Shamlan Blog

“New “admin” fees are being introduced for services which were previously free” writes Wendy Knowler of the Pretoria News.

Read the article at  http://www.iol.co.za/index.php?set_id=1&click_id=594&art_id=vn20090812033052664C926147

I wonder what would happen if the retailers charged you to enter the store, or pay for you groceries, or to use their trolleys? Retailers know these are simply the basic services they as a business need to provide in order to have the privelage of your customage. Not the banks though… the more you access your bank, the more they charge you!

According to today’s Star, there have been 7 armed attacks this week alone, targeting some of Gauteng’s busiest malls.

Read the full story here http://www.iol.co.za/index.php?set_id=1&click_id=13&art_id=vn20090812032711234C120833

The banks have all the technology that is needed to eliminate cash from the economy, but instead of “taking the high road” and making these solutions available to all South Africans, they continue to cynically and relentlessly profit from the situation, pricing solutions like the debit card out of the reach of ordinary people. It is shameful!!!

There has been a massive increase in the number of Fuel Retailers promoting the acceptance of Debit Cards for fuel purchases. Don’t fall for this massive con. All it does is funnel even more money to the banks. Here’s what you need to know:

1. When you use a Debit card the transaction fee to yourself and the fuel retailer is calculated as a percentage of the value of the transaction, usually with a minimum charge.
2. This means that as the fuel price rises, so the banks make more and more money, even though they aren’t doing anything more for it. The transaction is just “bits and bytes” to them, regardless of the value of the purchase. In fact, the MORE you use your card the LESS it costs them, yet they charge you more the more you use it!
3. A percentage of the fee charged to you and the fuel retailer goes to VISA and MasterCard, despite the fact that they have nothing to do with the transaction, and add no extra value to the transaction.

There are better ways to do this that will cost you less.

1. Use cash. This the cheapest form of payment to both yourself and the fuel retailer. Yes, I get it that cash is risky and all that, but you can always seek out a fuel retailer with an ATM, and draw the cash there and then. Many fuel retailers re-stock the ATMs with the cash, from which they get a benefit. If you find a fuel retailer with an ATM from your own bank then you may find that the withdrawal is covered by your monthly fee, which essentially means this transaction cost you nothing.
2. If you are opposed to using cash, then apply for a Garage/Fuel card from your bank, but whatever you do, DO NOT LINK THIS TO YOUR CREDIT CARD. You will be charged interest on your credit card from the date of the transaction. It is effectively the same as drawing cash from your credit card. Link the card to your current account. You will be charged a FIXED transaction fee that is less than a debit card transaction fee. This is also cheaper for the Fuel Retailer.
3. If you currently have a Garage/Fuel card linked to your credit card, change this linking to your current account as soon as possible. Many banks “default” this card to your credit card, but it doesn’t have to be. When linked to your credit card this is the MOST EXPENSIVE option to you, because of the interest you will be charged.
4. If you are on a car allowance, Standard Bank offer an “individual” fleet type card that will give you handy reports for your Tax Return. This is not a “punt” for Standard, it is just a good product. Be careful though, because you will pay interest on the balance from the date of transaction.
5. If you find that you use the same Fuel Retailer most of the time, ask them if they operate Accounts. Some Fuel Retailers will allow you to open an account whereby you pre-pay the account with an amount equal to the amount you usually spend in a month. You will incur the “opportunity cost” of not having the amount in your bank account, but you will also incur no transaction fees!
6. Finally, DON’T FILL YOUR TANK, unless you use at least a tank a week. Fuel in your tank is money that’s not in your bank account earning interest, however small the amount is! My car certainly doesn’t pay me interest on the “balance” in my tank

Hopefully these tips will be helpful to you.

Announcing the formation of the Merchant Payments Coalition of South Africa

It is my intention to form a non-profit organisation committed to challenging the current unfair pricing that persists in the debit and credit card acquiring environment in South Africa. It is proposed that this organisation be called The Merchants Payments Coalition of South Africa (MPCSA) and be founded along the lines of The Merchants Payments Coalition, Inc. (MPCI) that currently exists in the USA (www.unfaircreditcardfees.com).

If you review their website you will see that we have the advantage in South Africa of already having had an investigation into precisely this issue, that of the Jali Enquiry into Bank Charges, concluded late in 2008. The key challenge that faces the South African card merchant however is to see that the recommendations made by the Enquiry find their way into implementation. Although these Recommendations have been passed to the Competition Commission for implementation, to date they have shown little Will to see the Recommendations implemented. In fact, the Competition Commission has admitted that it was “less powerful” against South Africa’s largest banks and has stated that

1. “[They] have no power to enforce the recommendations“; and
2. “[They] hope the banks will change their behaviour“.

Read this full article at

http://www.fin24.com/articles/default/display_article.aspx?ArticleId=1518-1786_2496081

It is ironic that the same Commission has come out “all guns blazing” to tackle the retail community with accusations of price fixing, profiteering and collusion. Given that retailers struggle to get two of their own stores to agree on a price, this situation is almost laughable, although, its certainly not funny! The sum total of the annual profits of the top four retailers in SA don’t even equal the annual profit of a single top four South African bank.

The initial objective of the MPCSA will be to ensure that Recommendation 8 be implemented without delay. This Recommendation states:

“An independent, objective and transparent regulatory process for determining interchange in the payment card and other relevant payment streams should be put into effect and enforced as soon as practicable. The process envisaged would involve the establishment of an “Interchange Forum”, within which there would be a specific sub-forum for each payment stream where interchange is to be subject to regulation. The regulator of the payment system – the SARB – would appear to have the authority under section 10(1)(c) of its own enabling Act to devise and implement the necessary rules and procedures. Such a process, under compulsory regulation, would begin by establishing the validity of interchange in each case, and the appropriateness of each cost component for such an interchange. This would allow, for example, the interrogation of whether the cost of the interest free period on credit cards should be part of the credit card interchange fee.”

MPCI research in the USA has revealed that the Interchange component of merchant fees accounts for the 2nd highest expense a large merchant incurs, following Wages. http://www.unfaircreditcardfees.com/site/page/factsfees. Given the pressure the retail industry is under from both the Unions and the Competition Commission, addressing this cost line could go a long way to creating the margin necessary to appease wage demands.

I have already written a number of White Papers which address Interchange and Debit Card fees, which can be found on this blog. I believe these form a sufficient foundation to engage the SARB on establishing the Interchange Forum. What is still required however is a coalition of merchants with the Will to undertake this challenge, and I believe the formulation of the MPCSA could be just such a vehicle through which to do this undertaking.

If you are a South African card accepting merchant then get in touch with me to get the details around the MPCSA.

An American perspective, but relevant in South Africa too…

Have you ever wondered why some of your favorite small stores ask you not to use your credit card for low-dollar purchases? It has to do with a huge, hidden credit card fee that costs Americans $48 billion a year — more than annual fees, late fees and over-the-limit fees combined…. http://www.stltoday.com/stltoday/news/stories.nsf/editorialcommentary/story/0E8D4B3B42C1C507862575F6007F7590?OpenDocument

“Funnies” brought to you by the greedy and irresponsible behavior of Visa, MasterCard, and the Big Banks!

http://www.unfaircreditcardfees.com/ads/interchange_able/

“Sales of luxury houses by the Johannesburg offices of Sotheby’s International Realty SA have risen by 21%, to 726 units in the first half of this year compared with the same period last year. The average price rose to R7.5-million from R5-million, said chairman Lew Geffen.”

http://www.thetimes.co.za/Business/BusinessTimes/Article1.aspx?id=1042870

This shows who’s not feeling the pinch in this “recession”!

The union in the retail sector, Saccawu, said on Friday that it has failed to resolve its outstanding issues with Massmart stores Makro, Game and Dion, and is preparing for indefinite strike action from next week.

Read on at  http://www.thetimes.co.za/Business/BusinessTimes/Article1.aspx?id=1046626

While I’m prepared to conceed that the retailers may be culpable when it comes to profiteering, their profits pale into insignificance when it comes to the banks. If the unions really wanted to do something for their members, they should focus their attention on the massive rip-off ABSA, Nedbank, Standard Bank and FNB impose on all South Africans. Don’t expect anything from the Financial Sector’s lap dog SASBO though, they’ve been too well trained by the very entities they are supposed to keep in check.

For some time now I have been bothered by the amount of profit the South African banks make. It is important to remember that “profit” is the amount of income a company has after it has deducted all the costs of doing its business from the revenue it has generated from doing it’s business. We hear about how the financial markets are such a challenge to the banks at the moment, but lets consider just how much profit these guys have made.

For the financial reporting year of 2008 (for 2007-2008), the big four South African banks returned the following numbers:

ABSA – R10′6 Billion
FirstRand – 10′4 Billion
Standard Bank  – R 8′8 Billion
Nedbank  – R 7 Billion
Total – R36′8 Billion

That means that collectively, of all the revenue collected by the banks from their customers, and AFTER paying all their costs, the banks were left with R36′786′000′000. ABSA reports in its financial reports that in 2008, and despite revenues of R20′981′000′000 last year, it found it was necessary to lay off 6′000 people last year in order to “keep the business going”.

The big retailers, who have been accused by the Competition Commission of collusion and profiteering, published profits as follows:

Massmart – R1′3 Billion (Game, Dions, Makro, etc)
Shoprite – R1′6 Billion
Pick n Pay – R 937 Million
Woolworths – R894 Million
Total – R4′8 Billion (That’s less than any ONE of the single banks)

It seems a bit strange to me that, while the Competition Commission says it won’t act against the banks, it is pulling out all the stops to nail the retailers. Tiger Brands was fined last year for transgressions of the Competition Act, yet their profit was only R1′9 Billion. I would bet one of the larger bank’s Credit Card businesses did almost that much all by itself. Furthermore, the level of effort and risk engaged by the retailers in getting their stores and products within the reach of ordinary South Africans is in stark contrast to the banks who seem singularly incapable of doing the same.

Recently, following pressure from NUMSA, and in response to challenges surrounding the gap between the Reserve Bank repo rate and Prime rate, Sim Tshabalala, the chief executive of Standard Bank South Africa, said,
“Standard Bank had total liabilities of R608bn and borrowed only R2bn to R3bn at the repo rate. The bulk of the funding was raised in the wholesale market – from corporate treasuries and institutional investors – which was significantly more expensive”.

This is fundamentally untrue. Corporate Treasuries and Institutional investors borrow and lend in relation to the Johannesburg Interbank Agreed Rate (JIBAR), which is significantly lower than the repo rate, never mind prime. Plus, the banks also borrow internationally at rates lower than JIBAR, and we all know the pittances they pay their personal deposit customers. The Reserve Bank, who’s lending rate is the repo rate, is known as a “lender of last resort” and therefore the “R2bn to R3bn” Tshabalala refers to would have been the funding the bank incurred at its highest cost, the repo rate. The rest, in contradiction to Tshabalala, was “significantly less expensive”.

I am not sure what your definition of “enough” is, but the bank profits are, in my opinion, “too much”. My ex-father-in-law has a saying, “there is a difference between scratching your arse and tearing it”. Crude, I know, but so are these excessive profits. We really need to stop and ask ourselves what exactly is it that these banks do to justify siphoning almost R37 Billion out of our pockets? It is only the greedy for whom “enough” is never enough.

Hidden credit card interchange fees inflate the cost of nearly everything consumers buy, even when you pay cash.  Two dollars of every $100 the consumer spends using credit cards goes directly to the credit card industry.  Americans paid over $48 billion in interchange fees in 2008, more than twice what was paid in credit card late fees and three times ATM fees. according to www.unfaircreditcardfees.com

Read more at http://www.unfaircreditcardfees.com/site/page/factsfees

“With Visa and MasterCard making moves to enter the Canadian debit card market, Canada is poised to repeat the mistakes made by the United States in the 1990s. Allowing Visa and MasterCard to infiltrate American debit markets has cost consumers in this country billions of dollars in excess debit interchange and impaired the expansion of the most cost effective and secure method of payment. There is no reason to expect things to be any different in Canada.” according to www.unfaircreditcardfees.com.

Read on at http://www.unfaircreditcardfees.com/site/press/u.s._retailers_caution_canadian_officials_against_visa_and_mastercard_entry

Norman Manoim was selected by the Cabinet in April this year to take over the chairperson’s seat from David Lewis, writes Lloyd Geyde of the Mail & Guardian. “I think we are surprised by the extent of collusive activity that we have come across,” Manoim says. “We are hearing about blue-chip companies that are involved in this 10 years after the Competition Act has been around. “It’s very unfortunate that leaders of industry are involved in these kinds of things.”

Lets hope he intends to take a long hard look at the 28 recommendations that came out of the Jali Enquiry into the anti-competitive behaviour of the Banks!

Read more at http://www.mg.co.za/article/2009-08-04-keeping-capitalists-honest

I received this the other day and thought it was quite interesting. Creditation goes to whoever wrote it, but it wasn’t me!

It is the month of August, on the shores of the Black Sea. It is raining, and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit.

And that, ladies and gentlemen, is how the United States Government is doing business today and the main reason that the rest of the world is now in the mess it is!

Those that have read my previous blogs will know that I am on an anti-Credit drive at the moment. A bit like an irritating ex-smoker, constantly berating their friends who still smoke! Sorry for that, hey, but if you are irritated by me, you should be even more irritated by this issue.

Since I am trying to kick the credit habit, I followed the best possible route and went “cold turkey”, locking away the credit cards and switching immediately to my debit card. Now, my wife and I have often differed in some of our views on debit card and ATM usage fees. Given my back ground in working for the Banksters I have always felt that most of their fees were justifiable, I suppose in the same way a drug pusher justifies their role in that destructive supply chain. Now that I am no longer and agent of the Dark Side I have a fresh perspective on these fees.

On ATM machines, I felt, and still do, that to a certain extent the principles behind the charges are justifiable. Firstly, I believe that one should pay more to use another bank’s ATM than your own bank’s, because the other bank has the costs of establishing and maintaining the machine, of keeping it working and stocked with cash. If this wasn’t the case, then the banks would not be able to sustain the interoperability between all the banks and their customers. It is convenient to be able to use any bank’s ATM, and convenience always comes at a cost. We are blessed in this country with abundant access to ATMs. Anyone who has traveled overseas must concur with me on this. Last year I arrived in Milan, the fashion capital of the world, and struggled to find a ATM at the airport, and when I found one, it didn’t “speak” English. Our ATMs all speak three or four languages! So, yes, this investment needs to be rewarded. Strangely though, our recent Governmental Enquiry into Banking Fees felt this principle was wrong, and are insisting on a standard price for all ATM transactions. I don’t believe this is truly reflective of the spirit of competition, as it will reward the lazy banks who couldn’t be bothered to get out there and install ATMs, and dis-incentivise the investment new machines and technology by the banks that are bothered to get their machines out there. What’s more relevant is the second issue, which is whether the base-line fee, i.e. the fee charged by your own bank to use their ATM is fair? Now that’s a different issue. Considering the massive cost savings delivered to the bank by having the customer “self-service” with a machine, versus taking up prime real-estate in a branch, there should be a greater incentive to service their customers this way and therefore, the base line fee really should be lower than it is. Sadly, the Enquiry seems to have missed this all important point, with the point of departure being “how much should the fee be?” rather than “should there be a fee?”. The third point with ATM fees is the method on which the fee is calculated. Most banks work on a percentage of the value of the withdrawal, what they call an advalorem based fee. Once again, in principle, I am not apposed to this idea. There is a direct correlation between the amount that you withdraw and the cost to the bank for servicing this withdrawal. The more you withdraw, the more money the bank has to replenish, which means getting this cash to the machine in our wonderful, but crime infested country. Consider for a moment the cost of armored cars, insurance, people, bullet proof vests, semi-automatic machine guns, etc. And that’s just the criminals! So, I’m prepared to accept that an advalorem based fee is fair.

Now, you may be asking, what has this to do with the Banksters and the Great Debit Card Rip Off? Well, first off, I want to show that I can be reasonable! I have always believed in a fair price for a fair service. But, the principles behind debit card charges are not fair. There are a number of things you need to know about debit card transactions, some of which you may know, but most I am sure, you don’t.

1. To do a debit card transaction, there needs to be two bits of technology present. Your card, and the retailer’s terminal. You pay to have the card, and the retailer pays for the terminal. This is unlike the ATM, where the bank pays for making the machine available to you. So, the banks’ costs on both sides are covered.
2. When you swipe the card, you are asked for your PIN number. This is great for you, because no one can use your card without the PIN so, unlike a credit card, there is a far reduced opportunity for fraud. Although, as I illustrated previously in the “The Case Against Interchange”, credit card fraud generally lands in either your’s or the retailer’s lap. This is a huge benefit to the bank, because it all but eliminates the fraud that lands in their lap. You would think therefore that the banks would really really want you to use a debit card, huh?
3. After you have put your PIN in, the retailer’s terminal connects directly into the banking system. The cost of this connection is borne by the retailer. No cost to the bank here then.
4. The retailer’s terminal, which the retailer has paid for, “talks” to your bank over a connection the retailer has paid for, and checks whether (1) the PIN is correct and (2) if you have enough money in your account to honour the transaction. No bad debt costs here for the bank. No credit provision costs for them either, as you will either use your positive balance, meaning they now have to pay you less interest, or you will use your overdraft where they’ll be able to charge you more interest. Great result for the bank! Both of these represent “income” to them. Where the bank does have a cost is the “switching” costs incurred should you and the retailer not use the same bank and, either way, the bank has the infrastructure cost of the mainframe they run to make the system available. Importantly here, the switching and infrastructure cost to the bank per transaction is the same whether the transaction is for R1 or for R1′000. In fact because of the net interest gain the bank gets from you using your available money, the HIGHER the value of the transaction, the more the bank benefits. Further, as with all systems, the GREATER the number of transactions the system processes, the LOWER the cost per transaction to the bank. The all important point here is that the HIGHER the value of the transactions, and the GREATER the volume of transactions, the more profit the bank makes. This is before they’ve even charged anyone a transaction fee!
5. After your transaction has been approved, the money is immediately removed from your account, reducing your balance for the day and thus reducing the interest you may have earned that day, or conversely, increasing the interest you will be charged that day on your overdraft. Once again, the HIGHER the value of the transaction, the more the bank benefits. As a “thank you” for bringing them this great fortune, the bank then slaps you in face, and charges you a percentage of the value of the transaction as a fee, thus charging you MORE the higher the value of the transaction, despite the fact that they are already gaining a benefit from the higher value. This percentage can range from 2% to upwards of 30% of the value of the transaction. Just yesterday I was charged R3.90 when I used my debit card to pay for a R11.50 cup of coffee. That’s 34% of the value!!! If I had used my credit card I would have paid no transaction fee and the retailer would have paid between 3% and 5%.
6. The money that was immediately removed from your account, is only paid to the retailer’s account 1 to 2 days later, even if you use the same bank. If you don’t use the same bank, your bank gives the money to the retailer’s bank on the same day, and the retailer’s bank holds onto it for a few days for good measure, before putting it into the retailer’s account. During this time, the bank(s) make merry with the money, lending it at high interest rates to various overnight borrowers, which in some cases may be the very retailer you purchased at! That’s a good business to be in, lending your customers their own money back at a premium! It seems audacious, but that it is how it works. The bank also gets a further chance to slap a customer in the face, this time the retailer, charging them about 0.65% as a “thank you” (or is it a “f#$k you”?) for bringing them this benefit. Again, the HIGHER the value of the transaction, the more the bank benefits, yet they do not incur increasing costs based on the value of the transaction.
7. Of the transaction fees charged to you and the retailer, a portion goes to VISA or MasterCard (depending who’s badge is on your card) despite the fact that when a South African issued debit card is used at a South African retailer, these transactions don’t go anywhere near VISA or MasterCard. They don’t issue the cards, or incur any costs whatsoever, in relation to the transaction! No wonder they’re investing so much to convince you, through their marketing, to use your debit card. And don’t think for a moment they’re short changed if you use your card overseas. You’re in for a minimum fee of at least R15, plus a percentage of the value of the transaction, plus currency charges, should you have the audacity use your debit card in a foreign country.

So this is the Banksters and the Great Debit Card Rip Off. In South Africa, where we see such hideous crimes related to stealing cash, from armed stick ups to cash-in-transit heists, any reasonable person would assume that the custodians of our financial system would do everything they could to reduce the amount of cash in circulation, with the obvious substitute being debit cards. Instead however, just like a drug pusher prays on the helpless and the innocent, profiting from their misery, the Banksters, including VISA and MasterCard, are taking every advantage of the South African consumers and retailers, profiting mercilessly off the hideous crime environment, effectively penalising you for using your debit card. Instead of being part of the solution, they are in fact part of the problem, encouraging people to use cash, even though this places the consumer and the retailer at greater personal risk. The retailers are also penalised for trading in cash, getting further extorted on exorbitant cash deposit fees.

The simple truth is that debit cards represent the single best opportunity in this country to replace cash, but for as long as the cost, both to the card holder and the retailer, is linked to the VALUE of the transaction, they will remain extortionately expensive. It obvious that there is absolutely no justifiable reason for the banks to price them this way, and I know for a fact they only do so because they can.

This just leaves the question… “What are we do about it”?

Well, we can’t hope that the Government is going to do anything about it as the present and previous highest echelons of the ruling party have ensconced themselves in the boardrooms of the big banks. None less so than ABSA, colloquially referred to as “bankers to the ANC”, who’s upper echelons are a veritable who’s who of the ruling elite. Of course, in its previous incarnation, Volkskas, they were “bankers to the Nats”, so no change there then!

Don’t expect anything from the South African Reserve Bank (SARB) either. As I detailed previously on my blog in “Numsa and the Reserve Bank”, the SARB operates entirely in secrecy, including who its shareholders are, and you can be sure a huge chunk of the tightly held secret shares are in the hands of the major South African banks. Of course, I can’t prove that they are, but then again, because of the secrecy clauses in the SARB Act, they can’t prove they are not either!

The last line of defense for the consumer in a capitalist system is the Competition Commission but, following the publication of 28 recommendations for change by the Jali Enquiry into Banking Charges, Simon Roberts, the commission’s divisional manager for policy and research, (as reported on Fin24.Com on 3rd April 2009) stated that

“The inquiry into bank charges made recommendations and (we) hope the banks will change their behaviour”.

He went on to say that

“The commission could not enforce the recommendations”!

Expecting the banks to change their behaviour voluntarily is a little like setting the fox to guard the chickens, and expecting the fox not to eat the chickens. It is in the fox’s nature to eat the chickens, just like it is in the Bankster’s nature to extort money from hapless consumers.

The retailer’s have a major interest in seeing this situation change, but so far few have proven willing to challenge the banks. Perhaps that’s because they don’t want to bite the hand that feeds them, as they themselves depend heavily on the banks for funding. Perhaps also they know that they can recover their fees in the prices they charge the consumers, especially given the cheap pricing they get from the sweat shops in the far-east. Maybe they might change their attititude when, as is planned, the Banksters increase the percentage fee the retailer currently pays to process debit cards. This increase has the blessing of the Competition Commission who “hope the banks will then decrease their fees to the consumer“.

So that just leaves you! I’m ready to toyi-toyi down Commissioner Street, but are YOU? The truth is that it is only when the masses rise and demand change that change will come. If you’re ready to don your gumboots and head for the financial district let me know. I’ll be leading the charge!

I bet the person responsible will still their bonus though….

Absa to take R1.1bn loss on stock futures

Absa, the local lender most exposed to single stock futures, would write down nearly R1.1-billion on the value of shares in four JSE-listed firms it was forced to buy last year, the bank revealed on Friday.

Read on at http://www.busrep.co.za/index.php?fArticleId=5109758

VISA and Mastercard, already in the spotlight after a Competition Commission inquiry into bank fees last year, are facing a competition probe after a complaint by a Johannesburg-based business.

Read on at http://www.thetimes.co.za/News/Article.aspx?id=1039397

Max Keiser: Prosecute the Bankster Crime Syndicate

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Capitalist economic theory is based on the assumption that there is a scarcity of resources, be these land, buildings, homes, money and such. Because of the scarcity, there is competition for these resources, and this competition leads to a capitalist economic concept, that of Supply & Demand. In this concept, the more Demand there is for a resource, the more a provider of these resources can charge for them. As the price of the resource climbs, more people will then want to Supply that resource, decreasing the scarcity of the resource, which then ultimately, slows the rise of, or even decreases, the price. Then, as the price of the resource rises, fewer people can afford it, thus reducing demand for the resource, which also has the effect of decreasing the price. Eventually, in theory, the price of the resource will find equilibrium, where it is such that there is sufficient demand for the resource at that price, and sufficient willingness of suppliers to supply at that price. An example which most people are aware of is house prices, hence we have “buyer’s” markets, where there is less demand for houses than supply, hence price rise slows as providers of houses compete for buyers, and conversely, “seller’s” markets, where there is less supply of houses than are being demanded, hence prices rise as buyers compete for houses, hence causing the prices to rise. This theory can be applied to everything a household consumes, from houses to hosiery.

In theory, prices for consumer items should therefore be determined primarily by the buying power of the household. The buying power of the household is determined primarily by the collective income of the household. Thus a household’s capacity to compete for resources is limited, in theory, to its earning power. I say “in theory”, because a household can access an additional resource to boost its spending power, based on its income. This resource is Credit. The cost of this resource is the Interest and fees the household pays for the use of the resource. Again, the greater the demand for Credit, the more the providers of Credit can charge for the supply of it, and hence the higher Interest Rates will rise, and conversely so too. As I mentioned, being able to access Credit increases the household’s buying power, hence the more resources it can demand and, as we have seen, increasing demand increases the price a provider of the resource can charge for it. Clearly, the households that can access Credit are at an advantage to those that can’t, or who can access relatively less Credit.

Credit, as a resource, has been around for centuries, but Credit as we know it came into existence following the establishment of the Bretton-Woods financial system in 1933 but, because of the two world wars, only became a mass consumer product after the end of World War II. Post WWII governments no longer needed Credit to fund their war efforts (War is very good for Credit providers!)  hence making more Credit available to the households. The availability of Credit to households had the effect of increasing the buying power of these households, thus increasing demand for resources, thus fueling price rises. It had got to the point where, because of the seemingly limitless amount of Credit available, that instead of finding price equilibrium, home prices continued to rise as more and more Credit kept getting fed into the households. This created a never-ending upward spiral in prices, taking fewer and fewer households with it. Households that couldn’t access Credit were simply left behind. That this is true can be seen in the slow down in home price increases as household Credit was limited by, first the implementation of the National Credit Act in 2007, and then the impact of the global Credit “crunch” which started in late 2008. Home prices are, when adjusted for inflation, falling, in line with Supply & Demand theory, as households’ ability to compete for homes diminishes as a result of the increased scarcity in available Credit. This leads to an unintended consequence whereby the price a home can fetch on the market is less than the amount the household owes to the provider of the Credit. That is all fine so long as the household has enough of the “money” resource to keep paying for the costs of its Credit resource. If not, the “house of cards” (excuse the pun) comes tumbling down and the household must now return the resources it bought with the Credit, or suitable other resources to the same value. But, oops, the value of the resources being returned to the provider of Credit may not be enough. And if one of the resources is the household’s Home, where are the people in the household going to sleep? Furthermore, none of the parties win in this case. Firstly, the provider of the Credit now has a home it has no use for, and cannot dispose of as there is not enough demand for the home in the market, and the household has nowhere to sleep.

This exposes the futility of “repossession” in economic times such as these. Sure, its easy for those who can still service their payments to condescendingly accuse those who can’t for “living beyond their means”, but these people would not have been living beyond their means had Credit not been made available to them firstly, and secondly, the rapacious provision of Credit by the credit providers caused home prices to rise to the point that the only way to get one was to use Credit. This is a bit like “riding a tiger’s back”. You’re safe, until you fall off, then the tiger turns on you and you get consumed!  Those people who do condescend to blame the unfortunate credit defaulter should remind themselves that this is all relative, and I’m certain they to have bought homes beyond their means, by their own definition, and are only one pay-cheque away from the same situation.

The thing that beguiles me the most however is the manner in which the American’s have gone about dealing with this problem. The original plan, marketed by Obama during his election campaign, was to “mop up toxic debt”, thus enabling the indebted household to restructure their debt payments to levels they could manage, leaving them in possession of their home, and the Credit provider still in a healthy position. This would have been a Win-Win situation for the household and the Credit provider. What has happened however, post-election, is that trillions (that’s billion billions) of dollars have been given directly to the Credit providers, who have repossessed the homes anyway. This is known as a Win-Lose! (For the latest in this see http://www.infowars.com/max-keiser-prosecute-the-bankster-crime-syndicate). This makes the words of Thomas Jefferson, penned in 1776, quite prophetic. He wrote:

“I believe that banks are more dangerous to our civil liberties than standing armies. If the American people ever allow the private banks to control the issue of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them [the banks], will deprive the people of all property until their children wake up homeless on the continent their fathers conquered”.

Futhermore, John Adams also wrote, in the late 1700’s, that:
“All the perplexities, confusion, and distress in America arise, not from defects of the Constitution, not from want of honor or virtue, so much as from downright ignorance of the nature of coin, credit and circulation.“
This is just as applicable to South Africa today. I wonder how many people even know where money actually comes from. If you think its the Reserve Bank I strongly suggest you Google “where money comes from”. Do it, even if you think you know!
It is clear that Credit providers are just like drug-pushers, tempting those “ignorant of the nature” of the drug into using them, thus creating a dependency on the substance such that life becomes unbearable without it. Given that it is impossible for 98% of South African household’s to buy a home for cash, because the prices have been artificially inflated due to Credit, how else does one get a home without using Credit? Renting a home serves only to fuel the problem, concentrating the ownership of homes in hands of those who are either insanely wealthy, by fair means or foul, or those who can still access credit. In addition, Supply & Demand theory pulls in again, this time increasing the level of rental prices due to increased demand for rental properties, thus leaving some households behind, again. Someone always loses, just like with drugs. The drug lord gets rich and the user gets their life destroyed! To further illustrate the point, in testimony to the recent Enquiry into Banking Charges, ABSA Bank (a provider of Credit) stated:
“Credit cards are necessary because Credit cards enable cardholders to make larger purchases than would otherwise have been the case”! (Banking Enquiry Report Pg 315)
And, the conclusion of the Enquiry Panel, on Credit cards, was

“Like a mirage, the interest-free period serves as an attraction to those credit card users who prove unable to repay timeously, and who are thereby more easily drawn into high-interest bearing debt”. (Banking Enquiry Report pg 347)
The inescapable conclusion from this is that Credit, like drugs, should be deemed a controlled substance, to the point of becoming an illegal substance. The entire economy needs a massive “reset”, to remove the artificial increase in prices brought about by Credit. This will force an immediate decrease in prices as no household will be placed at an artificial advantage through the application of Credit, thus allowing all households to compete equally for resources and thus allowing households to “live within their means”. This does not contradict Capitalism. Some will always have more than others, be it through demanding a higher salary as a result of higher intelligence or better education, or through the creation of new products through innovation, that households will demand. The difference is, that there will be no Credit providers to “push” their toxic products on unsuspecting households, enslaving them and creating a yolk and burden for the households from which it is impossible to escape.

I have followed NUMSA’s commentary regarding the SARB Repo rate for some time now and, while I believe they are correct to be concerned about the “interest rate” I would like to suggest that their efforts are somewhat misdirected. I believe it is the Retail Banks, and not the SARB, that should be the target of their efforts. Even Mr Mboweni has expressed his concerns at the “spread” between the Repo Rate and the Prime Rate of the Banks.

In response to the comments by Mr Mboweni, Sim Tshabalala, the chief executive of Standard Bank South Africa said, as reported in the Business Day,

“Standard Bank had total liabilities of R608 billion and borrowed only R2bn to R3bn at the repo rate. The bulk of the funding was raised in the wholesale market – from corporate treasuries and institutional investors – which was significantly more expensive“.

I believe that this last statement must be untrue, as the Reserve Bank is considered a “lender of last resort” and therefore should be the most expensive. This is one of the fundamentals of the Central Banking model. Why not then simply borrow all the funding required from the SARB if other sources are “significantly more expensive”? The fact is that the wholesale market, off shore and corporate treasuries lend at a cost significantly LOWER than the Repo rate, which is why this funding is sourced as a preference. This is precisely why a higher Repo rate attracts portfolio investment into the economy from off shore as it raises the threshold of what is considered a competitive interest rate.

It is also important to consider that the Retail Banks are renowned for lending at the lowest risk, in order to maximise profits, leading to the adage that “the bank is someone who gives you an umbrella on a sunny day and takes it away on a rainy one“. What value therefore do they really add to the economy? Why do we need to pay a premium to borrow from them when we could conceptually borrow directly from the SARB?

This is a question that is becoming more topical today, especially given the massive bailouts supplied to these institutions overseas. I have often pondered why, in America, the government didn’t simply bailout the indebted home owners? This would have had the same effect, bailing out the bank but still leaving the individual with her/his home. As things currently stand, the banks have repossessed the homes AND received bailouts from the government, thus leaving the individual penniless and in the street.

Thomas Jefferson saw this in the 1700’s already when he stated

“I believe that banks are more dangerous to our civil liberties than standing armies. If the American people ever allow the private banks to control the issue of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them [the banks], will deprive the people of all property until their children wake up homeless on the continent their fathers conquered”.

That appears to have been quite prophetic, and illustrates the point that Capitalists and private banking do not go hand in hand. Interestingly, the last American President to attempt to reform the American banking system was John F Kennedy, and we all know what happened to him!

To quote the arch capitalist economist John Adams

“All the perplexities, confusion, and distress in America arise, not from defects of the Constitution, not from want of honor or virtue, so much as from downright ignorance of the nature of coin, credit and circulation.”

The same is true to South Africa and Communists, Socialists and Capitalists alike should have a mutual concern as to the “nature of coin, credit and circulation” in this country. The recent Jali Commission of Enquiry in Banking concluded, in September 2008, that

“SA banks operate as a tightly knit oligopoly that maximise profit by avoiding outright price competition“.

What should be of greater concern to NUMSA than the Repo rate should be the subsequent comments, on 3rd April 2009, by Simon Roberts, the commission’s divisional manager for policy and research, as reported on Fin24.Com that “The inquiry into bank charges made recommendations and (we) hope the banks will change their behaviour”. He went on to say

“The commission could not enforce the recommendations (emphasis added), particularly the lowering of charges on the inter-bank transfer system, as the industry was sceptical (emphasis added) about the possible entry of new “unstable” players which could “contaminate” the country’s financial system.”

It would appear that the nation’s last line of defense against rapacious capitalism (the Competition Commission) has been breached, and I have no doubt we will follow in the footsteps of America and before long “[the banks], will deprive the people of all property until [our] children wake up homeless on the continent [of their ancestors]”.

It is for these reasons that I believe the energy of NUMSA and COSATU should be directed at the major retail banks. If there is an issue of concern with the SARB, it should be the fact that the SARB, by government decree, acts in complete secret. Section 33 of the Reserve Bank Act states:

(1) No director, officer or employee of the Bank, and no officer in the Department
of Finance, shall disclose to any person, except to the Minister or the Director-General:
Finance or for the purpose of the performance of his or her duties or the exercise of his or
her functions or when required to do so before a court of law or under any law-
(a) any information relating to the affairs of-
(i) the Bank;
(ii) a shareholder of the Bank; or
(iii) a client of the Bank,
acquired in the his or her duties or the exercise of his or
her functions; or
(b) any other information acquired by him or her in the course of his or her
participation in the activities of the Bank,
except, in the case of information referred to in paragraph (a) (iii), with the written
consent of the Minister and the Governor, after consultation with the client concerned.

I personally do not believe it is appropriate that a “state” organ such as the Reserve Bank, which has such a huge impact on all citizens lives, should be able to operate in secrecy and that its Shareholders should be a secret. I believe it is a matter of major public concern whom these shareholders are, especially since we already know, via the Press, that a number of them are not South African. Essentially this very NATIONAL asset is in fact a wholly privately owned business that is accountable to shareholders, not the government, and trades at a profit. THAT, good people, is worth demonstrating about.

About the Author

Julian Curtiss has an MBA in Strategic General Management, including a Distinction for Strategic Finance. He has worked in the card industry for the last 10 years, and has consulted to some of South Africa’s largest corporations on the benefits of financial process re-engineering. Before working for the card industry, Julian was involved in financial re-engineering projects incorporating work in the UAE, United Kingdom, Zimbabwe, Kenya, Uganda and South Africa. Julian is a regular speaker at industry conferences and a regular contributor to many industry journals.