South Africa: Getting a Measure of Mass Banking

Johannesburg — A MAJOR thrust of The National Payment System and Competition in the Banking Sector, a report commissioned by the Competition Commission, is to question the make-up of bank charges levied on payments.

Although bank charges are currently a popular target of governments, watchdogs and consumers the world over, bankers counter that, for all their anti-bank-charge cant, few consumers do much to manage them or to seek cost-effective alternatives.

A further theme of the commission's recently released report is the imperative to improve access by under-served consumers to competitive financial services -- whether these be provided by banks or non-banks.

In South Africa, the Mzansi account, launched as a low-cost product by major banks and Postbank in October 2004, was a concerted initiative aimed at attracting the then-13.2million unbanked South Africans into the economic mainstream.

Mzansi was created in response to the Nedlac financial sector summit of August 2002.

In the subsequent 2003 Financial Sector Charter, banks undertook to provide access to first-order retail financial services within 20km of 80% of South Africans in LSM 1-5 (a measure of living standards, denoting South Africa's lower-income earners).

Ironically, Mzansi nearly did not see the light of day because the competition authorities were concerned that the banks might be colluding in setting the pricing of what was designed to be a standardised, easy-to-understand product.

Though the banks agreed on a standard interchange fee between themselves for handling payment transactions, the different pricing charged to customers put paid to concerns about anti-competitive practices.

The latest figures on the take-up of Mzansi are not available, but Postbank has been the most successful in attracting customers, followed by Absa, Standard Bank, FNB and then Nedbank.

Bankers say the Postbank take-up is distorted by its mass conversion of existing accounts to the Mzansi platform.

Though designed to have rock-bottom pricing -- to the extent that it is not really profitable for the banks to operate -- and though it is the most widely available basic banking product in South Africa, Mzansi turns out not to be the cheapest way of doing conventional banking.

Relative newcomer Capitec walks off with the laurels for providing the cheapest banking. Its low charges and high-interest accounts are clearly designed to attract customers away from the big four and Postbank.

Though it does not yet have the same footprint as its far bigger competitors, it has been careful to position its outlets in high-traffic areas for the entry-level segment.

Another bank that has not generated the sort of response expected is Pick 'n Pay Go Banking, which is operated as a division of Nedbank but uses the retailer's stores.

Although Go Banking appears expensive in the example in the comparisons table, a customer whose salary was paid by electronic transfer and who performed four combined withdrawals and purchases a month at a Pick 'n Pay store would pay bank charges of only R12.

In a bid to pare costs, Mzansi's functionality -- the range of operations that can be performed -- was intentionally limited compared with the major banks' next tier of entry-level products, marketed as Absa Flexisave, FNB Smart, Nedbank Transactor and Standard Bank E Plan.

Transactions on Mzansi are limited to deposits, withdrawals, shopping or cashback at shops, and balance enquiries. Interest is paid on credit balances (which cannot exceed R15000) and there is no monthly service fee. FNB and Postbank have added debit-order functionality.

Some banks apply limits on the number of basic fee transactions that can be conducted before the costs start to ratchet up -- generally more than five cash deposits or five withdrawals a month.

Curiously, for all the hype surrounding Mzansi's launch and the more than two million customers it has attracted since, bankers report surprisingly (and satisfyingly) brisk take-up of their more sophisticated entry-level products by customers initially seeking an Mzansi account.

This suggests that the greater functionality (such as debit orders for regular payments) and bundled products (such as educational helplines or funeral cover) have real appeal in the entry-level segment.

This is confirmed by Saks Ntombela, Nedbank's retail product solutions managing director, who notes that customers appear to be prepared to pay more for the greater functionality of Nedbank Transactor.

Depending on how they used the more sophisticated account, he said they could save money over time compared with Mzansi account fees because there are no transaction limits.

However, Ntombela explained: "When we do the comparison of Mzansi products with other entry-level banking products using an average entry-level customer profile, Mzansi still turns out to be cheaper than other entry-level products."

It is this "average entry-level customer profile" that is the key to cost comparisons.

The banks create their own picture of an "average entry-level customer profile" by monitoring the transacting patterns of their own customers and those of other banks who use their infrastructure.

In a competitive marketplace, each bank naturally uses its own picture to illustrate that its proposition is cheapest.

In the comparisons table, we have used an FNB profile. Other banks will offer a different combination of typical transactions.

So, in Nedbank's case, Ntombela's own average profile for the entry-level segment shows that Mzansi is the cheapest Nedbank product, followed by Nedbank Transactor, then Go Banking.

But Capitec still beats the big banks -- largely because its approach is tailor-made for this segment.

However, the absolute cost of bank charges is not necessarily an issue to every consumer.

What is telling, given the concerns raised in the Competition Commission's report, is that customers have responded so favourably to bankers' pro-active marketing of their more sophisticated products (which are more profitable in the longer term for the banks).

This suggests that entry-level customers are prepared to pay for different levels of service according to the value proposition offered.

Given that much of the anti-bank-charge noise in the market comes from the middle-to-upper market segments, Ntombela's affirmation that Nedbank Transactor is available to all customers -- and not just to the entry-level segment -- should set people thinking.

If complaints about bank charges are genuine, he and his competitors at other banks should expect a wholesale migration of customers to their entry-level products, which do most of what customers need at a competitive price.

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