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Banks Avoid Rivalry Over Prices - Study
Cape Town, Dec 15, 2008 (Business Day/All Africa Global Media via COMTEX) --
Retail banking in SA operates as a tightly knit oligopoly that maximises profit by avoiding outright price competition, says the report of an inquiry into competition in retail banking.
The 600-page report issued by the Competition Commission on Friday did not say banks operated as a cartel but that they took advantage of "the degree to which customers, once recruited, became locked into a particular bank".
Banks estimate their earnings could be cut 1%-2% if the recommendations of the panel of inquiry, which found that transaction and interbank charges were too high, were implemented fully. The treasury said it would work with the Reserve Bank, the trade and industry department and the commission to find a way for the government to deal with the recommendations, but stressed they did not necessarily reflect its views.
While some of the recommendations of the report, submitted to the commission by panel head Judge Thabani Jali in June, have been disclosed (such as a regulated R5 cap on processing fees for rejected debit orders and a change towards direct charging of ATM fees) the panel's views on the "appreciable market power" wielded by banks were revealed only with the release of the full report.
The panel concluded that this market power prevented, restricted or distorted competition in the provision of personal transaction accounts. The oligopoly let banks sustain prices higher than would prevail in a competitive market.
Banks, the report says, relied on the expected reactions of rivals when taking strategic decisions. They tended to set fees within a close enough range of each other so as not to impinge too much on each other's market share.
The panel recommended greater transparency, disclosure and comparability of bank charges and products.
"The cost and trouble involved in switching banks further weaken the competitive effect of price differences where those can be identified by customers and allow supra-competitive pricing to be maintained.
"According to our calculations, total switching costs as a percentage of the net present value of average annual banking costs over three years are likely on a conservative estimate to be well in excess of 5%."
The panel found no identifiable relationship between the prices of personal transaction accounts and the costs to banks of providing them.
The treasury said the report "raises important policy issues and provides recommendations which (we) will comprehensively review and analyse".
"Many of the inquiry's recommendations require a co-ordinated policy response" by the different organs of state, it said. Industry stakeholders would be consulted on any major reforms, and these would be subject to approval by the ministers of finance and trade and industry.
Sections of the report were blacked out because banks were concerned that confidential, market-sensitive information would become publicly available. This means that profits generated from various banking activities are not disclosed, although the concluding chapter of the report notes that gross revenue of more than R4bn accrued to banks from about 1-billion ATM transactions in 2006.
In the same year, transactional fee income represented a third (R34,5bn) of banks' total income.
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