VZCZCXRO5759
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%