Collusion and Price Fixing at the banks
by Andrew on 17/01/08 at 10:56 am
13 comments
To accept credit cards at your shop (online or offline) you have to have a merchant facility with a bank. The bank will charge you a few percent for this privilege, and they share their cut with Mastercard and VISA. Because this percentage is calculated on turnover, it can add up to a substantial proportion of a small business’ profit.
Our online stores (such as Yuppiechef.co.za) currently have a merchant facility with FNB, who we pay 4.5% of our turnover every month. This is a fairly normal rate for a small business, but we know that bigger online stores are getting around 3%, and big offline retailers are closer to 1%, so we obviously want to push that rate down if possible. I decided to phone Nedbank to see if they were interested in my business.
This is how the conversation went:
Ring ring….
WANDA:
Hello, Wanda Schafer here, Nedbank merchant division Cape Town.
ME:
Hi Wanda, this is Andrew Smith. I run a few online stores, and I’m interested in moving my merchant facilities to Nedbank. Can we chat?
WANDA:
Sure. Who are you using at the moment?
ME:
FNB, but we’re happy to move if your offering is right.
WANDA:
We can offer you 5%.
ME:
Oh. So you’re not interested in knowing what our turnover is? Are you negotiable at all?
WANDA:
What is FNB offering you at the moment?
ME:
4.5%
WANDA:
Well then 5% is the best I can offer. We have a gentlemen’s agreement with each other that we don’t undercut prices.
ME:
[Long silence while I pick my jaw up from the floor]
So, by “gentlemen’s agreement”, you actually mean “collusion and price fixing”?
WANDA:
Sorry Andrew, I’m heading in to a meeting with another client. I can’t chat now.
Click.
Tiger Brands have just been fined R100 million by the Competition Commission for colluding with the other bread makers to keep the cost of your lunch at a higher price than the market would naturally have set. “Undercutting”, as Ms Schafer likes to call it, is the cornerstone of a free market economy, and without it the little guy (both consumers and small business) are ripped off.
I have never once dealt with a small business that has refused to give me a lower price on paving my driveway or fixing my toilet because they “have a gentleman’s agreement with the other plumbers in your area that I can’t beat their quote”.
It is only the big corporates who are greedy and arrogant enough to use these tactics and actually tell their customers that they are doing it. Ms Schafer has obviously worked long enough within the banking industry that collusion is so natural that it rolls off the tongue.
If we as South Africans become numbed to monopolistic practices, we will all end up the losers.
[Update: I have had a few conversations with the banks and other role-players, so read the comments below to see how the discussion develops.]
Andrew Smith is the pedantic systems guy behind Live Alchemy, a SA e-commerce company. Andrew writes for Ideate in an attempt to make the world a more efficient place. View more articles by Andrew.
rowan
Jan 17th, 2008
Andrew, if you want to start a class action law suit, or petition the competition commission to investigate this “gentleman’s agreement” then you have my complete backing and I’m prepared to help where ever i can.
For the record, i opened an american bank account a few years ago when i was overseas and i still haven’t paid a single bank charge on the account to this day… makes me mad that i have to pay 5% on my merchant account as well, when it’s an electronic service that merely requires a quick check to verify available funds and then return an accept or decline message on the banks part. Cost to bank = mere cents, profit to bank = 5% of amount regardless of the amount, result to merchant 5% poorer for doing all the hard work!
JBagley
Jan 17th, 2008
There has got to be more to this whole merchant thing, because the banks will undercut each other to get your home loan or car finance, but for merchant accounts, they hold hands?
I’m wondering if Visa or Mastercard have a hand in it or something…
Very interesting indeed.
Neil Henegan
Jan 17th, 2008
Nice.
Would love to hear a follow up if you dig a little deeper.
Lauren C
Jan 17th, 2008
Yes my mom encountered this when she tried to get other insurance quotes for her car rental company. They just wont do it – and thats the insurance industry.
Andrew
Jan 17th, 2008
We have received some feedback from a contact in a bank. Their basic argument is the following:
- There is an agreement that the banks will not poach and undercut each other to buy business.
- They can’t have clients moving banks 4 times a year on price alone and ending back where they started with all banks losing out on the effort put in to acquire the business.
- Signing up a new merchant costs the bank in man-hours and resources, and this needs to be recouped over time because merchants are not keen on signing contracts or paying setup fees.
This did make some sense, but I’m still not convinced. Here are my current thoughts:
- If there were 100 banks competing for my business, would they still have this agreement?
- I am now locked in at 4.5% for the rest of time. The other banks are not going to beat that rate, and FNB knows that I’m not going anywhere so they’ll never need to improve their offering.
- What is the correct rate that I should be paying? Only a free-market can determine that, and we don’t have that here. When the Competition Commission fined Tiger Brands they didn’t specify what the bread price should be. They were happy that a fully competitive marketplace (with plenty of under-cutting) would set the fair value.
- There are plenty of opportunities for the banks to differentiate themselves on the merchant service that they offer so that we won’t keep hopping to the lowest price. But the arrangement that the banks have mean that there is no need to innovate, and all the offerings are pretty much identical. So we end up not only paying too much, but getting a bland service as well. (If they need any ideas on how to innovate, they are welcome to contact any of their merchants.)
There is still plenty to discuss on this topic so please feel free to chip in with your experiences or stories.
Nick Soper
Jan 18th, 2008
I remember learning at school that back in the day some banks (I think this is UK banks) didn’t pay out compound interest on your savings. So people simply closed their bank accounts once a year, then opened them again annually and effectively earned compound interest.
So the banks saw it to give compound interest and save on the man power.
What is different about this, and as an outsider-ish, and it seems to be a South African problem, is that as consumers we are not really given the opportunity to shop around.
How many times have you asked a company for a better deal only to be told “go ahead and use someone else, we don’t make any money off that product anyway” or something similar.
Consumerism has a long way to go down in SA, and highlighting the issues can only help. Or at least I reckon.
=======================================
Out of interest, ABSA offered me an online merchant facility for:
R2500 (inc VAT) for setup
R350(ex VAT) OR 5% of the turnover – whichever is more.
Thanks ideate.
alan
Jan 19th, 2008
i reckon this side of that market is way overdue for a shakeup – and that includes the payment gateway providers. we’ve been using safeshop for about 6 or 7 years for one particular client – and they haven’t bothered to update the software/client-side aspects even once. in that time at least the banks have redesigned their internet banking efforts.
Andrew
Jan 20th, 2008
Alan, a shake-up in the merchant-services market would be hugely appreciated.
Most online stores in South Africa start off paying 5 to 6% (ex VAT) per transaction (we managed 4.5% because we’d already been trading for a while). Many of the products we sell only have a 20% profit margin, which means we are giving a quarter of our profit to the banks before we even start covering any other expenses.
South African small businesses are struggling to get off the ground, and hundreds of online stores are going under before they reach sufficient volumes to qualify for reduced credit card fees. Older, established stores with lower transaction charges can offer a few percent off all their prices, which effectively shuts out newcomers in highly-competitive retail categories like electronics and books.
I don’t understand enough of the banking system to know why the fee isn’t capped. For example, writing a cheque costs 1.3%, but is capped at R29 per cheque. However, if we sell a R9,000 espresso machine on Yuppiechef ,we will pay over R400 to the banking industry for them to add a few lines to their databases and move the money around.
As confusing as this is, it does seem to be the international standard for merchant accounts. However, some Googling showed that 5% is not the international standard. For the volumes we are doing, PayPal would offer around 2.5% (https://www.paypal.com/us/cgi-bin/webscr?cmd=_wp-standard-pricing-outside), Google Checkout 2% (http://checkout.google.com/sell/?gsessionid=WUnH6IpZuyQ), and Amazon’s PayNow 2.5% (https://payments.amazon.com/sdui/sdui/about?nodeId=6022). Unfortunately none of these services are available in South Africa, and if I worked for a big South African bank I wouldn’t be in too much of a hurry to make it easy for them to operate here.
International companies have no problem publishing their rates on their sites for everyone to compare. “If your revenue is X you will pay Y%?. However, you won’t find ABSA, Nedbank, Standard Bank or FNB’s merchant rates online. They prefer to use the old-fashioned approach of “negotiating? your rate. This never works in the customer’s favour. If you are paying more than you should be you will never know it, and as your turnover increases you don’t know when you are entitled to a better rate.
Alan , I also agree with you that the Payment Gateways need a bit of a jolt. MyGate.co.za re-launched this year and became the first gateway to not charge a percentage (usually 0.5%) on top of the R1.50 per transaction for them to interact with the banks. Unfortunately they have not revolutionised the marketplace because they only integrate with FNB, and the other banks have basically refused to link up with them, despite the amount of business MyGate has proved they will bring to the other banks.
I am waiting for further comments from the banks. I will post them here as soon as I hear anything.
Cherryflava
Jan 21st, 2008
Wonder what rates the big online retailers get. Do Pick ‘n Pay and Kalahari also take the same bitter medication?
Andrew
Jan 21st, 2008
I’m sure Pick ‘n Pay home shopping would use the same merchant account as their retail stores, which is rumoured at around 1%.
I don’t know about Kalahari, but my guess would be between 1% and 2.5% at the highest.
Ideate - Small Business in South Africa
Feb 21st, 2008
[...] January I had a bit of a run-in with Nedbank about merchant facilities (read about it here). I pointed Nedbank to the article, and here is what their PR department spent a month producing (I [...]
Tiger Rands
Jun 10th, 2008
Wasn’t/isn’t Nic Dennis of the bread and Adcock drip fame also on the board of NedbanK?
Glen Ross
Sep 17th, 2008
Good afternoon all,
I trust that you are well,
I have read all your thoughts/feedback on this blog and have found it very interesting.
To update you on MyGate, we have now completed integration into Nedbank and have started the process for Standard Bank.
Will keep you all informed
Regards
Glen