New South Africans banks threaten the big five

Fintech products are becoming increasingly popular in South Africa as new players enter the banking space every year, threatening the dominance of the country’s biggest and most established banks.

Kokkie Kooyman, banking analyst and director at Denker Capital told Kaya Biz that technology had changed rapidly over the last few decades.

These technological advances created gaps in the banking industry, which smaller players have been able to fill.

Smaller, nimble players can generate fresh, innovative, client-facing ideas that they can implement quickly.

However, larger banks still have legacy information technology systems, making it difficult for them to react quickly to market changes.

The upside to larger banks is how many financial products they offer their clients, such as credit, mortgages or vehicle finance. Smaller players usually only have one or two products.

“The smaller guys have the advantage. They can spot a niche where the bank is behind and write a solution, but for them to capitalise on that is very difficult over the long term,” Kooyman explained.

This can be seen internationally, with players like Nubank in Brazil, Klarna in Sweden, and Monzo in the UK focusing on lending products.

Kooyman said the problem is that while it may be easy to lend money, it is difficult to collect.

Initially, these businesses gained many clients by lending money, but then they had to battle bad debts, and after a few years, they stopped growing.

“So I think we’ve seen wave one with the fintech coming with new products. But now it’s wave two: if they can consolidate and use that to launch more products.”

“But just bear in mind, technology is very expensive, and you do need large players behind you, even the fintech, to fund that.”

This backing is essential for these smaller players to get a return on their investment within a reasonable amount of time.

Over the last few years, South Africa has seen several new digital-focused players enter the banking market.

These include TymeBank, Discovery, Bank Zero, and the yet-to-be-launched Old Mutual Bank, all operating in different niches.

TymeBank came up with an innovative way to allow clients to open bank accounts very quickly.

They entered into a joint venture with Pick n Pay, where customers could go to kiosks in the retailer’s stores to open an account and get a card within 5 minutes.

Initially, this was only a deposit product, which helped them quickly acquire many clients. While this is a good thing, Kooyman said the important thing in banking is to acquire primary clients.

These people use the bank for their check account and, specifically, for the place where their salary is paid. “So TymeBank gained a lot of what we would call secondary clients, but not necessarily primary,” he explained.

They are currently in the process of launching a lending product, but Kooyman simply said, “We’ll see how that goes.”

Where TymeBank is focused on the retail market, Discovery Bank has chosen to focus more on middle-class clients.

The company used its Vitality rewards system to lure its health and life insurance clients to use the bank, which also helped draw clients to the banking app.

Although Discovery has done a great job attracting clients, the company still does not have as many primary clients as it needs.

“It’s a good example of how much it costs,” he said. The bank, launched in 2021, has cost Discovery billions but is still not profitable.

Bank Zero, which built its banking system from scratch, focused exclusively on small and medium enterprises (SMEs), which big banks have neglected.

As the name suggests, this bank charges no fees. It is unclear how they are turning a profit, “but it seems to be going well,” Kooyman said.

Old Mutual, which expects to launch its bank in three stages by 2025, is trying to capitalise on its large life insurance client base, similar to Discovery.

Kooyman explained that since the company already has a lot of data on its clients, Old Mutual hopes to use this information to convince clients to open a bank account.

This existing client data is a very important advantage for Old Mutual and Discovery. They have huge amounts of data on their clients, which reduces their lending risk.

“It enables them to be proactive in making client offers,” Kooyman said. The more data you have on a client, the less risk you take by offering them a product or a loan.

Initially, Old Mutual will likely operate in the lower end of the market and try to challenge Capitec. Like all of their competitors, their challenge will be the high cost of starting and running this endeavour.

“Old Mutual is also going to see how much it costs. And then you need very expensive people who can keep those systems alive, innovative, and fresh,” Kooyman said.

Banks also face a lot of regulatory pressure, especially in light of South Africa’s greylisting, to mitigate fraud.

Another challenge is cybercrimes, which cost banks billions every year. Banks need to be able to protect their clients from data breaches, which are a frequent problem in South Africa, even for big players like Standard Bank.

Naturally, all of this is a lot for a new entrant into the banking space to navigate.

As new players continue to enter the market, Kooyman urged clients to practice caution when using these newer products.