Good grief! It's not enough that we have the highest bank charges in the world, but now the banks rip us off as well. Blatant theft!
The great ATM rip-off
Maya Fisher-French
11 June 2007 11:59
Of the more than R30-billion in transaction fee income banks receive, about R2-billion comes from consumers using another bank’s ATM infrastructure. This will be a major focus of the Competition Commission report, together with interchange fees and improved access to the National Payment System, suggested a recent press briefing by the banking inquiry’s technical team.
The issue of ATM costs is an important one. Cash withdrawal fees make up the majority of bank charges for lower-income earners, who transact primarily in cash. A customer who draws cash from another bank’s ATM pays on average R10,75, based on an average withdrawal value of R242. This is a cost of 4,5%.
Although Mzansi customers pay a set withdrawal fee at any ATM, most banks charge a penalty fee if the monthly transaction limit is exceeded. According to the technical team, the bulk of penalty fees come from Mzansi cardholders. The penalties are as high as R12,50 per transaction, although Nedbank recently dropped its penalty fees. The current ATM system allows banks to hide fees under the proviso of a “Saswitch” cost.
If customers use another bank’s ATM to make withdrawals, they are charged a “convenience” premium, referred to as a Saswitch fee. But only a tiny percentage of this fee actually goes to Saswitch, which clears the transaction. The bulk of the fee is a carriage fee that the customer’s bank pays to the ATM provider for the service. Over and above the premium, the customer’s bank charges its normal ATM withdrawal fee, even though it did not provide the ATM service. Of an average fee of R10,75, Saswitch receives 13c, R4,55 is paid to the ATM provider and R6,07 is kept by the customer’s bank.
Standard Bank has argued that these charges are necessary to encourage customers to use its ATMs and prevent free-riding by smaller banks. FNB has proposed scrapping the carriage fee and replacing it with a direct-to-client charge. The technical team favours this proposal, whereby the bank whose ATM is being used would charge the customer directly, and this would appear as such on the customer’s statement. The customer’s bank could also charge the customer the administration costs of reimbursing the ATM provider for the amount withdrawn. These costs would clearly be stated and the customer would know where the fees are going.
A problem with such a system is that charges for ATM withdrawals in rural areas could be higher because of the increased costs of running a rural ATM and lower levels of competition. The lack of competition in cash dispensing is also a concern for the technical team, with the banks having formed an exclusive agreement that allows only a participant of the Payments Association of South Africa (Pasa), or a company contracted to a participant, to provide ATM services.“It would help to have competition from non-bank providers for cash dispensing,” says technical team member Dr Penny Hawkins, who adds that in Britain, of the 62 000 ATMs in operation, 60% are run by non-banks and use a direct-fee model. This opens up a can of worms about access to the National Payment System and the rules around who can be a member of Pasa, which many argue entrenches the oligopoly of the big four.
According to Galia Durbach, payment executive for FNB, in the British model ATM providers are required to be members of the payments association. However, the membership rules are less rigid and they do not have to be fully fledged banks. “One could drop the word ‘bank’ and have a set of criteria that non-banks could also meet. These would cover issues like access to capital, compliance with regulation and sufficient funding,” says Durbach.Smaller banks have raised the issue of the tight hold the large banks have over Pasa membership, which they see as an elite club run by the large banks, which are the primary members. A major blow for competitiveness is that a new entrant has to lay down its business plan in infinite detail to the members, who are also its direct competition. Brian Richardson, of Wizzit Bank, argues that Pasa should not be run by the banks. He says that while it is necessary for a sound financial system to require a potential new bank to disclose its business practices, expecting it to hand this over to its competitors is ludicrous. There are other issues around joining the payment system, including costs and time delays.
Questions also need to be asked about Bankserv’s fee structure, which favours the larger banks. Bankserv is the clearing house for South Africa and is wholly owned by the banks. It generates about R20-million profit a year, which is used to upgrade infrastructure and technology. Bankserv works on volume pricing -- the higher the volume, the less cost per transaction -- which benefits the larger players. A smaller bank pays about 100% more per transaction than one of the big four. The interchange fee is also likely to be a focus in the final report. This is the fee the customer’s bank is paid when the customer uses a debit or credit card at a merchant. It is an indirect fee that the consumer never sees, but which feeds into the overall cost of the merchant’s business and, therefore, affects the price of goods.
Like the carriage fee for ATMs, it is a single fee set between the banks, with credit cards attracting 1,7% and debit cards 0,55% of the transaction. Australia’s banking inquiry raised this as a concern, in that the higher charge for credit cards, although supposedly offsetting risks, encourages banks to issue more credit cards than debit cards to bump up revenue. Although there are no precise numbers, it is estimated that banks’ revenue from interchange is between R18-billion and R31-billion a year. The technical team believes that while an interchange fee might be necessary to balance the distribution of costs between the card holder’s bank and merchant’s bank, the fee needs to be reviewed. In the final set of hearings, which will commence later this month, banks will be asked to explain how they arrive at their pricing structures and why pricing is so complex and opaque. The banks have submitted reports on their cost structure and, although confidential, it would appear that these are as complicated as their pricing structures.
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