It’s game on. Nedbank donned gloves in the banking price war with the announcement that it is dropping the monthly account fee on its pay-as-you-use (PAYU) account.

The bank, according to statistics from Genesis Financial News & Data, holds the lowest market share among the big four in terms of deposits, loans and advances. Earlier this month it launched another zero-fee digital product aimed at customers younger than 25, called Unlocked.Me.

The latest development takes zero-monthly fee transactional products offered by the bank to three. In November last year it launched a no-fee mobile wallet account, MobiMoney.

However, scrapping fees on an existing product is arguably the most aggressive move by the green bank so far.

Nedbank’s head of card, payments and transactional products, Vanesha Palani, says the bank is simply responding to tough times facing consumers and thought it would lighten their load by bringing "accessible, affordable banking solutions".

"We are hoping to make things easier for our clients," she says. "Our commitment to financial inclusion remains absolute."

Nedbank is the second of the established banks to cut fees on existing transactional products in the face of rising competition by new players such as TymeBank, whose biggest selling point is zero fees. In March Capitec decreased the monthly admin fee on its Global One account from R5.75 to R5. It reduced a host of other fees, but increased a few others, including in-branch transfers.

Palani says that while a large percentage of Nedbank’s customer base has bundled banking products, more people are taking up the PAYU offering as well.

She says the account has recorded strong growth year on year. It is popular, she says, with people who use the account mainly for purchases, as it offers free card swipes. The PAYU accounts are not confined to entry-level customers — customers across all segments are taking up this product.

When Nedbank launched Unlocked.Me, analysts said it was targeted at a small base of clients as a defensive strategy.

Doubt lingered as to whether the bank could roll out a zero-fee account to more customers, as traditional banks have revenues to protect.

Though Nedbank did not say how much of its transactional revenues it will forgo by scrapping PAYU monthly admin fees, banking analyst at Avior Capital Markets Harry Botha says that even if a big share of Nedbank’s customers hold these accounts, the bank would still sacrifice less in transactional income when one considers the upside potential.

"Let’s assume Nedbank has 5-million customers. At R5.50 (including VAT) the fee cut will reduce Nedbank’s Group revenues by about R287m or 0.5%. It’s not significant. I think Nedbank hopes to recoup the fee reduction by attracting more customers," he says.

Palani says the bank is hoping to compensate for the lost revenue by an increase in physical and cash-intensive transactions, and bundled products. "We aim to offer affordable banking to everyone across PAYU and bundle products. Bundles are great value for high-transacting clients and those who love all the added benefits and value that come with these offers, like airport lounge access and rewards."

The move to announce three zero-fee entry-level accounts shows that Nedbank is not prepared to lose its customer base to the new players, which are targeting the same market with zero-fee accounts.

"I think the fee cuts are defensive," says Botha. "Management has a specific target to grow its transactional banking customer base. Nedbank’s fee structure is now similar to that of TymeBank but Nedbank’s distribution channels and overall product capabilities are much more advanced than TymeBank’s."

Nedbank grew its entry-level customer base by 8% in 2018 and, in terms of customer numbers, the segment is now the bank’s largest.

The bank is also offering a stokvel account to this market, allowing it to take more deposits and earn interest income.

Wessel Badenhorst, analyst at 36One Asset Management, says the entry-level segment has become an important part of Nedbank’s banking ecosystem.

The bank used to focus exclusively on the higher end of the banking market, particularly in the early 2000s. But it changed its strategy to grow retail banking as a whole in recent years, especially with the launch of the Ke Yona account in 2011.

"I suspect the launch of the zero-fee accounts is aimed at maintaining Nedbank’s competitiveness at the youth and entry level," he says, pointing out that this is the market where competition is intensifying the most.

"A lot of the growth in retail banking clients over recent years has been at the youth and entry levels for Nedbank (younger clients).

"They have struggled to increase their percentage of main-banked clients for the bank as a whole, as well as clients with more complex banking needs."

Badenhorst says there are at least three reasons it makes sense for Nedbank to service the youth and entry-level customers without charging them monthly admin fees.

"First, the cost of servicing additional clients who use digital platforms is marginal. Second, the deposits in these accounts still represent funding for the bank. The bank forgoes the fee income on these accounts, but can still earn the usual interest rate spread when it lends to other customers. Third, the bank clearly hopes to grow with these clients as they grow older, earn more and have more complex banking needs."

He adds that this model makes it easier and cheaper for Nedbank customers to stay than to switch between banks.