The Competition Commission Enquiry

1. The Competition Commission Enquiry Presentation by the Absa Group30 November 2006

2. The heart of the matter South African banking is competitive The South African payment system is world class and accessible Absa customers get good value for money Absa is playing a meaningful role in developing South Africa Absa’s plans and recommendations

3. Absa in a dynamic market • Market developments since 1994 • 1994 formation of Absa • 1995 large number of new banks registered • 1997/98 emerging market crisis • 1999 Nedbank attempted takeover of Standard Bank • 2001/02 A2 Banking crisis and Saambou failure • 2004 emergence of niche banks • 2005 Barclays acquires 56.6% stake in Absa • 2006 increasing international interest in South Africa • Evolving stakeholder focus • AsgiSA • Corporate Social Investment • Civil society needs • Consumer demands

4. Increasing competition • Increasing competition from smaller banks: • African Bank • Capitec • Postbank • Increasing competition from non-banks: • Pick ‘n Pay (Go Banking) • MTN • Virgin Money • SAA and Kulula • Mercantile Bank • Wizzit (SA Bank of Athens) • Sasfin • Edcon, Woolworths, Clicks • Shoprite/Checkers • Discovery • Vodacom Absa is a national full service bank competing with other national full service banks, as well as niche players. Niche players are able to be selective and do not provide complete solutions to the full spectrum of consumer needs

5. The changing role of banks: Beyond transactions and credit to development • The core business of banks in development: • AsgiSA and Financial Sector Charter • Enabling personal capital formation • Financing small business • Funding development • Supporting society: • Social investment • Absa provides consumers with value • Choice • Convenience • Security • Affordability • Absa Black Business Incubator Fund – R250 million exclusively for the advancement of black entrepreneurs • Thembani International Guarantee Fund – assists customers who are unable to provide security to banks • Expanded Public Works Programme – increases capacity in the labour intensive construction sector • Female Farmer and Youth Farmer of the Year Competition – promotes participation in agriculture

6. The South African Banking and Payments System is Competitive

7. Why is it important that South Africa has a world class financial sector? • The financial sector underpins economic growth and social development • A world class banking and payments system is as important to a grandmother in Tshikondeni, Limpopo as it is to an investor in New York City • The benefits of a world class banking and payments system: • Brings down cost of capital and money • Foreign Direct Investment and better country risk ratings • Facilitates economic growth • Enables economies of scale • Leverages cutting technology to the benefit of all The world class, sophisticated and accessible banking system in South Africa resulted from the competitive response of banks to the regulatory environment and market demands

8. Regulatory environment evolving rapidly, protects consumers and promotes global standards • Financial Intelligence Centre Act • SARB Vision 2010 • National Credit Act (NCA) • Dedicated Banks Bill • Home Loan and Mortgage Disclosures Act • Cooperatives Banks Bill • Second Hand Goods Bill • Regulation of Interception and Provision of Communication Related Information Act • Sector specific oversight: • South African Reserve Bank (SARB) • Registrar of Banks • National Payments Systems Act • Financial Advisory and Intermediary Services Act • Code of Banking Practice • Financial Sector Charter • Comprehensive general regulatory framework: • Consumer Protection Bill • Electronic Communication • Telecommunication Act • Privacy and Data Protection Act Compliance with South African and international regulatory developments drives sophistication in banking through vigorous and comprehensive regulatory oversight, but it comes at great cost

9. The NCA will change the dynamics of the market • Prior to NCA, large number of providers of credit • NCA • From 1 June 2007, total cost of credit will be clearly regulated • Total cost of credit is the total cost of a lending transaction faced by a client which includes fees and interest charged. Banking affordability is about more than just fees • Absa’s total cost of credit to customers compares very favourably with the rest of the market • Provision of credit to consumers tightly regulated – including: • Level of fees • Transparency • Form of agreement • Oversight by National Credit Regulator with significant powers • Products regulated will include mortgages, asset finance, credit cards and personal loans Certain competitors providing lending services to the low income market at a total cost of credit approximating 200% on an annualised basis

10. Competition drives innovation, performance and access • Products and services that resulted from competition: Cellphone and Internet banking • Cellphone banking • Absa first to market in August 2000 • Absa innovates again: First to market with WAP Cellphone banking in February 2006 • Absa Cellphone banking free since October 2005 • Only FNB followed with free Cellphone banking in Q1 2006 (3 month limit) • Internet banking • Absa first to launch limited Internet Banking service (enquiries and statements only) • Competitors followed with transactional capabilities • Absa launched free Internet Access to promote Internet banking take-up • Absa launches transactional service with market leading security offering • Free Internet Access evolves to low cost paid service • Absa now offers most affordable Internet Access in South Africa • Absa now offers the most affordable Internet banking in South Africa • In a comparative analysis done in 2006 by the Online Banking Report (based in Seattle, USA), Absa's online services was rated the best in South Africa and comparable to the best of breed internationally

11. Competition drives innovation, performance and access • Products and services that resulted from competition: ATM development • ATMs • ATMs originally only found at branches • ATMs placed in shopping malls • Through independent operators at service stations • Partnerships with retailers • Shoprite/Checkers • Today Absa is the market leader in ATM service offering • Multi language recognition • IEC (Independent Electoral Commission) voter registration • Eskom prepaid electricity • Virgin Mobile prepaid • 6 776 ATMs countrywide makes Absa clear ATM leader

12. Competition drives innovation, performance and access • 100 Internet kiosks • 175 self service kiosks • 30 cash acceptors • 2 300 ZOK containers • Retailer outlets • Access served by expansion of footprint: “Click, call or come-in” • R698million invested from 2003 to 2005 • R424million invested in 2006 • R513million total investment budget for 2007 • 8 traditional brick-and-mortar branches • 10 micro-loan centres • 30 portable branches • 1 student lifestyle centre • 2 small business centres • 375 ATMs • Absa is also in the process of introducing and rolling out similar innovative channels into its African businesses • Currently between 60-70 percent of Absa’s footprint is in previously disadvantaged areas • Absa continues to grow its footprint in previously disadvantaged areas

13. Access to theNational Payments System

14. Topics related to the National Payments System and ATMs Bankserv Interchange fees Sorting-at-source SASwitch interchange Issues related to the National Payments System are the domain of SARB. The SARB has and should lead the discussion of these issues

15. Bank utilities benefit consumers: Bankserv and SBV • Bank utilities provide economies of scale thereby reducing cost of banking • Promotes further investment and innovation in national core banking systems • Bank utility profits are re-invested in new projects to decrease cost for all consumers. By example the dividends from Bankserv to Absa over the last years are: • 2004: R1.75 million • 2005: R2.05 million • 2006: estimated R3.0 million

16. Interchange fees • Interchange fees on debit and credit cards help cover the costs and risks of issuers in relation to card issuing. These payments enable issuing banks to reduce cardholder fees and to increase cardholder benefits • Retailers derive benefits from lower cardholder fees and increased cardholder benefits. When more consumers have cards and when the costs of using these cards are lower, the benefit to a retailer of accepting cards increases • Benefits to the merchant accepting the card: • A “payment guarantee” by the issuing bank when the card is used • Greater convenience • A line of credit • Benefits to the consumer • The costs of using a card payment instrument would have been substantially higher • This “subsidy” to cardholders encourages the use of a more sophisticated, secure and convenient payment system • The consumer chooses which instrument to select

17. Sorting-at-source Definition: the process whereby retailers and other institutions sort payment instructions and submit them directly to the bank holding the payer’s account The Bank for International Settlements describes this process as “clearing”. Therefore only those regulated for clearing can undertake this action Sorting-at-source bypasses the regulated inter-bank clearing process. South African Reserve Bank not in favour of sorting-at-source, moratorium issued and subsequently withdrawn and uncertainty remains Until SARB provides clear regulatory guidelines for sorting-at-source, Absa is unable to participate in sorting-at-source activities

18. SASwitch ATM fees • Three different elements: • the interchange fee paid by issuing banks to acquiring banks on ATM transactions • the fee paid by consumers to the issuing bank for “us on them” ATM transactions • the SASwitch fee for switching actual transactions • An individual bank does not require the co-operation of other banks to adjust its fee charged to its customers for “off us” ATM transactions • Eliminating the ATM interchange would require the co-operation of at least one other bank • Consider unintended consequences of changes carefully • Encourage further investment in ATMs

19. Absa Customers get Good Value for Money

20. From price to value • The components of value: • Choice*: product and services • Convenience*: channels, branches, ATMs, EFTs, credit cards, debit cards, cashback at point-of-sale • Security*: trust, in-branch security, cameras at crime hotspots in ATM network • Affordability**: fees, total cost of credit, densification program • Delivering value to all customers, nationally across full spectrum of consumer needs • * Non-price competition • ** Price competition Absa currently has 8 227 551 customers of whom 1 004 331 joined in the last year. Consumers clearly perceive Absa as offering good value for money and are acting accordingly

21. The components of value • Choice • Transparency • Evolved with competition • Calculator • Brochures • Absa leads (Deloitte’s research) • Selection and packages • Stand alone choice always available • Economic benefit of packages • Core products and product extensions • Customer education regarding the importance of using the correct product • FlexiSelect overdraft vs. Micro-loan • Discretionary Saver vs. Contractual Savings

22. The components of value • Convenience • Largest and widest geographical footprint of outlets in • South Africa • Largest and widest geographical footprint of ATMs in • South Africa • ZOK containers – another first in the market and a new way of bringing banking to the people in rural / semi-urban areas • Contact centres and telephone banking with instant • voice recognition • Free cellphone banking with 104 977 transacting • cellphone customers • Absa is the only bank to offer free cellphone banking to our Mzansi and Sekulula customers • Most affordable access to internet banking in the • market with 689 632 registered users

23. The components of value • Security • ATM security measures • Disaster recovery sites • Commitment to customer service: back-up power generators • Best ATM up-time in the market • NotifyMe across all transactional activities • Internet banking with the best security measures in the market • Free anti-virus software to nearly 100 000 clients with a retail rack value exceeding R45 million • Free provision of early logon alerts and one time-passwords via SMS or e-mail • EMV card technology • Absa ready to go – constrained by other banks

24. The components of value • Affordability • Over the last five years Absa price increases have been • below inflation • No increase in prices in some cases • Mzansi since inception • Small Business 2005/06 • Benefits of micro-loans: consumers with high risk profile gets access to credit to resolve urgent needs and re-establish credit record for access to other banking products • Absa has most affordable micro-loans In China and Poland an average of 3% of consumers annual income goes towards paying banking charges. Absa is 1.8% or less

25. Absa transaction account fees over time The monthly account fees to a typical customer using Absa’s principal transaction products have increased by less than inflation over the last five years

26. The Reality of Delivering Good Value

27. Delivering value for a pensioner “As a pensioner carrying money has always been a big risk. What would I do if these criminals took my bag? I wouldn’t be able to run after them. That is the reason I am so happy to have the Absa AllPay Sekulula card.” “I don’t have to go to any pay office because I know that on pension day my money will be waiting in my account.” Ms Edith Mekoa is a pensioner Edith pays zero bank fees to have an AllPay Sekulula card. Her monthly pension is paid free of charge into her account and there are no admin fees. No minimum monthly balance is required. Pensioners can conveniently access their pension wherever they are. In addition pensioners using Sekulula Absa AllPay cards get two free transactions (inclusive ATM or point-of-sale) each month (e.g. Ms Mekoa can buy groceries and/or withdraw money from an ATM at no charge each month) Additional transactions are charged on card usage

28. Delivering value for a cost conscious new entrant When Mr Bhekisani Mtshali, a taxi owner tried to open an account, he became frustrated because of the requirements that many banks needed him to adhere to “My colleagues then introduced our group of taxi drivers to Absa and that helped us when we were issued with Mzansi accounts.” “Our first account started with a Mzansi account and we were upgraded to more superior accounts that allowed us to qualify for loans, credit cards and other benefits.” Mr Bhekisani Mtshali is a taxi owner “With our Absa credit cards we are able to pay for repairs or services and then we can pay the bank once we’ve made money.” “I wish all banks could learn from Absa and take time when dealing with the problems of many people such as ourselves who have never had a banking experience.”

29. Delivering value for a small business owner Mr Glen Ngobeni is the owner of Classique Grill House restaurant in Sisulu Square, Kliptown, Soweto 12 years ago he started a small Kota business from a freight container in Soweto As the demand for his Kotas increased he approached Absa Bank to help his businesses grow Mr Glen Ngobeni in his office in Kliptown Ngobeni is one of the first people to have been helped by Absa by receiving a small business loan Mr Ngobeni makes use of Absa’s Business Advantage Product which, for less than R10 per day, gives him access to accounting software, business and marketing programmes Mr Ngobeni’s premises are adjacent to the Absa Kliptown Branch in Soweto Within a 3km radius, he has access to 3 Absa ATMs

30. Plans and recommendations

31. Absa’s plans and recommendations Transparency: the calculator and comparative advertising Consumer education: Promote financial literacy in South Africa – contribute to SARB’s programme Continuously refine our manuals and pricing brochures in simple language Customer charter Service standards Switching code Fuel cards Internal: Training for a culture of compliance

32. Conclusion