Lean and mean vs big and bloated

2011-01-22 13:45

Low-income earners will soon be smiling all the way to the bank as they realise that less of their money is disappearing on charges.

This view is shared by Capitec Bank, the lender that is the pathfinder in this market, and the Banking Association of SA as more lenders enter this market.

This is the latest episode in how enterprising firms have changed the business landscape over the past 10 years, made mountains of money and broadened access.

Discovery revolutionised the health insurance and medical aid industry by introducing the medical savings account.

Kulula.com broadened access to air travel and helped to make it cheaper.

The Daily Sun, City Press’ sister publication, unearthered new readers and helped improve English literacy.

Cas Coovadia, the managing ­director of the Banking Association of SA, believes Capitec’s success has been a catalyst in growing the affordable market.

“Other players would have eventually entered this market but not as quickly as they have,” he says.

“What is happening is good for the sector as it is broadening ­access to financial services. Competition is going to bring down costs as products for this market will be appropriately priced.”

Carl Fischer, Capitec head of marketing and corporate affairs, says the increasing competition to bank low-income earners will help to grow the affordable retail banking market.

“The competition is going to keep us lean and mean,” says Fischer.

Capitec’s lean-and-mean approach to banking has delivered fat returns for investors and broadened access to financial services over the past 10 years.

Its ability to harvest good ­returns by offering no-frills banking has lured First National Bank (FNB) and Ubank, formerly Teba Bank, into this market that barely existed before 2001. Now the state-owned Postbank has concluded legislative changes that will also ­allow it to enter this market.

Ubank and Postbank are moving away from their past as savings institutions, while FNB launched low-cost EasyPlan outlets last year to compete directly with Capitec.

Postbank hopes to have met the requirements for it to receive its banking licence from the Reserve Bank by next year.

The market has responded well to Capitec. In just a decade it has attracted 2.5 million customers, spread between people who never had bank accounts before and those who changed over to it because of ­lower costs or the convenience of banking for longer hours.

This has allowed Capitec to grow its market share in retail banking to 7%. Finmark Trust estimates there are 19 million banked South Africans, mostly low-income ­earners.

“We have highlighted to our ­opposition that there is a cost­effective way of providing retail banking. The bigger guys focus on high-income individuals but we have shown that there is a huge middle income and mass market in South Africa,” says Fischer.

“Consumers, whether they are high-income or low-income ­earners, want affordable retail banking.”

Capitec, which emerged from a few struggling microlenders in 2001, served notice to the bigger banks that it was a player by undercutting them on services such as debit orders, debit card purchases and ATM withdrawals.

It has been somewhat of a maverick game changer.

Thanks to its centralised back office, which supports all of its 400-odd branches nationwide, Capitec has been able to keep its costs down and charge the lowest banking fees in the market.

Capitec operates branches that are as paperless and cashless as possible.

The bank is also ahead of identity thieves. It uses fingerprint ­biometrics and photographic ­identification technology, which makes it difficult for forgers to steal customer’s identities.

Entering the low-income banking market comes with a health warning.

Peter Mushangwe, an equity analyst at Legae Securities, warns that any new player that takes on Capitec must do its homework thoroughly because credit risks are high in the mass market.

He does not see the sensational growth of Capitec continuing at the same pace in the coming years.

“In 10 years time penetration in the lower income segment would have increased to levels that wouldn’t allow for the current super profits in that space,” he says.

He foresees Capitec being able to maintain its growth by possibly moving up the curve for a decade in terms of its client base.

The next frontier in the fight for customers is the provision of cheaper channels. Banks are encouraging their customers to do their banking through less costly channels such as debit cards, ­the internet and cellphones.

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