Last Monday, I argued that the drop in interchange fees with effect from March 16 was the biggest banking story of the year. That it was practically completely ignored by the media (save for one late-night interview on CNBC Africa) was an indictment of the sector.
In short, retailers will pay banks less when customers swipe their cards in store. How much less depends on the card, but the biggest change was the collapse of the hybrid (or ‘cheque’) card category. Now it’s debit or credit. The fixed portion of the interchange fee for (most) hybrid cards will drop 60% from 1.09% to around 0.44% (the actual range is between 0.36% to 0.52%).
The numbers seem small, but retailers are doing tens of billions of rands of transactions through their tills each month. 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) mean a significant difference.
Retailers score. Banks? Not so much.
But, if the loss to banks is R2 billion a year (as estimated by the Payments Association of South Africa (PASA) CEO Walter Volker) why have the country’s five largest retail banks (the ‘Big Four’ plus Capitec (not Investec)) said very little about this change?
It’s particularly curious why FirstRand (which owns FNB) and Capitec did not mention this change at all, given that these two banks issued hybrid cards “extensively” in recent years.
It took some digging and specific questioning from Moneyweb’s Hanna Barry to establish that the interchange reduction will result in a R300 million before tax hit for Capitec. Three hundred million rand! And yet this was not disclosed to shareholders in Capitec’s financial results announcement and commentary for the year to February 28, published on the JSE’s Sens last week.
Capitec will argue it was disclosed. It’s buried in the Chief Financial Officer’s report published on the bank’s website, but even then, the quantum of the impact is not disclosed:
“Growth in net transaction fee income in 2016 will be impacted by new rules capping the interbank and merchant fees earned by banks. These became effective on 17 March 2015. Increased transaction volumes in 2016 will offset the impact of this adjustment.”
A R300 million hit on net transaction fee income of R2.6 billion in the 2015 financial year (or even on gross transaction fee income of R3.7 billion) is not an insignificant number, it’s 12%!
Now, what Capitec is saying to investors is ‘don’t worry about that hit, we’ll make it up with volume growth in transactions in FY2016’. Any bets on Capitec repeating the 35% growth in transaction fee income in 2016? Exactly.
The only bank to provide disclosure and a quantification of the impact? Nedbank.
Again, this wasn’t done in the Sens announcement for the full year results to December 31, published on February 23.
In its presentation and full results book, the bank does disclose the impact of “selected fee reductions (R40 million) & no price increases (R195 million)” in the 2014 financial year. It calls this the “opportunity cost of no fee increases and selected reductions”.
There’s a single mention of the interchange fee reductions, buried in the 69-page full results book: “The NIR impact of the revised interchange rates, effective 17 March 2015, is estimated at R270m for Nedbank Retail assuming 2014 transaction volumes.”
That too is a big number. And, we can surely expect transaction volumes this year to increase from last year, suggesting that the impact will be closer to R300 million.
But, in Nedbank’s life, the impact on the retail business’s non-interest revenue (R8.8 billion) is obviously far lower than Capitec’s given the posted for 2014.
Transactional banking non-interest revenue in retail was R3.9 billion and card non-interest revenue was R3.2 billion. It’s difficult to fathom in which category (or categories) the interchange fees are counted, but assuming it fits within the transactional category (which commentary about “card transactional revenue” suggests), it’s still 7% of the retail business’s transactional non-interest revenue.
What’s strange is that these disclosures didn’t even get a single line reference in the commentary accompanying the two banks’ Sens announcements.
Stranger still is that the word “interchange” does not appear in any of FirstRand, Standard Bank or Barclays Africa Group financial results (all) published in March.
FirstRand earned card commission of R1.991 billion in the six months to December 2014. That’s a nearly R4 billion revenue item for the full year. Non-interest revenue in its SA retail business was around R6 billion for the half year. We also know that “point-of-sale transactions increased 17%”. But beyond that, not much more. Now, FirstRand may argue that the change will be disclosed in the numbers it produces in September for the full year (given that this interchange fee decline happened in the second-half of its financial year).
Standard Bank cites “non-interest revenue growth due to higher merchant activity” in its card business, with card-based commission (across the continent) up 16% to R5.5 billion. It’s very difficult to find South Africa-specific numbers for many categorisations in the Standard Bank results. We know that “card product headline earnings grew by 15% to R1 420 million” and that “Income growth of 16% was supported by 11% growth in average balances and higher domestic interest rates, together with increased activity by card holders and merchants.”
For Barclays Africa, there’s slightly more colour in its reporting. It says that “Retail Banking South Africa’s 18% growth in merchant acquiring turnover offset lower customer numbers and transactions shifting to electronic channels and Value Bundles.” We also know that merchant income (which “includes both rental income for the supply of point-of-sale units as well as transactional income for the transactions processed on the supplied terminals”) was R1.86 billion for the year to end December. That number does include its other operations on the continent.
Barclays Africa also tells us that, “Absa Card consolidated its position as the largest payment acceptance business in South Africa and the 61st largest globally”. And we know that non-interest income for retail banking in South Africa was R11.5 billion for the year.
There’s a fundamental problem with this lack of disclosure: PASA says the impact is R2 billion a year. Remove Capitec’s R300 million and Nedbank’s R270 million (arguably slightly higher), and you’re left with R1.4 billion. That’s an awful lot of money to “share” amongst the remaining three banks. Any bets on whether there’s a R500 million-plus hit lurking?
The sad truth is we’re unlikely to see full disclosure of this impact even in this current year’s numbers.
Do the banks honestly not consider this material?
* Hilton Tarrant works at immedia.
** He owns FirstRand shares, acquired in July 2011.