The Free Market Foundation (FMF) has warned against the South African Reserve Bank’s (SARB’s) proposal to introduce domestic debit cards.

In a consultation paper published on 2 March, the central bank said that it was conducting an assessment that will look at creating ‘white-label’ banking cards that can only be used in South Africa or neighbouring countries.

Among other benefits, this should allow for cheaper transactions than those offered by dominant players such as Visa and Mastercard.

The SARB said that most unbanked South Africans have no immediate need for a card that can be used overseas.

“This raises the question regarding the scope for developing white-label or locally branded cards as cheaper alternatives to the brands of the major card schemes – especially for consumers who do not enter into global internet transactions or use cards beyond the borders of South Africa or beyond the Southern African Development Community (SADC),” it said.

However, the FMF said that the introduction of domestic-specific would not ensure that South Africans receive either better service or lower real costs.

“The direct entry to this market of a central bank, with its innate insensitivity to business costs and therefore to social costs, would disrupt the market structure and innovative processes for all future card schemes, whether international or domestic.”

Similar problems would arise were the Reserve Bank not to enter but to design, and thereby to overdetermine, the market structure of a domestic card scheme, it said.

“Excessive involvement in market design by the regulatory power risks the proscription of better designs that emerge from entrepreneurial attentions.

“It would also risk the path-dependent lock-in of a business model that is potentially more dependent on regulatory processes than on market processes for its adaptation to a constantly changing economic environment.”

Problems 

The fact that there is not currently a domestic card scheme operating in South Africa is not a sign of market failure, the FMF said.

“If the financial marketplace is reasonably free from regulatory restrictions, and there are no significant national security concerns, then the absence of a domestic card scheme is a market success,” it said.

It said that if there truly remains a compelling national desire that there be a domestic card scheme in place, then the most beneficial path would be to remove regulatory and fiscal policy barriers to entry and competition.

“That is where the greatest gains in social welfare would be found. Reform of prudential regulation is within the purview of the Reserve Bank and reform of the tax system toward greater efficiency would be coordinated through the Department of Finance.”

“The fact that the card schemes most widely accepted throughout the world originated in, and continue to operate from the United States, suggests a direction, if not a minimum standard, for regulatory and tax reform in South Africa.”

Standardised measures of economic freedom consistently show that American businesses are less hindered by regulatory restrictions and compliance costs than are their South African counterparts, it said.

“Similarly, Americans enjoy lower marginal tax rates and commensurately lower tax burdens. Even within the United States, significant numbers of Americans are moving their families out of states with higher state regulatory and tax burdens toward those states with lower burdens. The same response to such incentives applies worldwide.”

Once implemented, the FMF said that there is also the distinct risk that the statutory body will:

“Once again, the statutory implementation of a domestic card scheme would not ensure that South Africans receive either better service or lower real costs. A card scheme that receives special regulatory treatment or implicit subsidies would not be a genuine low-cost operator.

“The incentive structures would run counter to market development and would harm users and competitors alike. By contrast, a domestic card scheme that emerges and builds acceptance in a relatively free market would rightly be perceived as beneficial to the finances and to the lives of South Africans.”