EDITORIAL: TymeBank takes tried and tested path to profitability
Unsecured lending has paid off handsomely for the big banks, although done imprudently, unsecured loans can trip a company up
African Rainbow Capital, the Patrice Motsepe-led investment house, does not have a hard time convincing shareholders that its branchless, app-only bank TymeBank is growing fast. The challenge is to show a clear path to profitability.
TymeBank is one of the three high-profile digital newcomers looking to shake up SA’s R400bn retail banking industry, which was traditionally dominated by four bricks–and-mortar rivals before Capitec came seemingly out of nowhere to muscle in on their turf from the early 2000s.
With Motsepe’s deep pockets and the expertise of banking veteran Sandile Shabalala behind it, TymeBank is sitting pretty with 400,000 customers barely five months after its launch in February, and it is targeting 2-million in three years’ time.
That rate of growth is roughly 44,000 new customers a month.
The SA banking market does offer easy pickings. Much of the 50-million-plus population are tech-savvy smartphone users, already comfortable with online banking apps, while TymeBank’s promises of higher interest rates on savings accounts and zero bank fees could trump deep-rooted reluctance to switch banks, particularly to newer ones that have no branches or ATMs.
However, Shabalala, brought in after two decades at Nedbank, is probably not too thrilled that the bulk of the customers his bank is winning are attracted to generous interest rates on savings accounts that can rise to as much as 10%, nearly double the highest level that traditional banks offer on basic savings accounts.
While those ultra-competitive rates make it popular with customers, they are unlikely to help it deliver industry-beating returns.
To solve the problem, Shabalala and his executive team told investors this week that he was taking the bank down a tried and tested path to profitability: unsecured loans, the lucrative but highly risky credit products that rely solely in customers’ promises to pay them back.
Done imprudently, unsecured loans can trip a company up. Just ask investors who were left smarting after the collapse of African Bank Investments. African Bank, which emerged from the ashes of that disaster, is busy re-establishing itself and attracting clients. TymeBank’s pledge to be cheaper while acknowledging the risk is something regulators will welcome.
Unsecured lending has paid off handsomely for Standard Bank, FirstRand and Nedbank — and even more so for Capitec, which started out nearly two decades ago after being hived off from investment heavyweight PSG.
Annual headline earnings, SA’s primary measure of profitability, have jumped more than twofold at the big five banks since 2011. Their average return on equity, a measure of income generated with shareholders’ money, stands at around 19% — nearly double their global peers.
Shabalala is pencilling in a break-even point by 2022, when the bank’s customer base reaches 2-million, with about 220,000 of those counted as primary customers rather than those who keep paying banking fees elsewhere while earning generous returns on the company’s savings products.
With lending as part of its product offering, it’s easier to follow the logic behind TymeBank’s assertion that it will recover the costs of banking some of its customers for free and offering them the greatest returns on savings deposits.
It would have been difficult to visualise a scenario in which TymeBank, with the current suite of low-margin but highly sought-after banking products, eclipses Capitec’s industry-leading return on equity of about 27%.
Just as it competes on the pricing of monthly account fees and sweeter rates on deposit savings, there’s a strong likelihood that TymeBank’s credit offering will rattle relatively high interest rates in credit cards and personal loans.
Unlike its traditional brick-and-mortar rivals, TymeBank does not have to pay electricity bills and salaries of cashiers in several thousands of branches across SA. It can use those savings to sell credit at competitive interest rates — a move that will surely make it both popular and profitable.