If Covid-19 is teaching us anything, it is how little financial resilience there is among the general population of South Africa.
Personal finances remain in a perpetually precarious state. The current financial system is not set up to help ordinary people. Sure, you can get easy access to credit at exorbitantly high interest rates, but it’s much harder to get proper advice on how to manage that debt, or how to get ahead in life more generally.
This is true for traditional financial services globally, but even before Covid-19, South Africans already had to contend with more than most: a broken economy, rolling blackouts and a weakened currency.
Then there’s the hidden burden of ‘family tax’ or ‘black tax’, which sees many people working hard and earning well, yet struggling to thrive because of responsibilities for ageing parents or family members that are dependent on them.
By some estimates, among first-generation middle- class earners, as many as 80% are paying, or have paid, some form of black tax, and it consumes between 10% and 25% of their income.
A tale of two circumstances
Looking at two typical SA stories illustrates how the black tax burden plays out in people’s lives. Take Kagiso and Loyiso: Two young men equal in talent, education, and work ethic, but with quite different starting points.
Kagiso gets his first car as a hand-me-down from his father, is on his parents’ medical aid until after university, and gets help so that he pays lower-than-market rent when he starts working. He also gets support in securing his first property.
Loyiso, on the other hand, leaves university with a student loan, must put his parents and sister on his medical aid, and commits a chunk of his first pay check to helping his sister complete her studies. He sends money home to his parents every month.
These early circumstances gather momentum to define their financial futures. Because of his more privileged start, Kagiso finds himself in a position to take more risks in his career. He starts a successful business in his mid-30s and can leverage this wealth by investing in property and his retirement.
Loyiso is never able to take any significant risks. He is saddled with student loan debt, contributing to family funerals, and supporting ageing parents, while juggling his own responsibilities and paying off a car.
Fast-forward a generation and it's plain to see why SA has such high and persistent levels of inequality. Kagiso's children are property owners while Loyiso's children are tenants who much support their father. Wealth flows backwards rather than forward through the generations and social mobility painfully low. Even with a good education, South Africans are highly likely to end up where their parents were.
To put this into numbers, a 10% to 20% black tax deficit means it will take you five years longer to buy your first property, and when you do, it will be in an area 25% lower in value than your unburdened peers. You will need to work seven years longer to enjoy the same lifestyle they do, and you’ll have 60% less wealth to give your kids a good start in life.
Your margin for error is much narrower, too. If you have a financial setback – for example, a failed business that costs you R300 000 – it will take you five years longer to recover. You’ll have to work well into your 80s to make up the difference, with a strong possibility of ending up in a debt spiral along the way, and pass on black tax to the next generation. It’s not difficult to see how the current economic crisis is going to further disadvantage Loyiso.
Ripe for disruption
For SA’s economy to unshackle itself from its entrenched inequality, we need to look beyond macroeconomics and start focusing on people’s personal finances.
The financial services industry is ripe for disruption. It currently caters for those who already have wealth, while ignoring those who need advice the most. And the problem lies at the very core of the traditional business model: Financial advisers make money from selling products, and products can only be bought by those who have money.
The challenge facing us is to cater for the mass and middle-income market segments in a way that mimics the bespoke and independent advice reserved for the ultra-wealthy. In effect, we need to focus on helping people make the right life decisions that ultimately lead to the creation of wealth; the career, lifestyle and business decisions that shift a person’s trajectory.
This demands a radical new way of thinking about financial advice – and, indeed, our clients. Instead of classifying somebody like Loyiso based on his current circumstances, we should be looking past these to what he can become.
Creating a sustainable business model
Making this model sustainable from a business point of view isn’t easy. Sometimes the important advice for Loyiso is that he needs to pay off his debt first or find a side hustle or borrow to fund his MBA.
Financial advice will need to be marketed in a way that convinces people to sign up and pay a monthly fee for advice. To do this, the service will need to deliver tangible value for the client over the long term, and at low cost.
Fintech can help solve the problem of economies of scale because it can reduce the time it takes to give every customer a personalised financial plan and provide high- quality and consistent advice every single time. It also allows you to empower clients to take charge of how they explore and interact with that advice.
Of course, sound financial advice cannot be left to technology alone. When people interact with stressful decisions like finances, empathy is an important factor to eliminate translation errors between man and machine. More importantly, financial plans demand sacrifice, and people need an accountability partner to help them stick to it.
Technology isn’t great at driving behaviour change over the long term, but a trusted adviser might be. But the human factor should be used when it makes a difference, allowing the machine to take care of the rest. The future of advice is in leveraging the best of both worlds.
In this new approach, a monthly subscription fee of a few hundred rand – multiplied over a decade – starts to look like a sustainable model. And for someone like Loyiso, it means a small monthly investment in his ideal future, at less than the cost of a gym contract.
The current crisis has highlighted the vast inequalities in this country; it has also highlighted the urgency for innovation in the financial services industry. If we don’t manage to create a model that provides more South Africans with fair and wise advice, we will never shake off the persistent inequality that dogs this country.
Abu Addae is the co-founder and CEO of LifeCheq.