NOMPU SIZIBA: FirstRand is eyeing the informal economy in parts of South Africa as it sees untapped businesses with great potential, and it’s going into the unchartered territory of investing in townships, starting with Alexandra, in the process perhaps helping to realise the government’s bid to rejuvenate the township economy.
So, what’s prompted this move, and does the reward outweigh the possible risks? To tell us more about this issue I’m joined on the line by Jesse Weinberg, the head of SME at FNB, which is the retail banking arm of FirstRand.
Thanks very much for joining us, Jesse. For years the township economy has been ignored by the formal banking sector, with people having to do their business on a very small scale, with limited access to funds, a survivalist-mode type of thing; and now you guys appear to be interested in lending money to folk there. At what point did you guys develop an appetite for this?
JESSE WEINBERG: Thanks for having me. I think what’s probably important to mention is that I don’t think it’s so much that the banks have ignored this particular market; it’s really always just been a matter of how you go about tackling or even going about entering this sort of market. That’s really what sparked our interest in the beginning. We reflected as executives around the table, and realised that, while we might be very good in terms of banking a lot of more formal businesses, there is a massive part of this country which is not necessarily what we sometimes call “Sandton businesses” which have their financial statements in order and their books done with a high level of financial literacy.
We said, as one of the leading banks in the country, we owe it not just to ourselves but also to our shareholders and to the country to reflect them, and make ourselves more relevant to this part of the country and how we can actually help provide better financial inclusion and financial services to the informal sector or, as we call it, the “unseen sector”.
NOMPU SIZIBA: That sounds great. So, what about the risk-reward question? How will you address that, especially because you are dealing with business people in the informal economy, like you say. The books are not necessarily up to scratch or anything, but these are businesses that could be making a lot of money.
JESSE WEINBERG: That’s true. What we’ve landed on is something that’s become a very powerful value of our organisation – the concept of shared value. And we are more convinced than ever that the only way we are going to get a reward from trying to tackle this particular market segment is, first and foremost, by putting value on the table to really help these businesses’ lives, or to convince them beyond a reasonable doubt that what you are offering them is something that’s valuable in their lives.
To that extent, all the solutions that we are rolling out, launching, are putting this concept of shared value first, to actually say exactly what you are describing to a business that is maybe operating in an informal environment – why would they look at what you are offering? Firstly, they need to understand it, and secondly they need to say, “I see the value in using your solution, because it’s going to add value to my life.”
The premise of this whole thing is that our solutions are really about saying, if we want people to get more involved in the formal financial world, they need to see value, and we need to recognise that.
We are in particular looking at the situation where we are interested in creating agents out there, for lack of a better term, where we feel that these businesses are getting value by being part of the value chain. There’s a much greater opportunity then for them to help on-sell the knowledge, so to speak. So, we think from that point of view, bringing more businesses into the supply chain and the value chains will reap rewards somewhere – even if not immediately but down the line – from the people participating more in the banking environment.
NOMPU SIZIBA: So, what type of business model are you looking at? How are you going to go about attracting unbanked businesses in the informal economy, and will e-banking be a big feature in your offering?
JESSE WEINBERG: There are a lot of problems to it, but I guess the one that’s worth mentioning is that we found that an overwhelming percentage of the trade that happens in the informal economy is around physical goods, and it’s around, to be even more specific, fast-moving consumer goods – FMCG. There is a lot of stock, and that’s where the bulk of the value is being traded from a rand and cents point of view.
And so, our solution that we are in the process of rolling out now is looking at how we can get more involved in terms of how stock flows between businesses. It could be a spaza shop that’s ordering trading goods from the wholesaler, or it could be a wholesaler ordering trading goods from a bigger wholesaler. Our approach is around essentially following the money and following the goods, because we feel that gives us much more of a concrete way to focus in on this market.
There are obviously many other initiatives which are lined up in the future, but at the moment we’ve actually done an investment deal with a fintech called Selpal, and the reason why we got to that deal in the first place was because their approach and our approach was very similar, coincidentally; it was around if you can start to put the primarily important things on the table first – and to this market it’s about “I need to buy trading stock, I need to sell, I need to get the best prices”. You start with those elements first, and then work it backwards from there. So, we might see banking as a product where, if you work in a bank you think that’s all your customers think about, but it’s really not all they think about. They are thinking about making money, they are thinking about running a business. The banking is really an enabler behind the scenes.
And so, exactly that methodology. We said alright, let’s go in, and let’s understand and let’s learn what makes these businesses turn. Then we can worry about the banking at a later point, basically understanding what the flows are looking like.
NOMPU SIZIBA: Jesse, very briefly, you are starting in Alexandra. What other regions do you see, potentially?
JESSE WEINBERG: We are actually in 15 townships at the moment. We’ve been running a lot of pilots, we’ve been running a lot of rollouts. Our biggest rollout at the moment is in Tembisa. Alexandra is also involved – we’ve also got deployment in Alexandra. But we have been testing a lot of things, looking at a nationwide rollout, and we are not specifically just in one township.
What’s fascinating is that every township has its own nuances and so, what we’ve been doing over the last while is understanding exactly what those nuances are. But really we are gearing up for a nationwide rollout.
NOMPU SIZIBA: It’s going to be an interesting one to watch. Thank you so much, Jesse, for your time.