Capitec’s assault on the big four banks

Capitec has done an exceptional job at winning market share from the big four banks – Standard Bank, Absa, First National Bank, and Nedbank – and has opened the door for many newcomers to do the same.

Capitec was founded on 1 March 2001 following the acquisition of micro-lending businesses such as Smartfin and Finaid by PSG.

Initially, the challenges of starting a new bank in South Africa, including strict regulations, big capital requirements, and the dominance of large retail banks, took their toll.

Even with the backing of PSG, Capitec struggled to attract a large customer base and notable deposits.

Research by Trudi Makhaya and Nicholas Nhundu showed that Capitec was plagued with challenges that stagnated growth between 2001 and 2006.

Capitec persevered with its strategy to target unbanked South Africans with its “single status” products which do not differentiate on income level.

It developed easy-to-understand products that made recruiting less cumbersome and staff training more efficient and less resource intensive.

The big banks, in comparison, developed products specifically aimed at the lower-income market.

Although it took many years, the “single status” strategy gave Capitec a competitive advantage and helped it grow its subscriber base and market share.

Apart from gaining traction in the unbanked market, Capitec also achieved something special – convincing people to switch between banks.

South Africans are notoriously hesitant to switch banks because of the tedious processes associated with moving to a new bank.

However, Capitec has had remarkable success in convincing clients to switch to them because of the simplicity and transparency of its products and pricing.

The enhanced levels of transparency with no hidden costs convinced many South Africans who were unhappy with their bank to try Capitec.

The chart below shows how Capitec started to capture revenue market share from two prominent competitors – Absa and Nedbank – from 2006.

Capitec increased its revenue share from 3% in 2006 to 16% in 2021.

Nedbank has held a relatively constant share of revenue, increasing its share from 28% to 31% over the period.

Absa, however, has lost a significant portion of the revenue share, sliding from 69% in 2006 to 53% in 2021.

Capitec has done far more than only growing revenue.

The annual net income margin and the 5-year average net income margin for the three banks under consideration show that Capitec outperforms its larger competitors.

Capitec is a very strong profitability performer generating the highest net margin for the 5-year average and latest financial period. 

Over the last two decades, Capitec grew its subscriber base to over 18 million clients, which CEO Gerrie Fourie said represents 45% of South Africa’s 35 million adults with banking accounts.

Capitec is now the largest bank in South Africa by subscriber numbers and is nearing the top in market cap.

It was able to take the fight to FNB, Standard Bank, Nedbank, and Absa because of its simple product offerings and high levels of transparency.

Apart from creating many happy shareholders, it has also opened the door for many new banks to challenge the big four, including Discovery Bank, TymeBank, and Bank Zero.

Capitec is, however, not finished.

The 2022 Brand Finance South Africa 100 report ranked Capitec Bank as the strongest brand in the country, which shows its great potential.

The Capitec CEO said they have big plans in the business market through Mercantile Bank, which they bought in 2019.

They are changing Mercantile Bank to offer strong digital and personalised offerings in line with Capitec’s philosophy of transparency and simplicity.

Fourie said the process should be completed by the end of the year, after which they will rebrand Mercantile Bank to Capitec Business Bank.

They also have a big cloud strategy that will help Capitec meet their clients’ needs faster and increase their computing capabilities.

Another exciting project is its Live Better initiative which gives clients with at least three recurring monthly deductions a 0.5% interest on their debit card and 1.5% interest on their credit card.

“Many people have two or three bank accounts, and they should be encouraged to take out their Capitec card first,” he said.

The market clearly believes the Capitec story, which is visible in its high price-to-earnings ratio (P/E).