South Africa’s oldest bank changing in front of everyone’s eyes

First National Bank (FNB) has undergone a quiet revolution over the past few years, with it looking to create a fully integrated financial services provider. 

This is seen as a ‘holy grail’ of sorts for a financial institution, with integration creating significant opportunities to cross-sell products and, particularly lucrative for a bank, grow non-interest revenue. 

Non-interest revenue is highly profitable compared to lending, which is substantially more capital-intensive for a bank. Revenue from lending is also sensitive to fluctuations in interest rates, whereas non-interest revenue is not.

FNB has had the assets to build a completely integrated financial services provider for years, with the institution able to meet all the needs of a client from lending to insurance and, more recently, to mobile connectivity. 

However, FNB CEO Harry Kellan explained to Daily Investor that while the bank has made strong progress towards creating one touchpoint for all these services, it is extremely challenging.

Kellan explained that the primary challenge comes from consumers, with many not responding positively to increased complexity when it’s offered. 

“I think the first challenge, and I don’t think we have fully overcome this, is actually customer behaviour,” Kellan said. 

“As much as you are saying we want to go to clients in an integrated way, if you go to a customer and say, ‘I am your integrated financial advisor’, they are going to go, ‘What are you talking about?’”

Kellan explained this is a much easier conversation with its more affluent customers, who are used to financial advice and engaging with advisors. 

The difficult part is doing this at scale, which requires significant investment in building a platform and integrating products and services. 

“When you move to a more volume-based customer, you want to be able to leverage the platform rather than people. I think that takes a bit more time,” Kellan said. 

FNB has a history of pushing the boundaries of what is possible with technology-based banking, with it being among the first to launch banking on mobile devices through USSD banking. 

It was also the first to launch a banking app that had full transactional functionality and did not require branch assistance or an advisor. 

“So, we are comfortable with actually trying to bring new innovations to market, and it does take time for adoption,” Kellan said. 

“The building blocks are there. You can get life insurance on the app, short-term insurance, buy shares on the app, alongside traditional banking products.” 

Front-of-wallet

Building a fully integrated financial services provider is extremely difficult, but it also promises substantial rewards in the form of cross-selling, higher-quality earnings, and increased client loyalty. 

FNB terms this as being “front-of-wallet”, which is more commonly referred to as “main-banked”, where a client primarily conducts their banking activity with a single institution. 

Building an integrated financial services provider is part of FNB’s effort to ensure a large share of its clients are main-banked with it. 

These clients are significantly more profitable for the bank, as they tend to have multiple products, engage more with the services offered, and are more loyal. 

FNB has proven successful at building a predominantly main-banked client base, and is now looking at how to cross-sell other products to these clients. 

The bank has proven particularly adept at cross-selling its insurance products to this base in recent years, with its insurance business reporting high double-digit growth. 

“On the insurance side, for sure, we have seen that penetration. If you look at annual premium equivalent, for life insurance it is up 30% in the past year, and for commercial insurance it is up 22%,” Kellan said. 

However, things have proven more challenging on the Wealth and Investment side. This business has grown its assets under management through FNB’s unit trust offering and money market funds. 

“But, I think in terms of further penetration from buying shares, investment products and all that, there is still some work to be done,” Kellan said. 

He explained that to leverage its platform more successfully, FNB is looking to make it more customer-friendly for users to find the bank’s diverse product range. 

“It is all on the app, but I think we need to make it a bit more friendly and available more easily, rather than the customer having to go and find the product,” he said. 

FNB has seen strong growth in the number of products its clients have with the bank, approaching three products per client on average. For comparison, Nedbank recently revealed it has managed to hit a cross-sell ratio of two, with it aiming for three in the years to come. 

Win-win

The upshot of this investment in building an integrated financial services provider, while not complete, is that FNB’s retail client base is the most profitable among South Africa’s Big Four banks.

Not only is this highly profitable, but the type of earnings FNB is generating is generally deemed to be high quality, with it growing non-interest revenue at an elevated rate. 

Non-interest revenue is typically generated through fees and commissions, alongside value-added services such as a mobile operator, eBucks, and insurance income. 

This typically reflects client engagement and loyalty. Crucially, it is not sensitive to interest rates, making it higher quality in the eyes of investors as the income is more predictable and sustainably scalable. 

FNB’s relatively new offerings in the form of FNB Connect, Send Money, eBucks, and nav>> have driven non-interest revenue growth in recent years. 

Approximately three million customers utilised these services, resulting in total revenue growth of 14% to over R1.6 billion within the retail segment.

Kellan celebrated the fact that FNB’s return on equity is a market-leading 41%, significantly higher than its peers, and a point of pride for the CEO. 

FNB’s focus on main-banked clients appears to be paying off, not just in terms of return on equity, but also in terms of actual cash generated by the business. 

The bank reported normalised earnings of R13.1 billion for the six months ended 31 December, an increase of 8% year-on-year. Normalised profit before tax rose 7% to R18.6 billion. 

However, while Kellan is proud of the bank’s performance, he admits that there is still work to be done for it to be firing on all cylinders. 

“The size of the business we have got here, it is difficult to have all elements of the business performing optimally,” Kellan explained. 

While the bank saw strong growth in South Africa and its retail base, its African operations and merchant services saw more lacklustre growth. 

In Africa, FNB’s operations in Botswana came under particular pressure amid a decline in natural diamond prices. 

“We are a large bank in Botswana. We can, and we will, be impacted by it, without a doubt. So there were more impairments and less liquidity in the market, which means fewer transactions,” Kellan explained. 

This was coupled with relatively flat growth in merchant services, with FNB overhauling its offering to reignite interest in its products and services in this space. 

“I wish I could tell you that we are a well-oiled machine firing on all cylinders. But then, I would be lying,” Kellan said.