No one can say South Africans don’t enjoy complaining. If you were to survey the state of the nation just by looking at out social media output about our shops and politicians, you’d think we live in a Mad Max-style post-apocalyptic wasteland, rather than occasionally being sold slightly overripe bananas by our local upmarket supermarket chain.
When it comes to high bank charges, at least, we have expert opinion to back us up. According to a 2008 Competition Commission report on the banking sector, bank charges are higher than they would be if the market were more properly competitive. The report also found that the lack of competition was deepened by a lack of transparency: “The market structure, because of current information asymmetries and product complexities, means that the banks have the ability to abuse their market power”.
Ordinary South Africans simply don’t have enough clear information about bank products to find the best deals amongst a bewildering selection of complicated offerings. (Which is why the My Treasury Savings Optimiser was developed to make savings accounts more transparent and easier to navigate.)
Determining fair bank fees is no simple matter. South African banks offer world class products and are expected to provide all clients – rich or poor, urban or rural – a high level of service. And while new technologies can lower costs, these technologies also need huge investments in data infrastructure, information security and development.
But high bank charges do more than leave us with a little less to spend each month. There’s also a conceptual problem; charges also affect the way we understand ourselves as clients in relation to our banks. When you think about it, the very idea of bank charges is pretty strange.
Who does your money work for?
Here’s a silly thought experiment. Suppose you have young children who go to daycare when you’re at the office. Imagine your children and their classmates spend their days finger painting and making macaroni necklaces. Great. You aren’t able to look after your kids on weekdays, they need a safe, stimulating space, and they’re spending their time having fun, learning to be creative and socialising. Those school fees are a small price to pay to ensure your children are properly looked after.
Now suppose that you learned the school was selling the macaroni necklaces and finger paintings and making a hefty returns. In fact, they were making so much more money from selling their student’s arts and crafts, and re-investing this money into better and more productive craft-making facilities, that it was clear that the school’s whole business model was in fact the production of macaroni necklaces with your and other kids’ labour.
What would you do? You probably wouldn’t pull your kids from the school. After all, you don’t have the facilities to look after them yourself and they still need a fun, safe place to hang out. But you would start to ask questions about those steep school fees. Why should you pay so much to provide the school with free labour? Shouldn’t the school be paying you? Or at least sending you the occasional fruit basket?
That analogy won’t l help you pass Finance 101, but it gives a sense of the mechanics of the relationship between banks and clients. When you deposit your cash into a savings account, it isn’t quarantined in some space marked for your deposits alone (as in the case of a safe deposit box). The bank puts that money to work, often very hard. Put simplistically, you give the bank money and they lend out as, say, part of a home loan bearing 10% interest.
Of course, it’s more complicated than that. Running a bank is expensive, banks take on the risk of defaults, and not all bank accounts are profitable, indeed low-balance current accounts can even cost banks money.
But the basic conceptual point is simple: Banks aren’t doing us a favour by taking our money. Their success depends on it. Excessive bank charges and a lack of information distort the nature of this relationship. Banks and clients should see each other as partners in growing our collective wealth.
That means demanding reasonable bank charges. It also means ensuring you get a fair return on your cash investments.
Get the best returns on your savings. Use the free My Treasury Optimiser to find the savings account that offers you the highest interest rate and make your money work for you.