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The biggest banking story of the year

Banks lose, retailers gain billions a year.

“If a tree falls in a forest and no one is around to hear it, does it make a sound?”

If a significant reduction is made to the amounts retailers pay banks for card swiping fees and no one reports on it, did it really happen?

 On March 16, exactly a week ago, the fees charged to retailers by banks for debit, cheque and credit card transactions were cut. Former chief executive of FNB, Michael Jordaan noticed. And it appears no one else. Crickets.

 

 

The detail is complicated. The Reserve Bank has categorised card transactions into 12 different rates, versus three previously. Importantly, the variable rate being a percentage of the transaction remains, this change relates only to the fixed interchange rate. (And, for now, I’m largely ignoring the card-not-present rate, which relates to internet purchases.)

Before last week, there was an interchange rate for debit cards, one for cheque (or “hybrid”) cards, and one for credit cards.

The biggest change has been the collapse of the hybrid card category altogether. These cheque cards previously attracted a fee of 1.09%, whereas they now (mostly) fit into the debit card categorisation, with fees ranging from 0.36% to 0.52%. (This higher fee is unlikely, and the reality is most debit card (including cheque card) transactions will attract a fee of 0.44%.)

 That’s a 60% reduction.

Let’s rewind. Gareth Ackerman, chairman of Pick n Pay, spent months in 2013 arguing for a reduction in these interchange fees. In an opinion piece in the Business Times, he highlighted that “it is worth noting that interchange fees in South Africa are more than double those charged in Europe”. Of particular irritation to him was the introduction of this ‘hybrid’ card.

A cynic would argue that banks developed and offered “cheque” cards to enable them to charge higher fees for transactions that were little-different to a plain vanilla debit card swipe. In fact, a while back, it was near impossible to get a debit card from one of the major banks. You got a cheque card. At some banks, nearly half their non-credit card base is made up of cheque cards. And over all these years, banks profited on the fact that cheque cards had interchange fees double the rate of what those products actually were.

Of course the banks claimed, among other things, that customers could use cheque cards for internet transactions and that this was reason enough for the higher fee. Yeah, right.

For debit cards, interchange fees (the fixed portion) have dropped by 5% and 35%, with the rate of a typical transaction (where there’s chip-and-pin on both the card and device) dropping by 20%.

For a (similar) typical credit card swipe, there’s been a 13% reduction in the fixed interchange (with the range of the declines being between 9% and 18%, depending on the security in the transaction).

But these aren’t just percentages. This is real money that is being paid by retailers to banks to process these transactions.

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Remember that supermarket groups are doing sales through tills of hundreds of billions of rands a year. Shoprite Holdings’ South African supermarkets reported turnover of R42.867 billion in the six months to end December last year. That’s an annual run rate of over R80 billion. Pick n Pay’s SA-specific revenue was R30 billion in the six months to end August 2014.

On these numbers, you can quickly see how a 0.6 percentage point change (hybrid cards), a 0.2 percentage point change (credit cards) or even a 0.1 percentage point change (debit cards) will make a significant difference in retailers’ lives, even with not all sales being card swipes.

In its results presentation from August last year, Shoprite estimated a “reduction in fees in excess of R100 million per annum” from the last week’s change. The real number is closer to R130 million. Pick n Pay hasn’t ever published a number, but it did make the point in its 2014 numbers that it is “South Africa’s largest acceptor of electronic tender”. You can bet Pick n Pay’s reduction in fees is going to be higher than R150 million a year.

The rate drops mean that accepting cards is finally cheaper than the cost of cash.

 

And it means retailers will pay banks less. A lot less.

The figure bandied about for the annual impact is R2 billion, which means banks will earn less of what Ackerman termed in his 2013 letter “a convenient and easy source of income for banks and card companies”.

Banks have been rather quiet on what this drop in income will mean. Dig deep enough though and there are some published figures. I’ll leave that for next week.

For consumers, this means very little. It remains to be seen whether retailers will pass these savings onto us. Experiences in other markets where this has happened suggest not.

But why has this taken a decade?

Indeed, the wheels of change move slowly when it comes to the National Payments System.

The Competition Commission enquiry into banking took place nearly a decade ago. Following that, the Commission, National Treasury and the Reserve Bank embarked on a process to determine interchange rates (the Interchange Determination Project) in 2011.

Determinations were published from the two phases, with outputs in December 2013 and in March last year. The plan was to make these changes on 1 January 2015. Except, the banks squealed that the timing made no sense (what with holidays and all), and the deadline got punted along for another 10 weeks. At least it’s now done.

Perhaps the next investigation into banking fees – and yes, we’re overdue! – might move along a little more swiftly?

 We can only hope.

* Hilton Tarrant works at immedia.

** He owns FirstRand shares, acquired in July 2011.

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