Patrice Motsepe. Picture: MARTIN RHODES
Patrice Motsepe. Picture: MARTIN RHODES

The past year has been momentous for the banking industry as the regulator opened the market for competition leading to new entrants, which are preparing to compete aggressively against incumbents.  

TymeBank, Bank Zero and Discovery Bank are all in the process of launching after receiving the requisite approvals during the year. Upping the ante will see a resurgent African Bank competing for customers, Capitec entering the business banking space and Investec consolidating its offering for the larger corporate market.

This all portends well for the customer. Lower fees and improved service should be the natural outcome of these market dynamics,  said Kuben Naidoo, deputy governor of the Reserve Bank and CEO of the Prudential Authority. He hopes the disruption brought by new technology will also see underserved areas of the market embraced by the industry.

“People in the townships think they are underserved, so we can’t disregard 70% of the population in a market. There is a degree of institutionalised racism in the industry, and the hearings on transformation in the financial sector brought to the fore the significant unhappiness that clients had regarding their banking alternatives,” says Naidoo.

Tech innovation

Technological innovation has drastically lowered the costs of acquiring and developing banking platforms and will be a key feature shaping the new entrant’s ability to compete, particularly regarding costs.

Michael Jordaan,  one of the co-founders of Bank Zero, told Business Day earlier in the year that his start-up sourced most of its technology from open-source software, which can be customised and modified for security purposes.  

Bank Zero, which will formally launch in 2019, has been conceived as a digital bank for the “smartphone generation”. It will not offer any lending products, but instead compete solely as a transactional bank for individuals and small businesses.

Patrice Motsepe’s African Rainbow Capital acquired TymeBank from the Commonwealth Bank of Australia in the latter half of the year and is in the process of ramping up its presence at partner Pick n Pay stores. The offering involves placing a tech-enabled “banking kiosk” at  stores where customers can open accounts and apply for products.  It is expected the offering will be extremely cheap and will compete for the wallet of customers at the lower end of the market.

But the offering that really has the incumbents worried is Adrian Gore's Discovery Bank, scheduled for the first half of 2019.  The bank, which will follow the principles of Discovery’s Vitality model, will reward clients for “good behaviour” through dynamic interest rates and discounts from Vitality partners. It is expected to compete aggressively for clients at the upper end of the market.

The bank will benefit from the hundreds of thousands of people already using Vitality and will round out Discovery’s full suite of products in short-term and long-term insurance, medical aid and investments.

Heightened competition is also coming to the business banking market. Capitec, previously only a retail bank, bought Mercantile Bank from the Portugese government. Mercantile has a  cutting-edge banking platform and offers a full suite of services to entrepreneurs and businesses. By its own admission, Capitec thinks the acquisition has saved it a couple of years in terms of launching its own business bank that will also focus on the small to medium enterprises market.

Investec is in the process of launching a reconfigured business offering that combines previously disparate parts of its business offering in one place, called Investec for Business.

This all comes at an unfortunate time for the incumbent banks. The dire state of the economy, with job losses and virtually no economic growth, has led to pedestrian credit extension. Earnings growth for the local operations of Absa, Nedbank, Standard Bank and Investec have been in the mid-single digits. Share prices year to date have performed even worse. Only Capitec and FNB produced anything like acceptable growth in earnings.

With ferocious competition expected in  coming years, the only winner likely to emerge is the customer.