New South African bank taking on Capitec off to a flying start

OM Bank is off to a strong start, with it switching around 1,000 clients a day from its existing Money Account offering administered by Bidvest Bank. 

This marks a promising beginning for the new bank in its efforts to challenge Capitec in what it calls the ‘middle mass market’, which consists of South Africans earning between R5,000 and R80,000. 

OM Bank CEO Clarence Nethengwe explained to Daily Investor that the conversion of existing Money Account customers is part of the bank’s phased launch to market. 

It began operating earlier this year, trialling its service with around 600 Old Mutual employees and testing its payment services with South Africa’s banking network. 

Old Mutual has around 400,000 existing Money Account customers, which it will look to transfer to OM Bank before aggressively targeting external clients. 

This, in effect, provides the bank with a head start in that it does not have to look to convert its first clients to Old Mutual, but can tap into the insurer’s existing ecosystem. 

Crucially, this is not merely cross-selling the bank to existing insurance or investment clients, but moving across clients who already engage with Old Mutual’s banking services. 

The insurer will also move over its existing R16 billion loan book to the bank, before tapping into its Mass and Foundation Cluster to bring insurance clients over to OM Bank. 

“We have taken a deliberate, phased approach to the launch of OM Bank that focuses on getting the fundamentals right,” Nethengwe said. 

“The current phase of the OM Bank launch focuses on the transition of customers from the Old Mutual Money Account. Early interest has been positive with close to a thousand Money Account holders switching every day.” 

This is despite OM Bank suffering from isolated incidents with incoming payments during the switching process.

The insurer has spent over R4 billion in building out the bank since 2022, with it expecting OM Bank to run at an annual loss of R1.1 billion and R1.3 billion until 2028. 

Intense competition

Old Mutual is aware of how competitive South Africa’s banking landscape is, with the dominant Big Four of Absa, Standard Bank, Nedbank, and FirstRand being increasingly challenged by the rise of digital players. 

Historically, banks have expanded into insurance as they are well-positioned to cross-sell insurance products through their banking channels and their ability to engage with clients through private banking. 

This has worked for many, including Standard Bank with Liberty and now Capitec with its insurance products.

The resurgence of the ‘bancassurance’ model in South Africa has seen traditional banks launch or integrate insurance products into their offering, and insurers launch banks. 

For insurers, such as Old Mutual, a banking app is crucial for them to cross-sell their insurance and investment products to a wider market. 

Furthermore, the higher engagement with banking apps makes the cross-selling of products far more effective and effectively ‘closes the loop’ with clients. 

This is becoming an increasingly important part of Discovery Bank, for example, which is set to become the single interface for all Discovery clients in South Africa. 

CEO Hylton Kallner pointed out that clients engage with the banking app on an almost daily basis, in comparison to the monthly interactions on insurance apps. 

For Old Mutual, this higher engagement is crucial to its increasing competition from banks in its traditional insurance business. 

Research from Swiss Re, one of the world’s largest reinsurance companies, shows that Capitec may take up to 36% of all new funeral insurance sales. 

This is a significant share that poses a major threat to Old Mutual’s insurance business. If Capitec can replicate this success with other insurance products, it can take a substantial chunk of Old Mutual’s Mass and Foundation Cluster.

As a result, the launch of OM Bank is a way to compete on equal footing against this threat by using the banking app to cross-sell Old Mutual’s insurance products to a wider customer base. 

It can also offer its investment products to consumers through the app, opening up a new distribution channel for its asset management business – one of the largest in South Africa.

Operating a bank will also give Old Mutual vital data on the financial behaviour of its clients, enabling it to offer products better suited to its customer base and personalise offerings.

Investors believe the launch of the bank could be a gamechanger for Old Mutual if it plays its cards right and couples the new offering with improved operational performance across its business units.

Mark du Toit from OysterCatcher Investments said there is value to be found in Old Mutual and that new CEO Jurie Strydom is set to unlock it.

Du Toit said that there are several quick wins that Strydom can implement, such as changing the reporting lines, which the company has already done, and reducing central head office costs

He also believes that turning OM Bank from a loss-making entity into a profitable one will help the group’s growth.