April 24, 2006/busrep
Two reports published last week open the way to a new banking dispensation in South Africa.
Among the major players that could trade as non-bank brands are retailers with large footprints throughout South Africa, cellular companies with vast communication networks, and insurers and microlenders, which are already providing some form of financial service and want to extend their offerings.
The Reserve Bank\'s vision for 2010, published on Friday, \"maps the strategic direction of the national payments system [NPS] after 2010\", said Johann Bence, leader of the project team that produced the paper after a 24-month debate.
A report on the NPS, published by the competition commission on Thursday, has similar implications. It looked at issues relating to the NPS that keep new entrants out of the banking sector.
One of the objectives of the Vision 2010 paper is to address the payment needs of the unbanked. To make banking more affordable, banking charges have to be reduced. And the most effective way to achieve this is to introduce more competition in banking.
To draw in more competitors, barriers to entry have to be reduced, among them the obstacles to participating in the NPS, through which all banking transactions in the economy are ultimately settled.
At the same time, the central bank, which has a legal obligation to oversee the payment system, must maintain its security and stability. If a payments system is not protected against risk, it could trigger and transmit \"payment disruptions\" - a euphemism for banking collapse.
The Dedicated Banks Bill is an attempt to extend access but contain risk. The bill, published at the end of 2004, allows for second- and third-tier banks, which undertake certain types of banking business only, to function within the payment system. \"It paves the way for the tiered banks to participate directly in clearing and settlement,\" said Bence.
The paper refers to \"development paths\" to help non-banks to become clearing and settlement banks.
\"For example, non-banks could become dedicated banks and could then be sponsored and mentored into the clearing and settlement system,\" Bence explained.
Penelope Hawkins, the principal author of the competition commission report, previously researched the potential for non-banks.
She set out her findings in a 2005 report, commissioned by advocacy group FinMark Trust, on the implications of the Dedicated Banks Bill.
Hawkins argued that the entry of retailers could improve access for the currently unbanked \"in view of their more sophisticated approach to credit management and willingness to target lower-income segments\".
And she concluded that the overall business case for retailers (but not all retailers) was strong because of \"their ability to cross-subsidise and offset the set-up cost, and the overall complementary nature of possible banking services to existing financial products\".
The outlook was less clear for microlenders \"given the uncertainty with new regulations emanating from the National Credit Bill\", she concluded. And the cellular companies \"have recently committed to alliances with existing banks and are unlikely to be early applicants\". So the most likely new arrivals will be large food and clothing retail chains.
Investec Asset Management portfolio manager Chris Steward said: \"There has been lots of talk of new entrants coming in ÃƒÆ’Ã†â€™Ãƒâ€ Ã¢â‚¬â„¢ÃƒÆ’Ã¢â‚¬Å¡Ãƒâ€šÃ‚Â¢ÃƒÆ’Ã†â€™Ãƒâ€šÃ‚Â¢ÃƒÆ’Ã‚Â¢ÃƒÂ¢Ã¢â‚¬Å¡Ã‚Â¬Ãƒâ€¦Ã‚Â¡ÃƒÆ’Ã¢â‚¬Å¡Ãƒâ€šÃ‚Â¬ÃƒÆ’Ã†â€™ÃƒÂ¢Ã¢â€šÂ¬Ã…Â¡ÃƒÆ’Ã¢â‚¬Å¡Ãƒâ€šÃ‚Â¦ But we need to have more clarity on who they might be. We don\'t know what the value proposition is likely to be. The regulatory situation is unclear and the infrastructure is highly complex.\"
Against this backdrop, he predicted that collaborative arrangements between banks and other players were more likely, like the joint cellular banking venture by MTN and Standard Bank.
He also challenged the perception that banking was a monopoly, citing recent below-inflation increases in bank charges.