The Banksters and the Great Debit Card Rip Off

Those that have read my previous blogs will know that I am on an anti-Credit drive at the moment. A bit like an irritating ex-smoker, constantly berating their friends who still smoke! Sorry for that, hey, but if you are irritated by me, you should be even more irritated by this issue.

Since I am trying to kick the credit habit, I followed the best possible route and went “cold turkey”, locking away the credit cards and switching immediately to my debit card. Now, my wife and I have often differed in some of our views on debit card and ATM usage fees. Given my back ground in working for the Banksters I have always felt that most of their fees were justifiable, I suppose in the same way a drug pusher justifies their role in that destructive supply chain. Now that I am no longer and agent of the Dark Side I have a fresh perspective on these fees.

On ATM machines, I felt, and still do, that to a certain extent the principles behind the charges are justifiable. Firstly, I believe that one should pay more to use another bank’s ATM than your own bank’s, because the other bank has the costs of establishing and maintaining the machine, of keeping it working and stocked with cash. If this wasn’t the case, then the banks would not be able to sustain the interoperability between all the banks and their customers. It is convenient to be able to use any bank’s ATM, and convenience always comes at a cost. We are blessed in this country with abundant access to ATMs. Anyone who has traveled overseas must concur with me on this. Last year I arrived in Milan, the fashion capital of the world, and struggled to find a ATM at the airport, and when I found one, it didn’t “speak” English. Our ATMs all speak three or four languages! So, yes, this investment needs to be rewarded. Strangely though, our recent Governmental Enquiry into Banking Fees felt this principle was wrong, and are insisting on a standard price for all ATM transactions. I don’t believe this is truly reflective of the spirit of competition, as it will reward the lazy banks who couldn’t be bothered to get out there and install ATMs, and dis-incentivise the investment new machines and technology by the banks that are bothered to get their machines out there. What’s more relevant is the second issue, which is whether the base-line fee, i.e. the fee charged by your own bank to use their ATM is fair? Now that’s a different issue. Considering the massive cost savings delivered to the bank by having the customer “self-service” with a machine, versus taking up prime real-estate in a branch, there should be a greater incentive to service their customers this way and therefore, the base line fee really should be lower than it is. Sadly, the Enquiry seems to have missed this all important point, with the point of departure being “how much should the fee be?” rather than “should there be a fee?”. The third point with ATM fees is the method on which the fee is calculated. Most banks work on a percentage of the value of the withdrawal, what they call an advalorem based fee. Once again, in principle, I am not apposed to this idea. There is a direct correlation between the amount that you withdraw and the cost to the bank for servicing this withdrawal. The more you withdraw, the more money the bank has to replenish, which means getting this cash to the machine in our wonderful, but crime infested country. Consider for a moment the cost of armored cars, insurance, people, bullet proof vests, semi-automatic machine guns, etc. And that’s just the criminals! So, I’m prepared to accept that an advalorem based fee is fair.

Now, you may be asking, what has this to do with the Banksters and the Great Debit Card Rip Off? Well, first off, I want to show that I can be reasonable! I have always believed in a fair price for a fair service. But, the principles behind debit card charges are not fair. There are a number of things you need to know about debit card transactions, some of which you may know, but most I am sure, you don’t.

1. To do a debit card transaction, there needs to be two bits of technology present. Your card, and the retailer’s terminal. You pay to have the card, and the retailer pays for the terminal. This is unlike the ATM, where the bank pays for making the machine available to you. So, the banks’ costs on both sides are covered.
2. When you swipe the card, you are asked for your PIN number. This is great for you, because no one can use your card without the PIN so, unlike a credit card, there is a far reduced opportunity for fraud. Although, as I illustrated previously in the “The Case Against Interchange”, credit card fraud generally lands in either your’s or the retailer’s lap. This is a huge benefit to the bank, because it all but eliminates the fraud that lands in their lap. You would think therefore that the banks would really really want you to use a debit card, huh?
3. After you have put your PIN in, the retailer’s terminal connects directly into the banking system. The cost of this connection is borne by the retailer. No cost to the bank here then.
4. The retailer’s terminal, which the retailer has paid for, “talks” to your bank over a connection the retailer has paid for, and checks whether (1) the PIN is correct and (2) if you have enough money in your account to honour the transaction. No bad debt costs here for the bank. No credit provision costs for them either, as you will either use your positive balance, meaning they now have to pay you less interest, or you will use your overdraft where they’ll be able to charge you more interest. Great result for the bank! Both of these represent “income” to them. Where the bank does have a cost is the “switching” costs incurred should you and the retailer not use the same bank and, either way, the bank has the infrastructure cost of the mainframe they run to make the system available. Importantly here, the switching and infrastructure cost to the bank per transaction is the same whether the transaction is for R1 or for R1’000. In fact because of the net interest gain the bank gets from you using your available money, the HIGHER the value of the transaction, the more the bank benefits. Further, as with all systems, the GREATER the number of transactions the system processes, the LOWER the cost per transaction to the bank. The all important point here is that the HIGHER the value of the transactions, and the GREATER the volume of transactions, the more profit the bank makes. This is before they’ve even charged anyone a transaction fee!
5. After your transaction has been approved, the money is immediately removed from your account, reducing your balance for the day and thus reducing the interest you may have earned that day, or conversely, increasing the interest you will be charged that day on your overdraft. Once again, the HIGHER the value of the transaction, the more the bank benefits. As a “thank you” for bringing them this great fortune, the bank then slaps you in face, and charges you a percentage of the value of the transaction as a fee, thus charging you MORE the higher the value of the transaction, despite the fact that they are already gaining a benefit from the higher value. This percentage can range from 2% to upwards of 30% of the value of the transaction. Just yesterday I was charged R3.90 when I used my debit card to pay for a R11.50 cup of coffee. That’s 34% of the value!!! If I had used my credit card I would have paid no transaction fee and the retailer would have paid between 3% and 5%.
6. The money that was immediately removed from your account, is only paid to the retailer’s account 1 to 2 days later, even if you use the same bank. If you don’t use the same bank, your bank gives the money to the retailer’s bank on the same day, and the retailer’s bank holds onto it for a few days for good measure, before putting it into the retailer’s account. During this time, the bank(s) make merry with the money, lending it at high interest rates to various overnight borrowers, which in some cases may be the very retailer you purchased at! That’s a good business to be in, lending your customers their own money back at a premium! It seems audacious, but that it is how it works. The bank also gets a further chance to slap a customer in the face, this time the retailer, charging them about 0.65% as a “thank you” (or is it a “f#$k you”?) for bringing them this benefit. Again, the HIGHER the value of the transaction, the more the bank benefits, yet they do not incur increasing costs based on the value of the transaction.
7. Of the transaction fees charged to you and the retailer, a portion goes to VISA or MasterCard (depending who’s badge is on your card) despite the fact that when a South African issued debit card is used at a South African retailer, these transactions don’t go anywhere near VISA or MasterCard. They don’t issue the cards, or incur any costs whatsoever, in relation to the transaction! No wonder they’re investing so much to convince you, through their marketing, to use your debit card. And don’t think for a moment they’re short changed if you use your card overseas. You’re in for a minimum fee of at least R15, plus a percentage of the value of the transaction, plus currency charges, should you have the audacity use your debit card in a foreign country.

So this is the Banksters and the Great Debit Card Rip Off. In South Africa, where we see such hideous crimes related to stealing cash, from armed stick ups to cash-in-transit heists, any reasonable person would assume that the custodians of our financial system would do everything they could to reduce the amount of cash in circulation, with the obvious substitute being debit cards. Instead however, just like a drug pusher prays on the helpless and the innocent, profiting from their misery, the Banksters, including VISA and MasterCard, are taking every advantage of the South African consumers and retailers, profiting mercilessly off the hideous crime environment, effectively penalising you for using your debit card. Instead of being part of the solution, they are in fact part of the problem, encouraging people to use cash, even though this places the consumer and the retailer at greater personal risk. The retailers are also penalised for trading in cash, getting further extorted on exorbitant cash deposit fees.

The simple truth is that debit cards represent the single best opportunity in this country to replace cash, but for as long as the cost, both to the card holder and the retailer, is linked to the VALUE of the transaction, they will remain extortionately expensive. It obvious that there is absolutely no justifiable reason for the banks to price them this way, and I know for a fact they only do so because they can.

This just leaves the question… “What are we do about it”?

Well, we can’t hope that the Government is going to do anything about it as the present and previous highest echelons of the ruling party have ensconced themselves in the boardrooms of the big banks. None less so than ABSA, colloquially referred to as “bankers to the ANC”, who’s upper echelons are a veritable who’s who of the ruling elite. Of course, in its previous incarnation, Volkskas, they were “bankers to the Nats”, so no change there then!

Don’t expect anything from the South African Reserve Bank (SARB) either. As I detailed previously on my blog in “Numsa and the Reserve Bank”, the SARB operates entirely in secrecy, including who its shareholders are, and you can be sure a huge chunk of the tightly held secret shares are in the hands of the major South African banks. Of course, I can’t prove that they are, but then again, because of the secrecy clauses in the SARB Act, they can’t prove they are not either!

The last line of defense for the consumer in a capitalist system is the Competition Commission but, following the publication of 28 recommendations for change by the Jali Enquiry into Banking Charges, Simon Roberts, the commission’s divisional manager for policy and research, (as reported on Fin24.Com on 3rd April 2009) stated that

“The inquiry into bank charges made recommendations and (we) hope the banks will change their behaviour”.

He went on to say that

“The commission could not enforce the recommendations”!

Expecting the banks to change their behaviour voluntarily is a little like setting the fox to guard the chickens, and expecting the fox not to eat the chickens. It is in the fox’s nature to eat the chickens, just like it is in the Bankster’s nature to extort money from hapless consumers.

The retailer’s have a major interest in seeing this situation change, but so far few have proven willing to challenge the banks. Perhaps that’s because they don’t want to bite the hand that feeds them, as they themselves depend heavily on the banks for funding. Perhaps also they know that they can recover their fees in the prices they charge the consumers, especially given the cheap pricing they get from the sweat shops in the far-east. Maybe they might change their attititude when, as is planned, the Banksters increase the percentage fee the retailer currently pays to process debit cards. This increase has the blessing of the Competition Commission who “hope the banks will then decrease their fees to the consumer“.

So that just leaves you! I’m ready to toyi-toyi down Commissioner Street, but are YOU? The truth is that it is only when the masses rise and demand change that change will come. If you’re ready to don your gumboots and head for the financial district let me know. I’ll be leading the charge!

Card giants accused of throttling IT firm

VISA and Mastercard, already in the spotlight after a Competition Commission inquiry into bank fees last year, are facing a competition probe after a complaint by a Johannesburg-based business.

Read on at http://www.thetimes.co.za/News/Article.aspx?id=1039397

Credit is a Drug, and just as destructive

Capitalist economic theory is based on the assumption that there is a scarcity of resources, be these land, buildings, homes, money and such. Because of the scarcity, there is competition for these resources, and this competition leads to a capitalist economic concept, that of Supply & Demand. In this concept, the more Demand there is for a resource, the more a provider of these resources can charge for them. As the price of the resource climbs, more people will then want to Supply that resource, decreasing the scarcity of the resource, which then ultimately, slows the rise of, or even decreases, the price. Then, as the price of the resource rises, fewer people can afford it, thus reducing demand for the resource, which also has the effect of decreasing the price. Eventually, in theory, the price of the resource will find equilibrium, where it is such that there is sufficient demand for the resource at that price, and sufficient willingness of suppliers to supply at that price. An example which most people are aware of is house prices, hence we have “buyer’s” markets, where there is less demand for houses than supply, hence price rise slows as providers of houses compete for buyers, and conversely, “seller’s” markets, where there is less supply of houses than are being demanded, hence prices rise as buyers compete for houses, hence causing the prices to rise. This theory can be applied to everything a household consumes, from houses to hosiery.

In theory, prices for consumer items should therefore be determined primarily by the buying power of the household. The buying power of the household is determined primarily by the collective income of the household. Thus a household’s capacity to compete for resources is limited, in theory, to its earning power. I say “in theory”, because a household can access an additional resource to boost its spending power, based on its income. This resource is Credit. The cost of this resource is the Interest and fees the household pays for the use of the resource. Again, the greater the demand for Credit, the more the providers of Credit can charge for the supply of it, and hence the higher Interest Rates will rise, and conversely so too. As I mentioned, being able to access Credit increases the household’s buying power, hence the more resources it can demand and, as we have seen, increasing demand increases the price a provider of the resource can charge for it. Clearly, the households that can access Credit are at an advantage to those that can’t, or who can access relatively less Credit.

Credit, as a resource, has been around for centuries, but Credit as we know it came into existence following the establishment of the Bretton-Woods financial system in 1933 but, because of the two world wars, only became a mass consumer product after the end of World War II. Post WWII governments no longer needed Credit to fund their war efforts (War is very good for Credit providers!)  hence making more Credit available to the households. The availability of Credit to households had the effect of increasing the buying power of these households, thus increasing demand for resources, thus fueling price rises. It had got to the point where, because of the seemingly limitless amount of Credit available, that instead of finding price equilibrium, home prices continued to rise as more and more Credit kept getting fed into the households. This created a never-ending upward spiral in prices, taking fewer and fewer households with it. Households that couldn’t access Credit were simply left behind. That this is true can be seen in the slow down in home price increases as household Credit was limited by, first the implementation of the National Credit Act in 2007, and then the impact of the global Credit “crunch” which started in late 2008. Home prices are, when adjusted for inflation, falling, in line with Supply & Demand theory, as households’ ability to compete for homes diminishes as a result of the increased scarcity in available Credit. This leads to an unintended consequence whereby the price a home can fetch on the market is less than the amount the household owes to the provider of the Credit. That is all fine so long as the household has enough of the “money” resource to keep paying for the costs of its Credit resource. If not, the “house of cards” (excuse the pun) comes tumbling down and the household must now return the resources it bought with the Credit, or suitable other resources to the same value. But, oops, the value of the resources being returned to the provider of Credit may not be enough. And if one of the resources is the household’s Home, where are the people in the household going to sleep? Furthermore, none of the parties win in this case. Firstly, the provider of the Credit now has a home it has no use for, and cannot dispose of as there is not enough demand for the home in the market, and the household has nowhere to sleep.

This exposes the futility of “repossession” in economic times such as these. Sure, its easy for those who can still service their payments to condescendingly accuse those who can’t for “living beyond their means”, but these people would not have been living beyond their means had Credit not been made available to them firstly, and secondly, the rapacious provision of Credit by the credit providers caused home prices to rise to the point that the only way to get one was to use Credit. This is a bit like “riding a tiger’s back”. You’re safe, until you fall off, then the tiger turns on you and you get consumed!  Those people who do condescend to blame the unfortunate credit defaulter should remind themselves that this is all relative, and I’m certain they to have bought homes beyond their means, by their own definition, and are only one pay-cheque away from the same situation.

The thing that beguiles me the most however is the manner in which the American’s have gone about dealing with this problem. The original plan, marketed by Obama during his election campaign, was to “mop up toxic debt”, thus enabling the indebted household to restructure their debt payments to levels they could manage, leaving them in possession of their home, and the Credit provider still in a healthy position. This would have been a Win-Win situation for the household and the Credit provider. What has happened however, post-election, is that trillions (that’s billion billions) of dollars have been given directly to the Credit providers, who have repossessed the homes anyway. This is known as a Win-Lose! (For the latest in this see http://www.infowars.com/max-keiser-prosecute-the-bankster-crime-syndicate). This makes the words of Thomas Jefferson, penned in 1776, quite prophetic. He wrote:

“I believe that banks are more dangerous to our civil liberties than standing armies. If the American people ever allow the private banks to control the issue of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them [the banks], will deprive the people of all property until their children wake up homeless on the continent their fathers conquered”.

Futhermore, John Adams also wrote, in the late 1700′s, that:
“All the perplexities, confusion, and distress in America arise, not from defects of the Constitution, not from want of honor or virtue, so much as from downright ignorance of the nature of coin, credit and circulation.“
This is just as applicable to South Africa today. I wonder how many people even know where money actually comes from. If you think its the Reserve Bank I strongly suggest you Google “where money comes from”. Do it, even if you think you know!
It is clear that Credit providers are just like drug-pushers, tempting those “ignorant of the nature” of the drug into using them, thus creating a dependency on the substance such that life becomes unbearable without it. Given that it is impossible for 98% of South African household’s to buy a home for cash, because the prices have been artificially inflated due to Credit, how else does one get a home without using Credit? Renting a home serves only to fuel the problem, concentrating the ownership of homes in hands of those who are either insanely wealthy, by fair means or foul, or those who can still access credit. In addition, Supply & Demand theory pulls in again, this time increasing the level of rental prices due to increased demand for rental properties, thus leaving some households behind, again. Someone always loses, just like with drugs. The drug lord gets rich and the user gets their life destroyed! To further illustrate the point, in testimony to the recent Enquiry into Banking Charges, ABSA Bank (a provider of Credit) stated:
“Credit cards are necessary because Credit cards enable cardholders to make larger purchases than would otherwise have been the case”! (Banking Enquiry Report Pg 315)
And, the conclusion of the Enquiry Panel, on Credit cards, was

“Like a mirage, the interest-free period serves as an attraction to those credit card users who prove unable to repay timeously, and who are thereby more easily drawn into high-interest bearing debt”. (Banking Enquiry Report pg 347)
The inescapable conclusion from this is that Credit, like drugs, should be deemed a controlled substance, to the point of becoming an illegal substance. The entire economy needs a massive “reset”, to remove the artificial increase in prices brought about by Credit. This will force an immediate decrease in prices as no household will be placed at an artificial advantage through the application of Credit, thus allowing all households to compete equally for resources and thus allowing households to “live within their means”. This does not contradict Capitalism. Some will always have more than others, be it through demanding a higher salary as a result of higher intelligence or better education, or through the creation of new products through innovation, that households will demand. The difference is, that there will be no Credit providers to “push” their toxic products on unsuspecting households, enslaving them and creating a yolk and burden for the households from which it is impossible to escape.

Banks are Just Another Supplier

Maybe I am missing a point somewhere, but the more I think about it, the more I feel that banks are highly overrated. Aristotle wrote “It is the mark of an educated mind to be able to entertain a thought without accepting it”. So allow yourself entertain this thought for a while.

I am not alone in this conviction. Thomas Jefferson wrote “I believe that banks are more dangerous to our civil liberties than standing armies”. My statement that they are overrated suddenly doesn’t seem quite so extreme! So, before we consider whether they are more dangerous than standing armies, let’s consider for the moment why I believe they are overrated.

During my twenties I became in awe of the banks. In all the companies I worked for and with, The Bank was held in high esteem, this all-powerful, almighty institution without which the company would “sicken and so die”. So, approaching the end of my twenties I thought I should go and work for one. Ten years and three banks later, as I approach the end of my thirties, I have come realise that there is “much ado about nothing” when it comes to the banks. That they are strategic to a company is without question, but they are certainly not all-powerful and almighty. I feel like ranting on like an Evangelical Preacher, crying something like “I have travelled into the heart of the beast, and found him wanting”! Where they are not wanting however, is in their ability to avoid competition, without being declared a monopoly. The recent Jali Commission of Enquiry into bank charges found “SA banks operate as a tightly knit oligopoly that maximise profit by avoiding outright price competition”.

They are aided in this endeavor by their customers, especially their corporate customers, who are reluctant to take them on, most probably being in awe of them, as I was. The reality is however, that a company’s banking partner should be dealt with like any strategic supplier. It is important in the first instance to remember that a bank has products it must sell, just like any supplier. Further, it is important to remember that the Relationship Manager, or should I say salesman, from the bank has sales targets just like any salesman from any of your suppliers, and this gives you leverage. Furthermore, it’s not as if his products differ significantly from his competitors’. Should you not take that loan, structured finance deal, overdraft, credit card, etc from him, he will not meet his targets and will not get his sizeable bonus, and consequently won’t be able to make that addition to his house at the coast. The point is that he is personally motivated to do business with you, regardless of the cold and impersonal nature of the organisation he works for. So the first thing you, the buyer, needs to dispatch, is your fear that somehow you will bring the company to its knees should you upset the bank. They need YOU.

Once freed from this fear, you should pursue control over this buying decision like you have over all the other categories of spend you have fought so hard to gain control over. Choosing a financial service partner is no more complicated than choosing a partner to supply that all so important component of your manufacturing process. I am certain that the procurement department at a cell-phone manufacturer is instrumental in sourcing the highly complex electronic chips that make their products work. Why not therefore then get involved in choosing the financial service partner that will assist in making the payment to the supplier possible? After all, the electronic chips are without a doubt more relevant to the strategic competitive advantage of the company than the bank is.

More than the selection process, it is even more crucial that, having selected a financial services partner, that partner is required to sign a Service Level Agreement. I can state with absolute certainty that not a single one of the readers of this article works for a company that has a signed SLA in place with its bank. This is not surprising. I have tried to recently to implement an SLA for one of my customers for their Corporate Card program. Being the respectful chap that I am, I sent the bank a draft of the agreement for their perusal and comment, which happened to include their logo along with my company’s logo and the client’s logo. It was after-all a tri-party SLA. At first the bank in question just ignored me. Then they sent me legal papers accusing me of breaching their copy-write by including their logo. So I removed their logo and resubmitted the agreement. They carried on ignoring it, and even tried refusing to talk to the client if I was present. I have heard that there are only two types of emotion, Fear and Love, and every other emotion is just a derivative of those. Well, I’m not “feeling the love”, so the question is “what do they fear”, from either the SLA, or me? I can guarantee that there is not a procurement professional out there that would hesitate to bind any strategic supplier to an SLA, or strategic supplier that would submit to one, so why not the bank?

As procurement professionals you will know, that even when you may lack bargaining power, which incidentally with the banks you DON’T lack bargaining power, you are still the Customer and therefore may still demand certain things. A commitment to Service is not unreasonable. Ironically, it was a bank president, B.F. Harris, who stated “Show me the businessman or institution not guided by sentiment and service; by the idea that he profits most who serves best and I will show you a man or an outfit that is dead or dying.“

So, why then do we, as procurement professionals, not become engaged in this decision? Perhaps it is linked to what John Adams wrote to Thomas Jefferson in 1787; “All the perplexities, confusion, and distress in America arise, not from defects of the Constitution, not from want of honor or virtue, so much as from downright ignorance of the nature of coin, credit and circulation”. Sadly, 222 years on, there is still much “ignorance of the nature of coin, credit and circulation”. However, as procurement professionals you will know that you don’t need to be an expert in the subject matter of the item you are procuring, to procure it. Isn’t that what Sourcing Teams are for? Why not convene a Financial Services Sourcing Team comprising the Finance Director, a Financial Manager and a Procurement Specialist? How is this different to sourcing complex electronic chips? That sourcing team would include the Operations Director, an engineer and a Procurement Specialist.

Greater minds than mine have pondered the position and relevance of banks to society, and none less so than Thomas Jefferson, who also stated “If the American people ever allow the private banks to control the issue of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them [the banks], will deprive the people of all property until their children wake up homeless on the continent their fathers conquered”. Ultimately, it is your responsibility, as a procurement professional, to ensure that you have created the best possible means for the supply of goods and materials into your organisation. This includes following the best practices of sourcing, buying and service level management. If your organisation doesn’t follow this in sourcing its financial services (sic) partner then it cannot be deemed world class.