Nothing gets up the noses of Personal Finance readers more than the word "bank". In fact, it seems that many of our readers regard banking as a necessary evil. Most complaints are about poor service and high charges.
But are these complaints justified?
You need to take a number of issues into account before you start slating your bank yet again. Retail banking is a complex business.
Recently, I was at a breakfast, hosted by the Cape Times newspaper in Cape Town, at which Finance Minister Trevor Manuel expressed his concerns about high bank charges, and told accountholders that they should fight for their rights.
Meanwhile, two recent reports dealt extensively with the access of low-income people to the financial services sector. This issue has a bearing on bank charges and interest rates. One report was published by Finmark Trust, a trust established by the British government's Department for International Development, and the other by the South African Reserve Bank.
I will not go into the details, but both reports conclude that many people at the lower end of the income scale do not have access to banking facilities. The reasons range from the costs of bank accounts to how far they live from a banking facility - the high cost of transport to the facility.
Finmark Trust concludes that an important factor in overcoming poverty is giving people access to the four basic types of retail financial service: transaction banking, savings, credit and insurance. Currently, about 20 percent of South Africans enjoy this level of access.
The research done by Finmark Trust and the Reserve Bank comes against a background of government concern that the banking industry is not doing enough to address the needs of the unbanked or under-banked.
It is an issue that is receiving significant attention at the National Economic Development and Labour Council, the debating chamber set up for government, organised business and organised labour to find common cause on macro-economic policy.
I recently read that people were closing their bank accounts because of high costs, and that shares in the banking sector were performing poorly. The conclusion reached by some of the investment analysts quoted in the reports I read is that the prices of bank shares, although low, are fair, because the current levels of bank profits are not sustainable - one of the reasons being accountholder resistance to fee increases.
Profit squeeze
Stephen Mildenhall, the chief investment officer at successful investment house Allan Gray, says fees and charges are carrying the profits of banks, and the banks will not be able to push the fees and charges much higher because of customer resistance. Thus, their profits will have to be restrained in future. If bank profits continue to increase at their current rates, a breaking point must be reached at which clients will really start to rebel, Mildenhall says.
As a result of the ongoing complaints we receive from readers and the reports I read, I sent the banks a series of questions about their charges and service levels.
Judging from the research and the claims of the banks, there does not seem to be evidence that people are closing their accounts because of high charges and/or bad service.
The Reserve Bank's analysis of the banking system refers to research conducted by marketing information company AC Nielsen, which shows that the total number of people with bank accounts increased from 7.8 million in 1996 to 11.2 million in 2001.
However, the rate of increase in new customers does seem to be levelling off, and most additional account-holders are coming from the lower income end of the market. At the top income levels, it is clear the banks are dealing with a saturated market. The only way banks can grow is by signing up more people in the lower- income brackets.
For some years, most banks have operated subsidiary companies or provided low-service/low-cost accounts in an attempt to attract lower-income clients. But even these services are too expensive for many low-income earners.
What, you may ask, have people with little or no money got to do with bank charges? Quite a lot currently - and even more in the future, I think.
As the government puts pressure on the banks to make banking more readily available to lower-income people, the question must be whether the banks will have to (or be able to afford to) increase their cross-subsidisation of charges? And whether middle-income accountholders will have to foot the bill?
The banks have already burnt their fingers badly by providing homeloans to the lower-income market, so they will be cautious when it comes to lending to the low-income group.
However, on the flip side of the coin, it appears that although lower- income earners may only be marginally involved in transactional banking, they are definitely key players in the credit market.
What is interesting is that most of the borrowing done by the lower income group is from what the AC Nielsen research terms "loan sharks". If "loan sharks" can make money in this market, the question must be why the formal banks have not had similar success?
Charges and interest rates
Tom Boardman, the head of retail banking at Nedcor, says that news-papers such as Personal Finance and complaining clients only look at one side of the equation when dealing with bank charges, particularly when making comparisons with the situation overseas.
Banks make their money from transaction charges, by charging interest on loans, and on the difference (margin) between the interest rate at which they borrow and at which they lend.
Boardman says that, compared to accountholders in foreign countries, South Africans may pay more in charges, but when we invest or borrow money, we are getting better rates than people in other countries.
He says the average difference in interest rates between what people pay when they borrow money and what they receive when they invest money is between three and 3.5 percentage points in South Africa, as opposed to up to five percentage points in foreign countries.
However, this is not generally the case. Research done by First National Bank (FNB) shows that the position varies from country to country.
Michael Jordaan, the chief executive of FNB Customer Solutions, says you can expect to pay more in charges in future if current trends continue.
Jordaan says for most South African banks, non-interest income from fees and charges represents about 50 to 55 percent of total income.
He says that in 1999, non-interest income for commercial banks in France represented 67 percent of profits. In Canada, it was 53 percent; in Sweden, 56 percent; in the United Kingdom, 40 percent; and in the United States, it was 43 percent.
"In almost every country in the world, non-interest income is a growing percentage of bank profits. Estimates are that by 2005, nearly 60 percent of banks' revenue worldwide will come from non-interest income."
It is clear, however, that the wealthier you are and the bigger your bank account, the more weight you have when it comes to negotiating both charges and interest rates. Although the banks say their charges are based on the cost of providing services, you can be sure - as with interest rates - that if you do not have financial muscle, you will pay more than a wealthier customer - and considerably more than a corporate client.
Consumer resistance
Louis von Zeuner, the group executive director at Absa, says I am wrong in assuming that bank charges are driven by shareholder pressure to increase profits.
He says increases in bank charges are limited to between six and eight percent a year, and these increases are less than inflation. One of the factors leading to increased charges is the rand/dollar exchange rate, because it significantly influences the cost of importing the technology the banks use to run their systems. (Hopefully, we will see a reversal in spiralling charges now that the exchange rate has gone the other way.)
Von Zeuner also firmly dismisses any suggestion that the banks follow one another in increasing charges and introducing new ones.
"The fact that there is parity between banks regarding bank charges reiterates that banks are unable to provide specialised services free of charge, and is indicative of the bottom-line costs the banking industry needs to charge to enable it to render specialised services and to remain in business. In the end, it is a matter of paying for specific services and transactions," he says.
Charles Chemel, the director of retail banking at Standard Bank, says banking in South Africa is fiercely competitive. Claims that all banks are the same are not valid. There are distinct differences between banks' products, pricing, distribution and service levels, Chemel says.
Von Zeuner rightly points out that banks are not charities.
"Banks rely on their products and services to generate profits. Most South African banks deliver the same kind of services, and the competitiveness of each bank lies within the quality of services and products, while remaining cost-effective. As a public company, Absa has a responsibility to show profits to satisfy its shareholders," Von Zeuner says.
Bank smarter
Jordaan says consumers should also get smarter at managing their accounts and charges.
"Time and again in our research, we have seen that while customers complain they are paying too much, they actually don't even know what they are paying! Too many customers don't even know what they are paying in bank charges, and should take some time to understand what they are paying and how best to save on costs," he says.
Chemel, however, does not entirely agree. He says pricing has become more transparent and clients are more aware of costs.
"We have made a concerted effort to simplify our pricing structure and to better communicate this to our customers. Customers have been made far more aware of the choices available to them," he says. "In fact, our research shows that customers now have a better understanding of pricing and to support this (contention) we are receiving far fewer complaints about pricing. In addition, our annual fee increases this year were, on average, below the inflation rate."
Chemel says South African banks need to strike a fine balance between risk, cost management, service provision and innovation in order to survive and remain profitable. Local bank margins are very much in line with international standards.
"Our cost-to-income ratio also compares favourably with international norms, notwithstanding a relatively distorted demographic and income structure in the country," he says.
The heat is on
My view is that banks are between a rock and a hard place. They will come under immense political pressure to provide affordable banking to the unbanked (which will cost money initially, but should pay dividends in the longer term). Banks are already under pressure to keep producing improved profits for shareholders (of which you are probably one, either directly or indirectly through your personal savings or retirement fund). Meanwhile, there are very few additional "profitable" clients out there that the banks can sign up.
Part of the free market system is that you, the consumer, are entitled to be in an adversarial position with any service or product supplier (I don't mean you can assault your bank manager!) and demand more for less money. So take Manuel's advice and demand better service from your bank at lower prices.