South Africa’s banking sector has seen an injection of new entrants into the market in 2019; however, it remains a space dominated by the biggest four players – something that needs to change.
This is according to Intellidex analyst, Peter Attard Montalto, in the group’s submission response to the minister of finance’s request for feedback on National Treasury’s economic reform paper – published in August.
One of the many economic reforms covered in the 77-page document is Treasury’s plan to improve competitiveness in the consumer banking space to unlock opportunities in one of the country’s most celebrated sectors.
While Intellidex expressed support for this goal, it noted that Treasury’s current plan would only have a marginal positive impact on economic growth for South Africa.
Instead, Intellidex highlights account number portability, and creating a different tier of banking licences that carry lower cost requirements as a way of driving the industry forward.
Current banking market
“The banking industry is currently at a high level of concentration. The big four banks control 83% of the industry’s assets, compared to 69% of assets in 1999. This inevitably affects the competitiveness of the industry, particularly from a pricing point of view,” the market research and analytics firm said.
The financial services industry has seen the entry of several ‘challenger banks’ in recent months, including Tyme, Bank Zero, Discovery Bank and a renewed African Bank. In time this likes of Post Bank and uBank are also likely to offer renewed propositions for the consumer market, while Bank Zero is also expected to launch in 2020.
Intellidex however, warned that while the last major phase of bank entry occurred post 1994, by 2002, most, including the likes of Saambou and Bank of England (BoE), had exited the market. Capitec survived, and quickly began to thrive.
Since launching in 2001, Capitec has grown into the largest bank in the country by active banking customers, recording 12.6 million customers by August 2019, and adding 200,000 new clients every month.
The group reported headline earnings of R5.3 billion for its 2019 financial year, and currently has a market capitalisation exceeding R150 billion.
To be successful, banks depend on several fundamentals including the cost of funding, interest earned on assets, bad debts, other non-interest revenue sources and operating costs.
On balance, established banks have an advantage in the market, Intellidex said, because they have established brands, larger balance sheets, economies of scale and capital resources to acquire licences etc.
However, there are things that can be done to level the playing field.
Intellidex said that admin is a large barrier that prevents customers from switching banks – specifically debit orders and other account instructions.
These costs usually lie outside the bank itself. One solution, currently being investigated in Europe and India, is account number portability.
Account portability, like phone number portability, would allow customers to move accounts to the bank of their choice, without having to change instructions. It also simplifies the process of opening accounts, Intellidex said.
Banking customers have a high degree of brand loyalty, in that they put their money where they believe it will be safe.
Here, Intellidex said the proposed deposit insurance scheme, which was due to be introduced via the Financial Sector Laws Amendment Bill in 2019, will have a great competitive impact.
“Insuring the first R100,000 of retail deposits removes the reluctance consumers will have in depositing money in a new bank they may not be familiar with,” it said. “This is particularly the case for banks that operate outside the typical branch banking model, for example by using fintech.”
“We therefore encourage National Treasury to implement the deposit insurance scheme as soon as possible in order to give new entrants to the banking sector an important level of trust with consumers,” Intellidex said.
South Africa already has interoperability between banks’ accounts: consumers can send money to each other from bank to bank.
However, this is a very limited view on interoperability that needs to be challenged, Intellidex said, adding that there are at least two additional ways to consider.
The first is inking bank accounts to the different savings pockets, e-wallets and other forms of neo-accounts that are prevalent in money-transfers.
“By enabling interoperability, any originating bank account should then be able to send money to any recipient money transfer service to complete the payment. Next, the recipient of a money transfer should be able to activate that neo-account where their money is held into a fully-fledged bank account, once all requirements are met,” it said.
Interoperability should also include the ability to send money from any bank account to any mobile phone number in the country.
“Banks already offer this service in-house, between their own customers to each other. The next step would be to enable this level of interoperability between banks, and then, in line with the first strategy, between banks and other money transfer providers,” Intellidex said.
Revised banking licences
South Africa already has a two-tier banking licence regime, with the mutual banking licence carrying a much lower barrier to entry (R10 million in capital, compared to the R250 million required for a full licence).
However, Intellidex argues that the mutual license is not purpose built and really exists as a way to accommodate building societies of two decades ago.
“The legislation is dated and the mutual bank structure is awkward in several respects. We therefore recommend that this second tier be created by amending the Mutual Banks Act to cater for a modern second tier banking sector that can operate in certain low-risk areas of the market, particularly in facing consumers,” Intellidex said.