Hands up

Hands up if you think your bank charges are reasonable. If you did that, you may not be paying enough attention to the transaction fees levied on your account each time you swipe a debit card, make an Internet transfer or a direct debit goes off your account – never mind what it costs for the privilege of maintaining a mortgage or other financial services your bank may provide. If you think those are rich, penalty fees designed to discourage non-compliance with the small print the banks attach to your account are growing by leaps and bounds.

The 2010 Finweek Bank Charges Report notes the growing gap between package options and the amount of money forked out by those who pay for each transaction individually as financial institutions seek to drive consumers to their all-inclusive options regardless of their personal requirements.

One commentator following our first study into bank charges six years ago pointed out that banks’ bundling an assortment of products together in a single package was akin to Pick n Pay offering pre-packaged baskets of goods at a lower price than each item would cost individually, regardless of whether you wanted them. Not interested in lamb kidneys, Brussels sprouts and okra? You were going to get them anyway as part of the deal.

Much the same is true of accepting the option proffered by harried consultants who are instructed to offer clients banking options based on their income rather than on their personal requirements. It’s more efficient from the bank’s point of view and the bank knows on a monthly basis what its annuity income stream will be.

Next time you go into your bank, do the exercise and ask about bank charges. You’ll immediately be asked what you earn and will be accorded a particular package according to your status – which is determined by your earnings.

This year’s Finweek Bank Charges Report was compiled by Horwath Forensics using the same set of criteria across all four retail banking groups. Researchers visited two branches of each group in Gauteng: Sandton City and Eastgate were chosen this year. The branches were visited at similar times in order to obtain a fair comparison in terms of service levels.

Absa’s decision to leave its bank charges flat in 2010 has paid off in terms of this study. This decision – coupled with the continued aggressive price increases levied by Standard Bank – has seen Absa knocked off its perch as South Africa’s most expensive retail bank, even if only by a small margin. This banner is now being carried by Standard Bank, in terms of both the package and pay as you transact (PAYT) options. However, the researchers did concede average service levels at Standard Bank during the study where noticeably higher than those at other banks.

While many might have dismissed Absa’s decision to leave retail charges unchanged this year as a cynical attempt to move down the bank charges charts, First National Bank has actually cut the cost of its banking – at least in terms of our profile of transactions (see separate box for details). While that approach is laudable, it would be naïve to dole out prizes to the most consumer friendly bank just yet. There’s a caveat, which will be explained shortly.

Probably the most worrying trend in the 2010 report is the rate of increases being imposed on Nedbank’s clients. Though it may cost less to bank at Nedbank now than it did in 2005, the mid-teens rate at which the group increased its fees into 2010 puts that record in jeopardy. Nedbank is no longer SA’s cheapest bank: the 15% increase on a PAYT basis and the 16% jump in its package deal puts it up the list and it loses its status as the country’s least expensive bank.

In our first bank charges review in 2005 Nedbank was by far the most expensive of SA’s retail banks, charging almost R550/month when its nearest rival was on R350. Under Tom Boardman, the group actively cut fees, but it’s been steadily increasing those charges at rates generally higher than its peer group ever since.

The most prominent feature of FNB’s results is that by eliminating the use of cheques and over-the-counter withdrawals, fees at this group dropped dramatically over the past two years. In order to provide comparative figures, Horwath Forensics restated the 2009 numbers. In the case of FNB, that led to a 20% drop in fees last year, with a further 1% decline into 2010. Though you may see that as a positive factor, it does illustrate the fact that FNB penalises its clients who refuse to shift to package options and charges them a considerable premium for engaging in old style banking practices.

The deal at FNB looks like this: you bank with them and want to see a human face – you’re going to pay for it. You’re also going to pay more on average at FNB if you transgress the rules and pay your credit card late, exceed your overdraft or draw cash over the counter if the ATM at the branch you use is offline.

The approach taken by FNB emulates aspects of European budget airline Ryan-air: you can book a ticket for much less than you can on British Airways but don’t dare be overweight on your allocated luggage allowance and if you fail to check in on-line, there’s a penalty for that as well. While FNB might have cut its bank charges, it put hefty increases on its penalty fees in an effort to discourage its clients from creating additional administrative work.

 Six years ago, Standard Bank was the cheapest of all the banks on both the package and a PAYT basis. However, since then our Finweek family has seen increases of 75% on its package option and 64% on a PAYT basis, even with its amended banking habits. At R735 to carry out our prescribed transactions on a PAYT basis, Standard is just one percent pricier than Absa, which put its increases on ice for 2010; it’s also the most expensive in terms of the package option. Our researchers noted Standard Bank debit order transactions in particular had seen substantial increases that drove its year-on-year pricing up 7% on packages and for those who pay for individual transactions.

When you compare what it cost our family to bank with Absa in 2005 against the price it pays in 2010, it’s hardly surprising the Barclays plc-controlled group felt obliged to freeze its hikes on its retail bank charges. At 82%, the increase in fees since 2005 is the biggest of any of SA’s Big Four on a PAYT basis while the increase in package costs is a negligible 2,5%. However, it was then the second cheapest and now the second priciest.

It further demonstrates the desire by banks to drive clients toward using electronic channels. It’s a strategy some analysts caution will cost banks over the long term because clients are harder to sell to remotely and as those clients do the same transactions at a lower cost, which is beneficial to them but means banks are obliged to drive ever-increasing volumes through their infrastructure to ensure top line growth.


How the sums are done

THE REASONS BANKS put forward about the charges they levy on their clients are well documented. South Africa’s Financial Sector Charter, fraught and troubled as it might be, stipulates banks require a greater geographic footprint in order to serve more clients in remote areas than perhaps they might choose to do on a purely economic basis.

Dealing in high-risk cash is very expensive. Every step of the process requires security, and cash-handling fees are a growing cost line for banks, which are actively pushing electronic channels as a means of getting consumers to use facilities that are less risky – and thus cheaper – for the financial institutions to provide. However, even that electronic communication comes at a cost as banks strive to deliver points of presence into a market with exorbitant communication costs. Pushing clients into lower cost channels has the impact of lowering revenues for the banks, which are currently all fighting an uphill battle in the revenue growth stakes.

Against that backdrop, we have carried out our sixth annual review of bank charges in SA. No single research study into bank charges is ever going to provide the definitive answer as to what will be the cheapest bank for you; there are just too many variables. What we do seek to illustrate is the broader trends in bank charges.

Does the negative publicity banks receive actually cause them to momentarily pause before sending out new pricing structures to their branch networks or do banks regard themselves as being beyond reproach.

Banks have never been happy about our reports, which have frequently made the point that our basket of transactions doesn’t resemble the banking habits of their “average” client.

“Who?” asked the banks, “draws cash over the counter any more? When last did you sign a cheque?” While the banks still offer both those services, it’s a fair point. So in 2010 we’ve done away with measuring over the counter (OTC) deposits and withdrawals, as well as cheques. We accept those are now more likely to be the exception rather than the rule. Instead, we’ve added to the number of withdrawals through ATMs and using electronic transfers.

Let it not be said our Finweek family hasn’t learned some expensive lessons over the past five years. That said: most banks will still charge an OTC fee when their branch ATMs are out of order and you should challenge the branch to reverse that fee. We also turfed out garage cards, because most petrol stations accept credit and debit cards.

The other well-worn criticism of our process is that our family’s banking patterns don’t reflect the so-called “average profile” of each of the banks. Being a cynical lot and seeking a direct bank-on-bank comparison, we weren’t about to invite the banks to submit their individual profiles, which frankly would have been open to manipulation. Instead, we wrote to each of the banks and to the umbrella representative body, The Banking Association, and invited them to come up with an average profile for the industry. They declined our invitation – on the basis that SA’s Competition Commission would see that as potentially collusive. First National Bank did send a detailed explanation of how its profile works, but as we were unable to make any comparisons the Finweek assumptions stand.

The reality is: you probably use the services of more than one bank. Your mortgage may come from one bank if you bought your property via the services of an originator and your car finance through a vehicle dealership may be with a second; while your primary transactional relationship could sit with a third and even your credit card could come from another supplier.

But for our purposes we assume our Finweek family banks with only one financial institution. When we first met them in 2005 they were living in modest accommodation and with two young kids. The family then had income of R500 000/year. But times change, kids grow up and our ambitious family is now doing somewhat better than it did then. Thanks to some career changes and a move to a new suburb, the family currently has joint income of R800 000/year and a bigger R2m mortgage.

The kids are growing up. One is a teenager, has a cellphone and wants to manage her own money. Our Finweek parents have decided the younger one may as well learn how to manage money earlier and he also has a bank account.

The world has moved on in five years – and so have bank charges. Our family transacts using the services of a single bank. They draw cash, pay their accounts, have debit orders, car finance and a mortgage. We assessed what it would cost the family to bank using either their bank’s package options or paying for every transaction. Without exception, our family would have saved money by using the respective banks’ package options and would have been left some room for additional transactions with the limits the packages afford them.

As in previous years, head office pricing experts weren’t consulted. Our researchers relied rather on bank literature, which in most cases is stored on a database and not readily available at branches – at least at those our team visited – brief face to face interactions with bank staff and discussions with call centres.

“As was the case during 2009, we received inconsistent feedback from call centres in respect of overdraft-related and mortgage administration fees,” says Terence Hatzkilson, a partner at Horwath Forensics. For example, Absa hadn’t updated its website at the time of our research and didn’t reflect 2010 pricing – a weakness with no serious consequences, as there was no change in the annual structure. But it does reflect some of the shortcomings in consumer communication about the issue of fees.

Generally, branch level service is patchy and not always reliable. Branches of the same bank delivered vastly different levels of service, and opportunities to open an account were missed, with consultants apparently more eager to churn clients than to actually seal a transaction of any kind.

Absa Eastgate was a far superior experience than its Sandton City branch. The same profile was exhibited by Nedbank, while the opposite was true for FNB. The researchers found Standard Bank’s delivery at both branches the best of the bunch.

For the full report – including the parameters of the study – please visit Fin24.com


Joins the bully boys

JUST WHEN SOUTH AFRICANS thought banking was going to become cheaper, our competition authorities have given the thumbs up to a transaction that may well put paid to that notion. The Competition Commission has had many noticeable successes over the past few years but its one black mark has been the bullying it’s taken at the hands of SA’s financial services sector.

It would appear it’s not just banks that have flexed their muscles – they’ve also been joined in their endeavours by BankservAfrica, the South African interbank clearing and settlements systems operator.

It’s no secret Bankserv – under CEO Pieter Cilliers – has been ruffling some feathers with its intention to expand and raise its profile. Traditionally, Bankserv has operated out of sight and out of mind while connecting SA’s financial services sector. In 2009 it handled more than 2,5bn transactions valued at more than R8 trillion.

At the start of September this year, Bankserv said it had acquired the businesses of Emid and Nomad and managed to push through Competition Commission approval, but with some conditions attached. Emid provides “back office” ICT services to small banks and other financial institutions; Nomad provides software that ensures the smooth transmission of card payment instructions from a retailer’s checkout system to its acquiring bank.

When Standard Bank made its presentations to the Competition Commission during 2007 it highlighted the point that there was no alternative to Bankserv and it should be managed as a national utility on a “not for profit” basis. Instead, Bankserv has geared up its marketing efforts as it seeks to become “more commercialised”.

Maarten van Hoven, manager: mergers and acquisitions at the Competition Commission, says certain conditions have been applied to the transaction and Bankserv may not bundle its services with the services offered by its new acquisitions, which will be reviewed after 10 years.

While that may be the case, Finweek gets the distinct impression SA’s financial services sector has again extended the middle finger to our competition authorities and have got away with a transaction any other sector would be jealous of.

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