National Credit Act

1. National Credit Act National Payment System Gabriel Davel November 2006

2. To address … • NCA & NCR Mandate, re competition issues • Payments processing & small value transactions, impact on low income consumers • Preferential payments processing • Since intervention re preferences, all problems solved ? • Conclusion

3. A. National Credit Actmandate re competition issues S13: Regulator responsible to monitor, support • Competitive, efficient credit market; Credit availability, price and market conditions; market share, market conduct & competition; access to credit; other matters relating to the credit industry S15: Referral to the Competition Commission • concerns re market share, anti-competitive behaviour or conduct that may be prohibited in terms of the Competition Act S18: Report on • market practices re consumer credit; implications for consumer choice and competition in the consumer credit market;

4. B. Impact of cost of payments processing on small transactions Why is pricing in, & access to payment systems such an issue ? • Fixed transaction cost on small transactions makes small loans inherently expensive • Mass payment processing brings efficiencies which can benefit consumer • Rent seeking behaviour by gatekeepers neutralizes this benefit, adding costs • Gatekeeping manipulate access to ‘essential infrastructure’, keep potential suppliers out of market, reduce supply of credit, reduce innovation  increase cost of credit & reduce access to credit

5. Implications People discouraged from saving, using credit more than appropriate Insufficient small cash savings = use credit to finance household emergencies & even anticipated expenditure Major reason why savings returns so negative is the impact of bank charges, with debit order rejection fees having a particularly severe impact Example 1: Savings accounts & return debit fees Competition in SA Banking, 2004 & MFRC

6. Example 2:Return Debit Order Charges • Range of Return Debit Order Charges: R35 to R50 (used to be in a range of up to above R100) • Impact on cost of savings:- Rates of -12% to as high as -43% • Any relation to the cost of processing the return debit order ? • Product subject to competitive pressure ? • Regulated cost plus pricing more appropriate ?

7. Example 3:Impact of transaction & transfer fees Competition in SA Banking, 2004

8. C. Preferential Payments Processing Agreements between banks & others, for preferential payment processing • Processing transactions in favour of particular parties prior to others • Beneficiaries: banks, micro-lenders, insurers, others • Processing own transactions prior to others Abuse by banks of responsibility in managing payments system, undermined neutrality & integrity of system

9. Impact upon the market of such preferences • Incentive for reckless credit extension & over-indebtedness • With preference, significantly reduced risk of default … if loan over-extended client, someone else will carry loss • Increased risk for competitors, responsible credit grantors withdrawing from market • Reduced supply of long term finance • Increased cost of finance • Reduced innovation

10. Legislative intervention re preferences = Consequential amendment to NPS Act, prohibiting preferences, protecting access to payment systems at equal terms = Prohibition of contractual preferences in the National Credit Act (90(2)m+n)  Problem should be largely addressed

11. D. Given that preferences are prohibited, is the problem solved ? • The changes that were introduced should make a huge difference (addressed Recommendation xiv of Falkena Report) • Yet, significant recommendations of the Falkena Report not addressed, e.g. • Interoperability & access of 2nd Tier banks ? • Regulatory intervention based upon EU’s “E-Money Directive”, allowing greater participation by non-bank institutions

12. Why is non-bank participation important… relevance of payment system ? • SA has huge challenge in terms of access to finance in areas such as Low Income and Township Housing and SME Finance • Banks clearly a huge role to play, but specialist institutions outside the banking sector, frequently better able to reach specific clients groups, or provide specific products • Effective, low cost distribution and collection of monies is a key in any of these innovations. • Should not be necessary for new entrants, new innovations to have to partner with a bank, in order to gain access to payment infrastructure !

13. Conclusion • Recognise that the NPS is a national asset, of huge value to the country • Impact of instability or failure huge: NPS process R54 trillion per year (R4,5trillion per month), GDP turned over 33 times in the NPS (Daily/ annually), the (per PASA) Caution required in any intervention !

14. Thank You !