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As the new Discovery Bank hits the market on Wednesday and four more newcomers ramp up operations, a recent World Bank report has found that South African banks can do more to provide access to financial services and to be more competitive.
The Treasury asked the World Bank to assess whether the financial sector had “fostered access to new entrants and innovative offerings to assist inclusion”.
Their findings released in June can be summarised as 'good, but much more can be done'.
“For customers who do not maintain a significant balance on which they can earn interest to offset costs, the pricing of the major banks' offerings is similar to that of their main commercial competitor in the lower-income bracket,” says the report.
It adds that, “Pricing bundles appear intended to drive customer behaviour away from branch and ATM services to electronic channels. However, at this level of the market, there remains a great propensity to transact in cash.
“Relevant account offerings are likely to become much more expensive for low-income individuals if they make use of branch or ATM services. Charges for using such services are significant.” And, the report notes that bank costs can soak up to 10% of the income of poor homes.
“Reluctance to use electronic channels may also be driven by other circumstances and by communication costs.”
The report is critical of the complexity of account offerings as it makes comparisons difficult. At the middle end of the market, the report finds that too many complicated choices make comparisons difficult.
“Structural complexity and differences in the content of the major banks’ bundles, and in each bank’s individual transaction pricing make it difficult for a retail customer to undertake a meaningful comparison of each bank’s offering.
“Even where banks had undertaken recent product reviews, they tended to retain complex pricing.” And, banks are not really competing on price.
“Overall pricing between the major banks’ core bundles is relatively close and higher than some competitor offerings,” says the World Bank.
The critique that overly complex products make it difficult for customers to compare costs is a problem across account types from transactional to fixed deposit accounts. In addition, the researchers from the World Bank found that there is legal uncertainty about whether or not general consumer protection legislation covers transactional and fixed deposit accounts.
On the question of how easy it is for customers to know what they are signing up for, the World Bank finds bank legal documents a fog of legal jargon.
“Despite some progress, the language used to articulate terms and conditions in customer agreements remains dense and laden with legal terms and jargon. There is a wide variation in how banks describe interest rates on fixed deposits.”
And, most banks do not provide documentation in the language of their customers.
“Most customer-facing produce documentation is available only in English and Afrikaans, despite the fact that 77% of adults speak another language as their main language at home. This has implications for customers’ understanding of the features and pricing of transactional accounts and fixed deposits.
And, while the banks have poured money into developing fee calculators, we are not using them.
“Industry-led efforts to provide fee calculators to help customers compare products appear to have been largely ineffective.”
The report is also critical of how banks engage their customers. In an age of data, there is almost zero human appraisal or consideration because staff are measured on targets.
“Quantitative sales data remains a key component of compensation metrics for frontline staff though several banks have recently introduced 'quality' sales measures.
“Frontline sales staff often rely solely on income-based account eligibility criteria to guide consumers toward certain products.”
The report also finds that banks are still imposing “potentially unfair fees” and it is critical of the practice of granting temporary overdrafts or “shadow” credit limits. The researchers also found that “in their account terms and conditions, banks retain extensive unilateral rights to make changes to fees and charges and other terms”. It also raised critical commentary on the availability of bank account statements and on how easy (or not) it is to switch accounts.
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