ATM Hearings with the Competition Commission

1. ATM Hearings with the Competition Commission April 2007

2. Contents 1 Current ATM Model 2 Explanation of Applicable Fees 3 Zero SASWITCH Fee Model 4 Direct Charge Model 5 Cashback at Point of Sale

3. Current ATM Model

4. Fees applicable to the Current ATM Model

5. A bank offers its customer additional service of using another ATM provider’s network – acquiring bank compensated for use of infrastructure • Otherwise off-us transactions will not be offered, leading to inefficient duplication of networks • Carriage fee for off-us transactions subject to bilateral negotiations, constrained by a range of substitutable transactions • Currently no impediment to competition • Nevertheless, FRB believes that alternative arrangements for off-us transactions could be explored The Role of the Carriage Fee

6. Cash withdrawal fees important in recovering costs of providing overall product • Discounted rate on lower withdrawals stimulate demand • Wider usage of ATM network allows costs to be recovered via lower average fees • Fee structure balances simplicity and encourages participation • Prices determined at product level but constrained by market dynamics The Role of Banded Withdrawal Fees

7. Carriage fee is paid to the acquiring bank by the issuing bank for use of their infrastructure The customer fee comprises only the ATM cash withdrawal fee paid to the issuing bank Alternative Model: Drop SASWITCH Fees

8. Pros & Cons – Drop SASWITCH Fees Pros Cons • Reduced direct cost to consumers • Challenges of setting the carriage fee remain • Simplifies ATM pricing • May reduce incentives for interoperability • Encourages efficient utilisation of ATM networks by consumers • May lessen price transparency • More attractive ATM offering to consumers

9. Alternative Model: Direct Charging The direct charge model will result in no Saswitch premiums charged to the customer and no carriage between banks The customer will pay a fee determined by the ATM provider for each transaction performed on their ATM

10. Pros & Cons – Direct Charging Model Pros Cons • No need to negotiate fees bilaterally • New costs will be incurred by ATM providers • Direct price competition amongst acquirers • Difficulty in predicting changes in customer behaviour and prices • Increased access to ATMs for consumers • May require significant customer education • Additional ATM functionality could be offered • Commercial & technical difficulties in rolling out direct charge model • Greater transparency of pricing at point of transaction • Operates in a number of countries

11. Cashback at Point of Sale

12. Overview of Cashback at Point of Sale Transactions • Transaction performed using a debit card at a Point of Sale device at various retailers • For FNB, cashback at POS carriage fees flow from issuer to acquirer as with ATMs • Uses existing POS infrastructure • Fee arrangements negotiated between the acquiring bank and the merchant based on overall deal economics • Rollout partly determined by retailers’ demand

13. Summary • The current ATM model is competitive • Cannot look at transaction costs and revenues in isolation • FRB has looked at alternatives to the current model • Dropping SASWITCH reduces direct cash withdrawal fees to consumers • Direct charging removes the need for carriage fees While there are pros and cons to each model, the objective is to improve the market overall

14. Appendices

15. Overview of Mzansi Accounts • Mzansi joint initiative between banks under FSC guidelines – offer cheap transactional banking to low income customers • ATM and other transaction fees discounted • No SASWITCH premium for ‘off-us’ withdrawals • Improve efficiency of ATMS in remote areas • Reduce prices to Mzansi account holders • Simple, flat fee structure which is easy to understand

16. Overview of Mini-ATMs • Deployed in rural areas with limited/no access to ATMs • Mini-ATMs offer limited functionality • Situated in retailer’s stores and utilise their cash holdings • Lower transaction volumes than traditional ATMs

17. Off-Us Customer Fees and Carriage Fees * Until bilaterals are in place

18. Centralised Costs Product House Costs Channel Costs e.g. Group Brand, Technology e.g. Mzansi, Smart & Cheque Accounts e.g. Branch, ATM, Cellphone Banking Total Costs of Running FRB are Allocated to Products where they are Recovered

19. Revenue Generating Transactions Non- Revenue Generating Transactions e.g. ATM Withdrawal Cheque Payments POS Purchase e.g. Account Opening Account Maintenance Account Closing Not all Costs can be Directly Allocated to Revenue Generating Transactions Costs

20. CEO, Brand &Finance Technology CentralSupport Branch ATM Telephone Cellphone ChequeProcessing Channels Smart & Mzansi Smart Other PersonalCheque PersonalOther SME Corporate Other ProductHouses Costs are Allocated at Product Level

21. High Negative Ambiguous net impact net impact Issuing Share Ambiguous Positive net net impact impact Low Low High Acquiring Share Potential Short Term Impact on a Bank if SASWITCH is Dropped