Established banks to get a run for their money
New entrants licensed to set up (and shake up) business
NEW banks due to open in the next few years are expected to give the incumbents a run for their money, but the wellestablished banks are gearing up for the competition.
Riaan Stassen, the former CEO and now chairman of Capitec, said it would be a mistake to underestimate potential new entrants to the banking sector. This comes after Discovery Bank, Postbank and Tyme were all granted provisional banking licences by the Reserve Bank in the past few months.
“Not for one minute can we afford to relax at Capitec and think that we’ve done it and it would be impossible for someone else to come in. It’s always possible. We’ve proved that,” said Stassen.
Jacques Celliers, CEO of FNB, has welcomed the competition, saying it was a sign that entrepreneurship in South Africa was alive and well.
“Disruption is hitting us from all sides, but we are up for the challenge. It’s important to remember we, too, can copy fast,” he said.
Standard Bank and Nedbank did not respond to requests for comment.
Issued under section 13 of the Banks Act, the licences, the first granted in 11 years, enable these firms to begin setting up banks. They have a year within which to submit section 16 applications to receive final approval from the Reserve Bank to conduct the business of a bank, including taking deposits from the public.
“Discovery has revolutionised the insurance industry in South DISRUPTOR: Capitec chairman Riaan Stassen Africa,” said Stassen. “Obviously they think they can do the same in banking . . . I see them as direct competition.”
He said there was plenty of market opportunity across retail and business banking, particularly in servicing small and medium-sized businesses.
An even bigger mistake than underestimating new competitors was to make assumptions about what they wanted to achieve, he said. “[The big four] thought we [Capitec] aimed to attract deposits to fund our microlending book, and wanted to remain a bank for the poor. That was never the intention.”
Today, Capitec has 7.9 million active clients, of which 3.6 million are primary banking clients (who make regular deposits), making it larger than Nedbank’s retail customer base.
Attracting large numbers of customers that are profitable is a major challenge for any bank. Arguably, Discovery Bank’s competitive advantage will be its ability to tap its existing affluent customer base. Its medical scheme alone covers 2.7 million BRANCHING OUT: Capitec now has a larger retail or primary bank client base than Nedbank lives.
“That’s a big risk for [other] banks since these [retail affluent] customers tend to be more profitable,” said Harry Botha, an analyst at Avior Capital Markets.
“Banks that deal with more affluent customers are most at risk, such as FirstRand and Nedbank, whereas Standard Bank and Absa service a more broadbased market.”
Discovery will likely use a variation of its Vitality rewards programme to attract customers and reward them for good banking behaviour.
The insurer already had a successful credit card offering through its joint venture with FirstRand, which meant it had credit data on existing cardholders, said Adrian Cloete, a portfolio manager at PSG Wealth.
“They are innovative and disruptive and I think they will have a big impact on the market. Banks will have to respond to them in some way,” Cloete said.
A lesser-known competitor is Tyme (take your money everywhere).
This is a local mobile payment start-up that was acquired by Commonwealth Bank of Australia last year.
Having developed MTN Mobile Money and built Pick n Pay’s money transfer service, Tyme is clearly well versed in digital financial services, but little is known about what its banking strategy might look like.
Still, its giant parent is reason alone to take notice of this new entrant. At $98-billion (about R1.357-trillion), CBA’s market capitalisation exceeds that of South Africa’s top five retail banks combined ($58.7-billion). Based on public statements, CBA is serious about developing its emerging-markets footprint and reported after-tax profits of $7-billion for the year to June.
Whatever Tyme’s strategy in South Africa might be, it has serious firepower to support it.
Postbank, which is already a deposit-taking institution in terms of the Postal Services Act and a participant in the national payments system, has 5.5 million bank accounts (mostly among low-income consumers and not all of them active) and R5.3-billion in deposits.
“After we are granted the licence, we will be able to expand our offering beyond savings and transactional products to include lending,” said acting Postbank MD Shaheen Adam.
Postbank hoped to win more government business, such as distributing social grants on behalf of the South African Social Security Agency and paying salaries for provincial governments, he said.
“We can utilise the distribution services of the Post Office to expand our range of services to government,” said Adam.
While new banks had an advantage — they could develop better technology from the start and did not have to deal with legacy systems — banking was capital-intensive and there were high regulatory hurdles to overcome, said Cloete.
“It’s a tough market to compete in.”
Discovery and Tyme declined to comment.
Disruption is hitting us from all sides, but we are up for the challenge