It is widely accepted that the South African financial sector is highly concentrated. Since the IMF’s 2014 report (Financial System Stability Assessment) not much has changed. Insurance, banking, capital markets and pensions activities are still dominated by large, cartelised, highly capitalised and equally powerful financial institutions which suffer from a historical bias towards extending financial products to high and middle-income earners. As such, any talk of growing financial inclusion and increased competition by enabling market penetration by other market players falls on fertile ground.
The understanding is that a degree of competition would have a strong bearing on the efficiency of production of financial services, especially the quality of financial products. Competition would enhance, and be enhanced by customer mobility. It is on record that the industry, particularly the South African banking sector, exacts comparatively higher transaction fees in the world. Competition would thus come not only with increased access to financial services but also lower charges and fees. Switching providers would be less challenging. Such mobility helps to generate the best terms for customers as financial service providers endeavour to entice patronage. Likewise, competitive market structures have a potential to promote stability by reducing the number of institutions that are “too big to fail”. In the same vein, competition would displace inefficient financial markets players while enabling the efficient ones to enter markets and expand. In fact, in most emerging economies insufficient competition has been linked to sub-optimal performance and lack of innovation by existing market players.
Usually competition policy is meant to address the potential anti-competitive effects stemming from individual cases rather than from a generalised situation. However, in the case of South Africa the recent case of the cartelised manipulation of the exchange rate demonstrated the existence of herd behaviour and established the fact that this was not a case of individual banks but a generic, system-wide crisis. It is such misconduct that gives ammunition to the agitation for greater competition.
Making a case in favour of competition on the premises of populism, cost minimisation and allocative efficiency alone espouses a degree of naivety. Cross-country studies have shown that there are other analytical issues that need to be considered. To start with, empirical and theoretical evidence – and indeed diagnostics of the 2007-9 global financial crisis – have demonstrated that intense competition was closely linked to excessive risk taking and the consequent private market indiscipline and the turmoil we witnessed. Policy makers have responded by restructuring and re-regulating the industry with a view to arresting the untrammelled greed that competition for bonuses generated. In essence therefore, it is argued that competition worsens stability.
A corollary challenge pertains to the enforcement of competition regulations. As the Economist (It’s complicated, 18 October, 2014) noted that making sure companies compete fairly is problematic and tricky. This is due to the fact that, when compared to the regulator, firms being regulated have superior knowledge about their businesses. Labouring under asymmetric information, regulators, particularly in politicised industries such as ours, easily end up adopting a heavy-handed or an overly lax response.
It is no wonder therefore that the world over, and for ages now there has been a realisation that financial sector competition is not unambiguously good. As such competition policy has to be cautiously applied. The unique characteristics of the sector mean that financial institutions are still treated somewhat differently from for instance, typical markets in goods and services. Such characteristics imbue the sector with an aura and a clamour to let monetary and financial policies as well as market forces, and not regulators, determine the sector’s activities. This has been clearly demonstrated by events in the recent financial crisis where some institutions were regarded as “too big to fail” and warranted state bail-outs.
In the South African context the structure of the financial sector continues to spawn a call for the reformation of the industry with a view to making it mirror the demographic set up of post-independence South Africa. Proponents of transformation argue that the current financial sector topography is lopsided, that it has for long been an exclusive club of a few and that such a hegemony can only be shattered by a strategy which stimulates a greater degree of competition by enabling the entry and participation of new market players.
Probably what complicates the whole debate is the fact that it is hard to be definitive on how the competition policy should be steered. In fact, shifting the paradigm has always divided economists. In this contest, the majority of scholarship acknowledges that competition has the ability to spur improvements such as creating greater access to services, vaster product differentiation and lower the cost of financial intermediation. All such outcomes are linked to higher living standards and faster economic growth. Nonetheless, concerns should not be ignored.
In all this debate, competition policy should not be swayed by populism or electioneering. It should not be a political points-scoring exercise which basically licenses an assortment of small, under-capitalised players that cannot capture economies of scale or make solid investments in people, technology, training and research into product development that supports innovation. Policy should be about creating strong firms that can compete aggressively not only with each other but also with foreign firms and global markets. The whole exercise should seek to create a balance between financial stability, market competition and the economic, social and historical realities that abound. Achieving that might entail for instance, creating a new regulatory attitude that not only removes both subtle and direct forms of protectionism and barriers to entry but also the design and implementation of exit strategies that are not anti-competitive. DM