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What the digital onslaught means for SA’s big banks

No immediate risk but it will be difficult to grow client numbers in the long run, portfolio manager says.

As new banks with radically different cost structures enter the market in an economic environment that is unlikely to provide much support for top-line growth, the question is whether South Africa’s large banks are well placed to respond to the digital onslaught.

African Rainbow Capital’s TymeBank officially entered the market in February, with Discovery Bank and BankZero expected to follow soon.

While it was widely known that TymeBank would have no bricks and mortar infrastructure of its own (it operates through kiosks and till points at Pick n Pay and Boxer stores), arguably the most standout number from its recent investor presentation is that it runs with 125 full-time employees and that the number probably won’t change much at scale. It had 80 000 clients at the end of February. Breakeven point is projected for 2022 with around two million customers.

What do these changes in cost structures mean for traditional banks? Are the big four in a good position to respond to the digital onslaught?

Broadly speaking, roughly 20% of clients are responsible for about 80% of profits at South Africa’s big banks, says Jan Meintjes, portfolio manager at Denker Capital. The most profitable clients have several products at the same bank, which probably include a home loan, car loans, a current account and insurance. It is highly unlikely that these clients would cut ties with one of the traditional banks to save around R40 in costs on an entry-level transactional account.

More newcomers likely

Yet this doesn’t mean that the big four can rest easy, as newcomers will likely follow in Capitec’s footsteps and may attract price-sensitive clients on the transactional side.

“The entry level banks are not an immediate risk for established banks, but at the margin, they will have an impact on the growth of client numbers in the long run.”

At the same time, the benefit of a significant capital base at established banks shouldn’t be underestimated, Meintjes says. New entrants must lure clients and establish themselves, while traditional banks won’t be sitting still.

“By offering product and service bundles, traditional banks can entice clients to stay.”

Nedbank is in a “very good position” to compete with digital entrants, its chief executive Mike Brown said after the release of its annual results on Tuesday.

With eight million customers and three million primary client customers, incumbents like Nedbank have a huge advantage, he added. Nedbank reported full year headline earnings growth of 14.5% to R13.5 billion. The improvement was boosted by the turnaround at Ecobank.

Continuous tech investments

Brown says the bank has been careful to invest an appropriate portion of profits in its technology platforms, including R2 billion a year in new technologies over the last three years, and it will be difficult for some of the new competitors to offer a significantly better customer value proposition.

The Nedbank Money app, which was relaunched about 18 months ago, has been downloaded 1.5 million times and has added approximately one new service per week since launch.

About five years ago, Nedbank realised that it was simply too hard for customers to sign up with traditional banks.

“You go into a branch, there is too much paper,” says Brown. “We sign everybody up by product, so every time you want a new product, it feels like you are starting again.”

To address this, Nedbank will be launching a new customer ‘onboarding platform’ in the first half of 2019 where customers only sign up once, with new products offered as a drop-down set. Its new loyalty and rewards programme will be launched during the second half of the year.

Nedbank Group revenue grew 6% to R54.8 billion. Its total assets surpassed the R1 trillion mark for the first time in 2018. It declared a final dividend of 720 cents, taking its full year dividend to 1 415 cents, an increase of 10.1%.

Its share price closed 0.22% higher at R272.

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For me, I think digital banking is the way of the future and will certainly change the game for traditional banking methods. Another good think which I appreciate, is that this method will increase online activity or participation in South Africa, making it ideal for online business.

It is time the monopoly of the big 4 is challenged. They should also be aware of the fact that the “price sensitive” customer is growing in number as the cost of living far outstrips inflation in SA. What is not to like about 10% interest and no fees?

Agree. The possibility of 9 or 10% interest on certain conditions is a big draw card – can Nedbank and the other big banks equal or beat this? It’s also in line with encouraging South Africans to save more.

How about this…. when you want to take out a home loan, you have to put the offer in first and THEN see what interest rate the banks will deign to give you. Banks have far too much power in this country and we pay far too much interest. For this reason my dream is to pay cash for a home and tell the banks to get stuffed.

Inge, great article. Would be very interesting to see what sort of dead wood the big four have re fixed assets around the country? Every little dorpie used to have a bank or two and as that model is dying, those assets need to be dealt with? Just an idea

We still need the big banks as it’s about the closest we’ll get to justice and accountability in SA at present with the ANC government in such a mess. Consider that it was only AFTER the big banks shut the bank accounts of Bosasa that arrests were made – whether or the right people or not is another question. But it relates to corruption and money laundering – will Tymebank and other new entrants have the same standards even if their clients are individuals and not business accounts?

Briefly visited TymeBank’s website to see products/services provided.

Yes, one welcomes fresh blood in this banking space. NOTE that as a “virtual” bank, ONLY ‘transactional’ account services seems to be on offer (along with free VISA card on one of the products, and an ‘e-Wallet’ type cash transfer product)

As a ‘digital’ bank it is extremely limited what it offers to the public:

If you require a Homeloan, you have to look elsewhere…
If you want Vehicle Finance, you have to shop around elsewhere…
Unsecured loans? Nope…none of that either.
Business/commercial loans / bridging finance, etc. Not here…
Any Foreign exchange services? Nope…rather stay put in SA.
Trust/executor dept handing deceased estates? It’s quite dead here…
Offshore investments? Didn’t see any.

As fast as a digital bank is able to commence operations, as fast it can disappear from the horison when difficulties arise….the banking server just goes ‘poop’….and off we go.

Great info, thanks MichaelfromKKlerksdorp.
HHmm…great website but call center overloaded and no prompt reply to email inquiry. Think I’m still not ready to completely do without my old, rusty but trusted “big bank” with its efficient, friendly staff with real faces and voices just down the road.
And Nedbank CEO Mike Brown can be rightly proud of the excellent results the bank posted recently despite the new competition and gimmicks.

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