QUESTION ONE [60]

Read the following article and answer the questions that follow Can SAs new challenger banks knock out the big four?

Can SAs new challenger banks knock out the big four? For two decades, SAs banking sector has remained largely the same. The advent of Capitec, in 2001, showed that customers were desperate for something different. Now, three new banks all backed by powerful SA business personalities are opening their digital doors, offering something entirely different. So what can they offer thats new, and how much of a threat is this for the big four banks? 28 MARCH 2019 STEPHEN CRANSTON Financial services used to change slowly. Twenty years after Douw Steyn launched the direct-to-consumer insurer Auto & General in 1985, insurance was still largely sold through brokers, and index funds still accounted for a tiny portion of investment assets. Banking changed even more slowly. More than 25 years after the launch of the internet, most banks still distribute a large portion of their products through a branch network. These branches will still be perfectly recognisable to anyone visiting SA for the first time in 30 years. None of the big banks will rock the boat; they want to protect their collective income. That era has come to an end. In the past few months, three new banks have launched with a leaner, cheaper business model that will change the face of SA banking Discovery Bank, TymeBank and Bank Zero. Its been a long time coming. After Saambou and Fidelity Bank collapsed in the early 2000s, the SA Reserve Bank was for a long time reluctant to let new banks open. But these three new banks are backed by formidable business personalities with deep pockets. Discovery Bank is part of the wider group run by CEO Adrian Gore, which began as a health-care company in 1993. Discovery boasts Remgro associate Rand Merchant Investments (RMI) as its anchor shareholder. Tyme Bank is controlled by African Rainbow Capital (ARC), an investment company controlled by the eclectic Ubuntu-Botho group headed by Patrice Motsepe. As the Forbes rich list has it, Motsepe is one of the 1,000 wealthiest individuals in the world, with a fortune of $2.4bn. Before it was bought by Motsepes company, TymeBank was owned by the Commonwealth Bank of Australia (CBA), one of the worlds top 10 retail banks.

The question, however, is what the existing big four banks FNB, Standard Bank, Absa and Nedbank will do to counter the threat. "The big banks ignored Capitec in the early 2000s," says Louis Chetty, head of financials at Stanlib, "and lost considerable market share. I am sure they will not make the same mistake again." Capitec has more than 10-million customers, who will have been enticed, in part, by the much lower cost of banking. And yet the big four still have 83% of all bank deposits in the country and 92% of all mortgages, which shows how concentrated the market still is. Harry Botha, a banks analyst at Avior Capital, says it could take three to five years for the challenger banks to make material inroads into the large banks earnings. Discovery, TymeBank and Bank Zero are pursuing a branchless model, with their apps being their shop window. This means SA isnt far behind the rest of the world: the first app-only current account in the UK was introduced by Starling Bank just two years ago. Perhaps if the Reserve Bank had been more open-minded, SA could have beaten them to the punch.

But, globally, this is the trend. No-one should have been surprised by Standard Banks announcement two weeks ago that it was closing up to 15% of its branch network or 91 branches. Botha says Standards natural market share has fallen thanks to the success of Capitec and FNB, in different parts of its client base. Standard Bank CEO Sim Tshabalala called it "realigning the retail and business banking model to the changing needs of customers". And, of course, the convenience of digital banking makes so much more sense than travelling to a branch and queuing. TymeBank chair Coen Jonker tells the FM: "The banks have done their best to protect their legacy income streams for years, and the transactional fees on simply taking money in and out of accounts is the hardest to justify. As new banks we wont have that legacy to defend." The big four banks have long operated as if they were an informal cartel. Even the one entrant in the past 20 years to grow to large-bank status, Capitec, has adopted a traditional branch-based distribution model. Only Investec has operated without branches but to a narrow spectrum of high net worth clients. To see what sort of riches are up for grabs, consider Capitecs trajectory. In its first year on the JSE in 2002, Capitec made revenue of R270m, with just a smattering of clients. By August 2018, it was clocking up R9.3bn in operating income with its 10.5-million customers. Its share price has reacted accordingly: R10 000 invested in the bank at the beginning would now be worth R7.2m.

Fees were a big part of this success. Capitec has a nominal monthly fee of R5, with R1 charged for each digital transaction. Cash withdrawals are more expensive at R6 for the first R1 000 at a Capitec ATM, or a flat R1.60 at till points of retailers like Pick n Pay or Shoprite. As many of Capitecs transactional clients earn interest of 5% on their deposits, they often get more money coming in than they pay in fees. These new banks would appear, in part, to be targeting that market. However, Chetty says clients who have a loan with Capitec are unlikely to move their transactional accounts to the new banks in a hurry. "Banking will never be free," says Capitec CEO Gerrie Fourie in an interview with the FM. "Even at Capitec, we have a high fixed-cost base." Interestingly, Capitec is the only bank that is actually increasing its branch footprint, even though 2.2-million clients have migrated to the app and 4-million to the USSD (SMS-based) transactional platform. At the moment, Capitec has 840 branches, though many are smaller than those of the big banks. The branches have proven invaluable as the predominant sales point for the half-a-million Sanlam funeral policies sold through Capitec over the past year. Aviors Botha says SA is still a long way from a zero-fee banking regime, even among the new entrants. But fixed monthly fees and charges for electronic transactions could come to an end sooner rather than later. Discovery Bank will charge both sets of fees at least for now. Gore says banks operate on three legs: fees, interest and rewards. Some banks (like Capitec and the other newcomers) will offer competitive fees and attractive interestrates on accounts but no rewards programme; while the large banks pay little or no interest on current accounts but have decent rewards programmes. Gore says Discovery will not attempt to beat the market on fees, for a combined current account and credit card. Discovery Banks lower-income clients (those earning less than R300,000 a year) will pay between R149 and R186 a month in fees; middle-income customers will pay between R213 and R240; and higher-income clients will pay between R275 and R440. For a pure transactional account the fee will be R60 to R120, but as Discovery has no ATMs, cash withdrawal fees will be higher. But if it wont compete on fees, Discovery Bank will be second to none with its Vitality Money rewards programme, and the sophisticated way in which it encourages the right financial behaviour. Discovery Bank will match Capitecs 5% interest rate on positive current account, and add an extra 1.5% for those in the top tier of the Vitality programme. The three new banks are not just aiming for the tech-savvy. TymeBanks former parent, CBA, has a larger market cap than the entire SA banking sector, though it took a softly-softly approach to the new bank. Even before Tyme was registered, it offered money transfer services from Pick n Pay. Though Tyme doesnt have any of its own branches, it will have 750 points of sale through Pick n Pay and Boxer stores. This gives it reach into the main urban areas, as well as the rural areas where few banking services are typically available. Boxer customers are more likely to be unbanked, so could prove the most fertile hunting ground for Tyme. Most transactions are free if carried out at Pick n Pay or Boxer, and cost only R2 if done elsewhere, and the bank pays up to 10% interest on positive balances. TymeBank has such low costs because it is cloud-based and highly scalable, and has minimised the bells and whistles. Incredibly, there are just 125 staff keeping the bank running. Clients can join through the TymeBank website, but by far the most popular recruitment tool has been self-service kiosks, which provide a new card within five minutes. CEO Sandile Shabalala says the bank will start offering loans next year. It plans to offer keener lending rates because, like Capitec, it will be able to cross-subsidise its transaction and deposit books from its loan income. The tipping point for Tyme, at which it becomes profitable, is 2-million customers and 700,000 loans.

Questions: 1.1 Undertake a SWOT analysis of a TYME Bank as a challenger bank and a traditional big four bank. (16)

1.2 The big four banks have long operated as if they were an informal cartel. Do you agree with this view? Justify your answer. (6)

1.3 Evaluate the business model of the challenger banks mentioned in the article. (12)

1.4 Critically discuss the entry strategies of the challenger banks. (9)

1.5 it will be the big four who will bear the brunt of the industry disruption. About this view:

1.5.1 Discuss, with reasons, the strategies the big four banks should adopt. (8)

1.5.2 Discuss the elements of change management that the big four banks should undertake to counter the threat of the challenger banks. (9)