Shamlan's Blog

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!