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South Africa's banking sector is set to become more competitive as another foreign bank enters the market.

The debate over South African bank fees was re-visited at the end of June with the entry of Virgin into the country's credit card market. The company also announced further plans to extend its activities to South Africa's mortgage market.

Virgin has been already making headlines with its pay-as-you-go-cell phones, and the company is now planning to undercut the country's major banks with a new credit card from Virgin Money. Richard Branson, the head of Virgin, declared late June that South African credit card users were losing out to the tune of R1.5bn ($207.5m).

This is the second major entry by a foreign company into the South African retail space within a year, as Barclays Bank of the UK bought the Afrikaans bank Absa for R30bn ($4.15bn) in 2005. Virgin credit cards will be an equal joint venture with Absa worth R240m ($33m), and with Virgin Mobile choosing a local partner, South Africa's third mobile operator Cell C.

South Africa's banking sector is dominated by four major banks, and it is this lack of competition that is often blamed for a banking culture perceived by many to be out of touch with the needs of its customers. This complaint is not unique to the banking industry - consumer power is still considered to be a relatively fresh concept in South Africa, where long years of isolation stunted competition and consumer choice in many sectors of the economy.

Creating a culture of customer service and encouraging greater competition is proving to be a lengthy process. The charges levied by banks are currently under investigation by the South African Competition Commission. So far, the commission has cited a lack of transparency over operating costs and the sector's payments system.

Branson is looking to exploit the pressure being brought to bear on the retail banks by claiming that South African credit card holders have been denied choice for far too long and that the country's existing banking industry is not customer friendly.

Not everyone, however, is convinced that South African customers are getting such a raw deal. Paul Harris from First Rand Bank told OBG that South African banks are not overcharging clients and that talk of cartel activity was preposterous.

"Return on assets for South African banks are 2% at best", he said, "and that does not give us a lot to play with." He also pointed out that a cheque in South African is turned over in a day, while in the UK, for example, it takes up to four working days. Harris contends that while UK banks do not charge customers using an ATM, they simply look for revenue streams elsewhere.

However, some analysts claim that South African banks need to cut their dependence on bank charges through greater diversification of their revenue streams. It can also be argued that holding a cheque for four days has a negligible effect on the income of a bank's average customer. In most countries, banks charge customers of other banks to use their ATMs, whereas South African banks actually levy ATM charges on their own customers.

Many in the industry talk of Barclays bringing new practices and competitive initiatives to South African banking, and perhaps the new venture between Absa and Virgin will be the beginning. While Absa maintains that it is not in direct competition with their new partners, with the new Virgin money card aimed at younger customers, it seems almost inevitable that there will be a significant shake up of Absa's own credit cards in the coming months.

It has been reported that Virgin Money plans to pump up to R50m ($6.9m) into its card venture in the first year in order to help build up a client base, with a target of 130,000 cards in the first year. Virgin has said it plans to have 500,000 cards in circulation within five years.

Meanwhile, Virgin also plans to open a new front and take on the banks in the mortgage market, with plans to launch Virgin Mortgage in South Africa before the end of the year.

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