High charges: banks are not sacred cows

Representatives from cell phone networks “scrambled for answers” when they appeared before Parliament’s Portfolio Committee on Telecommunications and Postal Services in September.

The issue of high charges periodically comes up, this time under the #DataMustFall banner.  In 2009 the then lone Parliamentary activist, now Cape Town Mayor, Patricia de Lille expressed the public’s frustration over networks’ profiteering.  But this is the season for things to fall, and politicians fear such messages of discontent.

Reports show 1GB of data costs R11 in India, R22 in Nigeria, R32 in Namibia, but R150 in SA.  At the hearings MTN’s chief financial officer Sandile Ntsele disingenuously blustered about the US dollar being the “common denominator”, and not paying rands for Naira. 

But how does MTN justify charging South Africans more than Nigerians when, at the time of writing, R1 is worth US$0.072, and 1 Naira only US$0.0032 (1 Naira is worth ZAR 4 cents, coin we no longer use – it’s practically worthless)? 

The indisputable fact is, converting the naira to the dollar cost of data, Nigerians are paying 23 times more for data, and imported telecommunications infrastructure, than MTN’s South African customers.  But their data is cheaper, and Internet speeds faster. 

Networks waffle about cost structures that determine high charges, but are reluctant to reveal details – Vodacom refused during Parliament’s 2009 hearings into “excessive and exorbitant” mobile termination rates.  It’s inconceivable cost structures in Namibia, which also pays in US dollars for imported technology and data, are much different to ours.  But their data is about five times cheaper.

Do Parliamentarians really believe this guff?  The Nigerian government didn’t accept MTN’s excuses (for their failure to deregister SIM cards), so why does our government?

But if networks make such easy targets, and “grilled” to politicians hearts’ content, why do the same politicians give the other de facto cartel – how else to describe members of the club known as the Banking Association of SA – of the “big four” banks a free pass?

 

In September mines minister Mosebenzi Zwane created a furore when he declared a judicial commission of inquiry would be considered to investigate banks’ mandates. Ignoring the Zupta contagion that infects everything, what interests me is the reaction from all quarters, including Parliamentarians and media, who leapt to banks’ defence and bristled at the possibility – fictitious, it turns out; just politicking – they might be investigated. Excitedly, they said his statement caused “market uncertainty”. 

Why are banks shown deference bordering on the religious? 

It’s generally accepted bank charges in South Africa are among the highest in the world, which they deny of course.  Fees are a significant contributor to the big four’s revenue, about R40bn a year I believe.  The Banking Association’s Internet homepage states inter alia, “despite being a concentrated sector, it is still very competitive”. 

Munacinga Simatele, in his paper Market Structure and Competition in the South African Banking Sector, found the industry’s concentration ratio is over 80%.  This places it in the oligarchy to monopoly range (100% is a monopoly).  Six banks – Standard Bank, Absa, First National Bank, Nedbank, Capitec and Investec – account for over 90% of all retail deposits.

Simatele wrote that although the high level of concentration did not reduce competition, it is “puzzling the industry exhibits relatively high transactions fees in the larger banks”, aka the big four.  His findings and our daily experience brings into question the Association’s oxymoronic statement. 

After “hero” Finance Minister Pravin Gordhan took office in 2009, he expressed concern about bank charges and promised to look into it.  Instead, reportedly after banks threatened to review their business interests in South Africa, Treasury pressurised the Competitions Commission to drop their investigation into bank charges, and let banks regulate it themselves.  (Three years ago I wrote to him about this matter.  He did not reply.)

However, after his intervention charges escalated, with new and higher charges almost simultaneously instituted across the board.  The introduction of Mzansi accounts – entry-level “cheap” accounts (they’re not really) – did not hide the fact charges were increasing by large increments.  Despite this banks and Treasury claimed “progress” had been made.

The public are captive consumers with little choice.  Since 1994 the only new bank entering the market and overcoming high barriers to entry was start-up Capitec.

 

This is one of the fundamental limitations of our economy across all sectors.  It’s characterised by monopolistic/oligarchic companies and practices, overregulation, inefficiencies, high barriers to entry and high costs, among other things, contributing to a lack-lustre economy of stagnant growth, inflation and high unemployment. 

Excessive bank fees and high cell phone charges are only two manifestations of this structural deficiency – they won’t call it that, though – inherited from the pre-1994, apartheid-protected way of doing business, which was part of the deal the ANC made at transition. 

How do you accumulate a corporate cash pile of R725bn: from monopolistic profits, and reluctance to reinvest after you have taken all you can from the captive economy and consumers.

In a free, that is, open and competitive market, if fees are high, either there are industry-wide push-factors on costs, or the largest firms, for example, the established big four banks and two cell phone networks, are behaving in a cartel or cartel-like manner.  Both instances deserve investigation.

In one of government’s many economic policy blunders, former finance minister Trevor Manuel approved Barclays’ majority stake in Absa, Africa’s largest retail bank.  This concentrated the banking sector rather than opening it to competition.  (His wife, Maria Ramos, later became group chief executive of Absa.) 

Other blunders include semi-privatising Telkom and turning it into a private monopoly, which set back access to reasonably priced telecommunications for years.  Another was selling Iscor to then Mittal Steel, which immediately engaged in import pricing parity price-gouging.  Recently Director-General of Trade and Industry Lionel October said they were “naive” about Mittal.  Ironically, ArcelorMittal has now sought government protection from cheap Chinese imports, and both have “learned their lesson”.  But at the cost of immeasurably setting back economic growth.

These policy decisions were not naive.  Instead it indicates the ANC’s lack of understanding of the free market system and competition.  It’s a holdover of their socialist model married to apartheid’s over-protected, uncompetitive industrial model – a strange, two-headed beast.

Government generally appeases big business, accepts their explanations and is reluctant to get tough – as Nigeria did with MTN – even when the national interest and well-being of SA’s 55 million people are at stake. 

I support investigations into network and bank charges, and into the market concentration of industries.  But don’t expect answers on excessive cell phone and banks charges soon.  JSE listed companies, particularly banks, are SA’s sacred cows.

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