles must be constructed

fromthepointofviewofvarioustypicalcustomers,notfromthepointofview

of particular banks. By way of example, the profiling procedure needs to

takeaccountofthefactthatsomecustomersmaypreferelectronicpayment

channelswhileothersmaypreferbranchandpaper-basedtransactions.

23 A centralised banking fee calculator service should be established. This

shouldprovideanaccessiblefacilityforconsumerstoinputtheirownproduct

requirements–withassistanceifnecessary–andobtain(withoutcost)an

automatic, objective indication of where they could obtain those services

andatwhatprices.Itwouldbeuptothebankstomakeavailablereliable

productandpricingdataiftheywishedtheirservicestobeincludedinthe

answers supplied by the calculator service. The data should be open to

publicinspectionandtoauditintheeventofdispute.

24 TheCompetitionCommissionershouldproposetotheMinisterofTradeand

Industry thatconsiderationbegiven topermittingcomparativeadvertising

thatwouldallowbankstocomparetheirownpricesandproductofferings

directlyandexplicitlywiththoseoftheirrivals.ThePanelhasheldbackfrom

making a definite recommendation to this effect, because the Enquiry has

notbeeninthepositiontoassesstheimplicationsofsuchachangeforother

industries.

25 If after two or three years, the recommendations put forward to improve

comparisonandswitchinghavenotbeenimplementedor(onceimplemented)

havenothadthedesiredeffectofincreasingpricecompetitionandbringing

prices down significantly, then the Competition Commissioner should revisit

theideaofobligingthebankstoprovideoneormore“basicbankingproducts”

withsimilarcontent,capableofbeingsimplyanddirectlycompared.This

would enable customers, whose needs would be satisfied by such a particular

product,tocomparepriceandchoosetheirbankaccordingly.Thatinturn

wouldintensifypricecompetition,andcutacrosstheexistingsegmentation

ofthemarketatleasttotheextentthatsegmentationhasbeencontrivedby

banksinordertomaintainmarketpower.


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26 TheBankingAssociationshoulddevelopasetofcriteriaforaswitchingcode

tobe included in theBankingAssociationCodeofBankingPractice.This

code should include criteria regarding the provision of sufficient information

anddocumentationbybankstonewandexistingcustomers.Theschedule

involvedshouldexplaintheprocessofswitching.Theoldbankshouldprovide

thenewbankwith informationonstandingordersanddirectdebitswithin

a specified period of time of receiving the request to do so. The schedule

shouldspecifyhowthebalanceontheaccount,standingordersanddirect

debits,netofanychargesandinterestbutincludinganyinterestdue,willbe

transferredfromtheoldbankdirectlytothenewbank,andhowandwhen

the account with the old bank will be closed. Provision should be made

forcustomerstobeexemptfrompaying,orberefunded,anyfeesand/or

interest charges which are incurred within a specified period after the new

accountisopenedasaresultofafailureintheswitchingprocess.

27 It isproposedthattheNationalTreasuryencourageandpursuethenotion

ofacentralFICAinformationhubinconsultationwiththebankingindustry,

to see whether or not it could be established as a central repository of

customerinformation,andwhetherornotitcouldbeoperatedinamanner

consistentwiththeanti-moneylaunderingobjectivesofFICA.Thepurposein

thisrecommendationistoreducethetimeandeffortfacingconsumerswho

wishtochangebanks,byfacilitatingcompliancewithFICA.

2� Theroleof theOmbudsmanforBankingServicesshouldbeexpandedto

includeenforcementandmonitoringofcompliancewiththeproposedcodes

ofconductforinformationdisclosureandswitching.


Report to the Competition Commissionerby the Enquiry Panel

Executive Overview

June 2008

CC Cover.indd 1 6/20/08 9:07:43 AM

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