Banks are raking in between R500 million and R800 million a month from bounced debit orders. That’s a sizeable portion of the banks’ non-interest fee income each year for little more than running a piece of computer code.
Fees for bounced debit orders range from R5 for Capitec clients to R150 for Absa and Nedbank clients. The question arises why the fees vary from the reasonable to the ridiculous.
It’s a question bank customers in Australia, New Zealand and the UK started asking several years ago, leading to class action suits against the banks in these countries. The class action suits in the UK and Australia failed because the courts found the fees for bounced debit orders and other charges reasonable if they formed part of a basket of services. SA’s financial regulations are less prescriptive, so the chances of a class action suit succeeding here are much better, according to financial services legal consultant, Leonard Benjamin.
The Competition Commission investigated banking charges several years ago and recommended capping bounced debit order fees at R5 per item. “We have no reason to believe that, currently, banks would be unable fully to recover their costs ordinarily incurred in respect of rejected debit orders within such a cap,” concluded the Commission. “Such a cap should be imposed by regulation. It should apply to both savings and current accounts, and to ordinary as well as early debit orders. Banks, which incur additional expenses or losses in particular cases through their customers’ default in respect of debit orders, can terminate those customers’ accounts and/or sue for damages.”
Benjamin, a former national judoka who trained in martial arts in Japan before becoming a senior legal advisor to financial services companies, says the banks (with the exception of Capitec) failed to implement the recommendations of the Competition Commission because it is a cash cow. “We know that about 10% of the 33 million debit orders processed each month bounce for various reasons, usually insufficient funds. Customers are then charged sometimes more than R100 for reversing a single bounced debit order transaction. If there are multiple bounces, the fees can run much higher than this. The banks claim these are penalty charges intended to promote more virtuous behaviour by clients, but the effect is to further drive the client into financial difficulty, making it more likely their debit orders will bounce the following month. It’s great business for the banks.”
Benjamin estimates fees from bounced debit orders alone range between R6 billion and R10 billion a year for the six largest banks. That’s not counting fees for debit orders that are processed successfully. Non-interest income for the six largest banks came to about R120 billion last year, so the debit order bounce business is not something they are likely to give up without a fight.
According to the Payments Association of SA (Pasa), 33.5 million “normal” debit orders are processed each month, and a further 14.7 million so-called “early” debit orders.
Benjamin started to look into debit orders when his wife was the victim of a fraud. Illegal debit orders were being run through her Standard Bank account for the benefit of three “service providers” named as HotspotteryYD, PHOB YD and Somu YD. When she contacted the bank, she was informed that several other clients had suffered the same fate, but that there was nothing the bank could do, as more than 40 days had elapsed since the debit orders were processed.
Benjamin’s wife then escalated the matter to the bank’s Complaint Resolution Department, which stood by its position that 40 days had elapsed since the debit order was processed, so there was nothing it could do. For future debit orders, however, it could assist her at a cost of R52 per item, provided she visited her branch two to three days prior to the debit orders being presented. And if she wanted help in tracing the company presenting the fraudulent debit orders, it would be happy to so for a tracing fee of R26 per transaction.
In a written response to the query, the bank replied that it “merely fulfills the function of payment facilitator…. A debit order is an agreement between the accountholder and an external company in which the customer would authorise such service provider to debit an amount from his/her bank account. The debit order is not a contract between you and the bank, and the latter is not a party to the agreement at all.”
In terms of the rules of the Payment Association of South Africa, if a customer disputes a debit order after 40 days, the customer’s bank is required to give the bank presenting the debit order (the sponsoring bank) 30 days’ written notice to prove the validity of the transaction. If the sponsoring bank does not respond within 30 days, the funds must be manually returned to the customer’s account.
Incensed at the bank’s apparent refusal to abide by Pasa rules, Benjamin took the matter up with the Banking Ombud, who exonerated the bank of any maladministration. Standard Bank eventually refunded the fees charged as a “gesture of goodwill”.
“The main difficulty that consumers experience once a bank refuses to refund debits is that the amounts are relatively small so instituting legal proceedings, even through the Small Claims Court, to recover the amounts unlawfully deducted from their bank account is not viable. Under those circumstances, the Ombudsman’s office is a final resort for many customers, so it is imperative that it holds the banks accountable,” says Benjamin.
With as many as 1 million debit orders being disputed each month, this means the banks are having to resolve around 40 000 disputes a day. “The industry is clearly overwhelmed and as a result resorts to obfuscation and misdirection,” he adds.
The tendency of South African banks to charge a fee for almost every service associated with a bank account sets them apart from banks in many other countries, according to the Competition Commission inquiry into banking.
The findings further state: “We find that pricing decisions of the banks are driven by a number of considerations but are generally constrained only by what the customer will bear.”
The Banking Association referred questions concerning the industry’s lack of action on the Competition Commission’s findings to Pasa, which referred the same questions to the individual banks.