A COMPREHENSIVE ANALYSIS OF THE LOWER-END BANKING MARKET IN SOUTH AFRICA

Over 13 million people in South Africa are unbanked, which means that two out of every five South African adults have no access to formal financial services whatsoever. According to Falkena et al. (2004) the most prominent characteristics of the identified unbanked include the following: Do not have any form of transactional account; Are resident in informal areas and townships; Lack a steady cashflow; Are mostly black or coloured; 19% have never had a bank account; 3,6% are indirectly banked through either their families or a stokvel; Have not prior interaction with banks; Are not banking product literate.

From the above, it is therefore recognised that it becomes difficult for people to participate in the formal economy without some form of access to the formal banking system. South Africa has one of the largest divides between the rich and the poor, and the lack of access to banking poses significant social challenges in addition to the more obvious threats to macro-economic sustainability (Keraan, 2010). According to Keraan (2010), South Africa has 19.6 million are unbanked, 2.9 million who were previously banked and 10.2 million who are never banked.

Increasing access to financial services would benefit the individual, the community and the service provider. The South African banking industry is dominated by a relatively small number of competitors, all with a similar range of products and services. The big four banks (ABSA, FNB, Nedbank and Standard Bank) accounting to 85% of banking assets, they were primarily focused on the higher income market, to the exclusion of the lover income market, as shown in Figure 1 (SARB, 2007) cited by Fick (2007). The greater percentage of adults with a bank

account in the higher living standards measure (LSM) groups, in contrst to the much lower percentage in the lower LSMs.

100 90 80 70 60 50 40 30 20 10 0
LSM 1- LSM 3- LSM 5- LSM 7- LSM 92 4 6 8 10

Banked Unbanked

Figure 1: Distribution of the unbanked in terms of the Living Standards Measure Source adopted from AMPS, 2006 cited by Fick (2007)

Figure 2, further shows the relative positioning of the different role players within the industry, base on their degree of differentiation and market segmentation. Investec is only included in the position map for comparative purposes and would not form part of the analysis. According to Coetzee (2010) the provision of retail banking product and services to the low-end market has in the past been somewhat neglected by the big four South African retail banks (standard, ABSA, Nedbank and FNB).

The big four banks have started considering the lower end market since early 1990s, with the government and community groups (the external environment)

putting pressure on the banks to improve access to finance for all South Africans, especially to the low income individuals

Figure 2: A graphical representation of the major competitors and their relative positions in the South African banking industry. The size of the market is an indication of the latest published income attributable to equity holders.

While the government has through the Financial Sector Charter, exerted pressure on the banks to respond to the lower-end market in South Africa, by making financial services accessible, meaningful progress has been hard to some which Keraan (2010) says some was due to lack of appreciation for the full breath of innovation that is required across the critical banking areas of product, distribution and process.

Keraan (2010:1) further points out that there is significant wealth to be made in the lower income markets, pointing to the following examples; The social welfare system in South Africa paid out R69 billion in 2009 to the grant recipients all over the country. While most of this money is banked, the

lack of affordable and accessible banking infrastructure means that the dominant behaviour amongst recipients is to simply withdraw most of the cash from their accounts once it has been deposited. With the local taxi industry responsible for the commute of an estimated 21 million potential banking customers and turns over roughly R45 billion per annum, most of which is unbanked cash. The unbanked market segment represent 13 million adults in South Africa and is an equivalent of R54 billion every year that is completely unbanked at this stage.

The lower end market is seen as a profitable proposition for banks. Even though it is perceived as being risky due the negligible knowledge on how bank products function, the mere size of the market holds promise as to the volume of untapped client. By providing financial services that are relevant to the unbanked communities and people in the informal economy can improve peoples lives. This requires creating low-cost banking models based on highly efficient banking infrastructure which allow operational cost savings to be passed on to customers, which is found by banks to be challenging more so because most of the South African banks are not simply geared to profitably bank lower income markets . Nevertheless, several emerging players were extending payments and banking services to lower income markets in South Africa.

The discussion will look at the following banks (role players) and their strategies as regards the lower-end market industry in South Africa as further depicted in Figure 3:

ABSA bank

ABSA has proved its mettle through the years in the South African banking environment and their vision is to become the no.1 bank in South Africa and

selected African countries. Two significant concepts indicate that ABSA could well make a success of gaining market share in this segment. 1234 Branches are aptly named due to the 4 simple transactions that can be done in these smaller sized branches. These branches are additional to their vast, existing infrastructure and indicate a firm intent to take this market by storm. ABSA also recognised that money on the move is a crucial aspect to master in this market, hence the Cash send concept. ABSA definitely has the resources to make this a success. They have the required vision to understand that this market has huge potential and mature enough to adapt their strategy to move to simpler banking solutions aimed at the mass market. . In addition to this they own a stake in Blue Financial

Services who specialises in icrofinance in 30 African countries and 300 branches. This is a prime example of a dynamic strategy

Nedbank

Nedbank has always been known for their elite customers and focus on the upper segment of the market. They have never shown intention to move to a low-cost strategy, but rather to supply a more sophisticated product to a selected demographic group. It is difficult to find any concrete evidence that they intend to fiercely contend this market. They do however provide a product called the Transactor plus account which do not require a minimum income as prerequisite. This account charges a monthly fee of at least R26,00, excluding transactions. Nedbank do not intend simplifying the banking experience or expanding their existing infrastructure in terms of ATMs or branches for the purpose of penetrating this market. It has to be said that Nedbank will struggle to appeal to the low-income segment through their existing green banking focus, or a vision which strives to be admired by their clients. It would therefore concluded that Nedbank will not be successful in growing market share in this segment through their current strategic intent.

Standard Bank

Similar to ABSA, Standard bank has been around long enough to understand the challenges that an emerging African market holds. Huge infrastructure, sufficient financial resources, and lean organisational structure translate into a success story waiting to happen in this segment of the market. Standard bank introduced their Bank Shops relatively early, after the success of Capitec became evident. They moved swiftly to adapt their strategy to cater for this profitable market. In addition to the Bank Shops, they have introduced Loan Centres serving the credit provider purpose in this market (Ndzamela, 2011). There is a clear intend to tap this market and their size and established infrastructure might just prove to be the recipe for success. Their strategy is to drive transactional volumes which should prove to be profitable.

FNB

FNB is probably the only one of the big 4 banks who has successfully penetrated this market through innovative strategy formulation. At an early stage in the lowincome banking life cycle they introduced the concept of Easy Plan branches. This is not a unique concept, but was a pioneer in the implementation of these simplified branches. As with Standard bank, they intend pushing transactional volumes to the limit, which is really what this market is about. Additional products were introduced to cater for this market in their Smart Account bouquet. It is the opinion of the group that, apart from Capitec, FNB will be the most successful player in this market. Their slogan How can we help you? will appeal to potential customers as a no-frills bank, similar to Capitec. Their inherent goal is to increase transactional volumes

Capitec

In terms of the low-income banking segment of the market Capitec bank is the clear leader. It is one of the successful banks entering the lower end market. The reason for this is due to their ability to integrate their organisational structure,

resources and positioning in such a way as to grow their market. They follow an aggressive strategy towards reducing operational costs in order to transfer those savings to the customer. They pride themselves on their simplicity strategy.

Capitec has become the first bank to respond to calls for tougher regulatory scrutiny over bank fees by promising to make charges more transparent and easier to understand. By using a different business model than the big 4 banks, Capitec succeeded in capturing a segment of the previously unbanked market, and even managed to snatch some of the clients that used to bank with one of the big 4. One of Capitecs challenges is that South Africa allows companies to compete on infrastructure. Companies are allowed to have large privately owned property and distribution devices, which acts as a barrier to entry for entrepreneurs and emerging companies. A prime example is Vodacom and MTN who owns their own satellite towers. Cell C, who could not afford to construct their own satellite senders, have to pay for airtime on Vodacoms network.

However, Capitec will have to decide on their way forward, reconsidering their products on offer as the big 4 banks will probably find it easier to compete on their (Capitecs) turf than vice versa, due to their sheer size. Capitec could stagnate on its current market share due to the lack of resources in the form of infrastructure.

Figure 3: Analysis of different role players in the South African banking industry Nedbank
Objective Vision or Goal Building Africa's most admired bank

Absa
To become the number one bank in South Africa and selected African Countries in terms of profitability and return on equity

Standard Bank
We inspire to be a leading emerging markets financial services organisation. Sub-saharan Africa

FNB
To be a great business, helping to create a better world

Capitec
Simplicity, affordability, accessibility and personal service

Areas

Sub-saharan Africa

Sub-saharan Africa

Sub-saharan Africa

South Africa

Scope

Product description Industry positioning Infrastructure

All banking products All

All banking products

All banking products

All banking products

Transactional and micro lending Lower end

All

All

All

Medium The Green bank, may not currently be an advantage, but could be in future

Very Large Size

Very Large Footprint

Very Large Innovative, appeal to young professionals

Small Apeed of opening accounts

Advantage

Capabilities

Product or strategy for growing the low-income segment

More mobile products

More mobile products

Transactional volumes

Transactional volumes Easy plan branches

Credit cards

1234 branches

Bank shops

Capitec branches

Transactor Plus Account basic transactional

Cash send

Loan centres

Smart Account, no minimum income required

Higher lending limits

1.2

Is the segment attractive and sustainable?

The answer to the question is twofold: Firstly, yes, the segment is attractive, however not sustainable over a long term. It should be noted that South Africa is a country with high banking fees and the lower-end sector is attempting to counteract these high fees. Poor South Africans often do not have bank accounts (unbanked market) due to high fees as well as illiteracy in terms of not understanding banking procedures very well.

It was highlighted above that the lower end market is seen as a profitable and attractive proposition for banks even the big four. Although perceived as being risky due to the negligible knowledge on how bank products function, the mere size of the market (estimated to over 13 million South Africans are currently unbanked, as cited by Keraan (2010)) holds promise as to the volume of untapped client.

Due to its high incidence of poverty, South Africa has the potential to be a hub for the so-called lower-end banking sector. As noted above, people often cannot afford high banking fees. Thus, they could only be encouraged to open bank accounts and be actively involved in the sector if they could be guaranteed that a large portion of their income/savings will not be channeled towards fees and administrative costs.

Secondly, based on the above response, the segment will not be sustainable over long term because: No company should stagnate for too long by focusing on a narrow offering. It could only be good bank charges in the beginning as the company establishes itself in the market. However, the company should strive to move forward and even take the risk of pursuing new products or offerings and market areas. Furthermore, due to the fact that organisations or industries operate in a dynamic and complex environment, Capitec need to formulate its strategies to attempt to establish or continue retaining it competitive advantage.

Due to the attractiveness of the lower end market, the bigger banks as the competition are becoming increasingly hungry for that segment. It is obvious that

the top four banks will eventually caught up with Capitec with regards to its focus and success in the lower-end market. Therefore, Capitec needs to constantly and continuously improve its product offerings in this market, and on its efforts to outclass the competition.

2.

References

Coetzee, J. 2005. Banking the unbanked in South Africa: The practical implications on branch banking [Online].Available from: <http://www.essa.org.za/download/2005Conference/Coetzee.pdf> [Accessed on 26 July 2011]

Falkena, H. Davel, G. Hawkins, P. Llewellyn, D. Luus, C. Masilela, E. Parr, G. Pienaar, J. Shaw, H. 2004. Competition in South African banking. Task Group Report for the National Treasury and the South Africa reserve Bank, April

Keraan, T. 2010. Banking the bottom of the Pyramid: The egg that all emerging market banks need to crack [Online]. Available from: http://www.deloitte.com/assets/DcomSouthAfrica/LocalAssets/Documents/BankingtheBottomofthePyramid_16112010. pdf [Accessed on 26 July 2011]

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