“If you make products simple, cost is greatly reduced”
Anton Friend, treasurer at South Africa’s Capitec Bank discusses the bank’s core focus on retail, factors that allowed it to gain a foothold in the country, and the service model. March 17, 2014 | ResearchSouth Africa’s retail financial services industry is dominated by the “Big Four” players, ABSA, First National Bank, Standard Bank and Nedbank. Together they take up the lion’s share of retail banking assets in the country. For years, there was no competitive pressure on pricing, market share or margin, and high market barriers kept international and new banks out of the game. Consumers paid the price—they were charged exorbitant. Banking fees in South Africa are relatively high compared to developed markets. Hence, South African banks generate among the highest fee incomes across Africa, Middle East and Asia, an average of 45% to total retail banking income. When Capitec Bank started in 2000, transforming from a micro-lending business into a full service loans and savings bank under the leadership of Riaan Stassen, one of the bank’s founders, it set out to change the status quo. Today, Capitec Bank is South Africa’s fastest-growing full service retail bank, and as a relative newcomer to the South African banking sector it is acquiring customers at the expense of established giants in the market, shaking up the South Africa’s retail financial services industry. Revenue is driven by its deposit, debit card and unsecured lending business. It has no mortgage and credit card business, though the bank may enter the latter in the near future. Retail contributes 100% to total assets and around 91% to total funding. “In South Africa, many employers require you to have a bank account to receive a salary. People were forced to open an account but bank charges were so high, low income people were not able to afford it. Hence the only transaction they really had with the bank was short-lived and lasted only until the first salary. Churn was high. People didn’t trust the big banks. So those acquisitions turned out to be very unprofitable clients. The only transaction the bank did with them was on pay day, when everyone storms the branch and the bank makes a little bit money on one ATM transaction. What we did was to turn the whole thing around. If the big banks turned those clients away, we embraced them. Our business model is geared towards a high-volume, low-value type of transaction business. We have only one product on the transactional banking side with a standard set of fees. In South Africa, the norm is having about 20 different savings products, which makes it difficult for customers to understand which one to use. It is also costly to maintain because you have 20 different options to sell,” said Anton Friend, treasurer at Capitec Bank. Capitec Bank leverages its relatively new non-legacy banking platform and its simple and transparent banking fee structure, catering initially to the lower end of the market. Retail banking is the bank’s only operating segment providing transacting, saving and unsecured credit products to individuals within South Africa. It currently does not operate business and corporate banking, insurance or any other business lines. Capitec Bank’s meteoric rise took place over the last four years. While bigger banks such as ABSA, Nedbank and Standard Bank lost market share in deposits, the bank’s deposit market share increased from 1.5% to 4.0% between 2010 and end of 2013. In the unsecured credit market, its share shot up from 10% to 17% during the same time. At the same time, Capitec’s retail asset size of $4 billion and 560 branches as of end 2013 is smaller compared to that of ABSA Bank, the largest bank in South Africa with retail assets of $48 billion and more than 900 branches. The bank has added on average 70,000–100,000 new clients per month for the last 2 years and has 4.7 million clients as of August 2013.Capitec hasn’t seen any slowdown in growth rate, and it believes that with the rollout of more branches, service projects, re-engineering of the front end and lifting its service levels in the market, as well as the impact of investment in advertising with the “Ask Why Campaign”, it might be able to sustain momentum into 2014. The bank’s best known product is its Global One transaction account. It attracts a single monthly administration fee of currently $0.4. Prices are fixed per transaction, regardless of the value, except for cash deposit fees which are fixed at 0.75% of the transaction value. This is not common practice in a country where the fee rises with the value transacted. The bank charges though cash deposit and withdrawal fees. “The conventional idea in the industry is that platinum cardholders are made to feel special but others with low income don’t qualify for the better product or service. At Capitec Bank, everyone gets one price and one gold card. So the low percentage 0.5% of the population in South Africa that would qualify for a platinum card would be disappointed but 99.5% most are happy. What we have done is make our product offerings extremely accessible, affordable and easy to understand because even educated people find banking difficult. One example is our straightforward pricing structure. We don’t have many different pricing points and that took away the difficulty in banking,” Friend elaborates. Capitec Bank’s service model is geared towards simplicity and paperless banking. “If you make products simple, the volume of enquiry—and hence cost—is greatly reduced. When people come to the branch, you don’t need to go through a lot of authorisation levels. If you want to open an account, it should take 20 minutes until your card is printed with your name on it and immediately activated. You don’t need to wait for approvals. And if you are applying for a loan and the loan is granted, it is loaded directly on your card. The reason behind this is that only a quarter of adults in South Africa have a school leaving certificate. When customers arrive in a traditional banking hall, they need to fill out papers which they may not know how to do. As a result, they feel intimidated and hence don’t embrace banking. With us they don’t need to fill out forms. Our consultants enter their details for them online, which provides efficiencies for us as well. Our branches are paperless. When our clients open an account, we will take their photo with a webcam and register their details on their behalf. When they come back into our branches, we can immediately identify and help them—this doesn’t happen at any other bank. People in big banks are not made to feel welcome. At Capitec Bank, everyone is introduced to the branch manager. For every single customer who buys shares in us, we acknowledge that and welcome them to the family. We are entrepreneurs and you are part of running this bank,” explains Friend.
Capitec Bank is particularly successful in its unsecured lending business. “When the regulator opened the market for unsecured lending in 2007, it was done to increase the volume of access to formal finance. And that is where the huge gap is in the market. In South Africa, only 6% of adult South Africans roughly 1.8 million—have a mortgage and the number of people having a mortgage stayed flat over the last six years. The reality in South Africa is that most homes are not able to be mortgaged as banks are not able to secure a parcel or foreclose the property. But people living in informal areas may well have a stable job, such as a teacher, and have money. Capitec Bank provides unsecured lending to people who can afford a house. First world type secured mortgage financing doesn’t work well for the majority of people in South Africa. There are lots of institutions which do that and there is a lot of finance available. But we are saying over 60% of our long term loans are used for the improvement of people’s homes and the purchase of landed assets. This type of financing has a specific role to play in this country,” said Friend. To allow Capitec Bank to capitalise on segments which were neglected, its entire infrastructure and organisation had to be done from a low cost point of view, a DNA the big players were trying to copy but didn’t succeed. “Our cost-to-income is at 33%, whereas that of the conventional retail bank is 55%–70%. That is the reason why they don’t believe that this market is interesting. On the transaction side, our peers have products which compete with ours to an extent on price but they sell it to a very low portion of their clients. Moreover, it is one of many products, which they can’t afford to sell to their whole client base. In the beginning, we started to put our branches in low-income shopping malls as well as in townships and train and bus stations. Now middle income people started to use our products as we started to open branches in middle income shopping malls and because we provide great service and cut out all the fat that exists in bank such as rewards schemes and loyalty programmes, he explains Bigger banks have tried to come up with their own low cost banking strategy and branch sites but it didn’t work. In effect, to make it successful would mean to fundamentally reengineer the whole branch structure. “When we set up our banking platform in 2001, we didn’t have any legacy systems to maintain. Everything is done on a Windows-based platform and all the branches are linked to the centrally located servers. The cost of our banking system is incredibly low. We have effectively centralised all back office activity. We have on average about ten full time employees in a branch and none is back office staff. We have four branches served by one back office person. That means we have a 40:1front to back office worker ratio. Generally, in South Africa you see as many people in the back office as there are at the front office,” he adds. “We measure almost everything. We can monitor every single client from entry and measure our consultants’ time for every single transaction service. Above average consultant or teller times reflect inefficiencies and we can monitor and manage staff to achieve set standards. No other bank can manage banking processes as efficiently as we do,” Friend emphasizes. With its current success, there are questions whether the bank is able to maintain the quality and service standards into the future. The current distribution infrastructure would not be able to handle 10 million clients and Capitec Bank needs more clients to reap the economies of scale to bring down fixed costs. It is still in a growth and expansion phase, aiming to increase market share, footprint and client numbers materially. Capitec Bank will be opening 70 new branches in 2014 (compared to an average of 55 branches per annum between 2009 and 2013). In 2001, the bank integrated a FNS core banking platform into their banking system, the same one SBI India is running for their thousands of branches. By 2018, the bank aims at further internationalising their business model and a larger virtualisation of their business by replicating its business model in other parts of Africa and building a full-fledged mobile/internet banking suite. Categories: Cards, Consumer Credit, Deposits, Retail BankingCards,Consumer Credit,Deposits,retail, Cards,Consumer Credit,Deposits,Retail Banking, Keywords:Anton Friend, Capitec Bank, South Africa Anton Friend, Capitec Bank, South Africa
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