Cablegate: South Africa: Bank Fees Under Fire

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RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #2665/01 1810846
ZNR UUUUU ZZH
R 300846Z JUN 06
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 4241
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHBU/AMEMBASSY BUENOS AIRES 0247
RUEHTN/AMCONSUL CAPE TOWN 3002
RUEHDU/AMCONSUL DURBAN 7898
RUEHJO/AMCONSUL JOHANNESBURG 4748
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

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%

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