The Study of the Emergence of Entry-Level Bank Branches in South Africa

Over the last decade the provision of bank accounts in South Africa has grown from 30% in 2003 to 46% in 2011. Technology and branchless solutions play key roles in improving access to financial services. Physical bank branches are however often critical to persistent high value take up and use of financial products as it plays an educational role and can build trust with the consumer beyond what is possible with technology alone. The increasing role out of low-cost, high volume branches (referred to in this study as entry-level branches) to the previously excluded market segment is therefore of particular interest. To gain a better understanding of what this shift means for the financial services landscape, Cenfri on behalf of FinMark Trust commissioned Genesis-Analytics to review the landscape of entry-level branches and identify successful elements of an entry-level banking strategy in South Africa.

 

The study revealed that serving the entry-level market required a focussed approach to reduce operational and capital expenditures as well as innovative means to acquire and effectively serve high volumes of clients in the new target market. Across the banks this translated into four changes in entry-level banking strategies: change in bank branches, change in composition of infrastructure, change in products and services and a shift in promotional activities. Across the four changes adopted by banks, common strategies to serving the entry-level market emerged, that include: 

  • Introduction of cashless bank branches that substantially reduces the cost of infrastructure and eliminates the cost of cash handling.
  • Smarter staffing to reduce staff costs such as employing fewer staff with lower qualifications and offering a lower basic and high commission remuneration structure.
  • Extending operating hours to serve commuters effectively.
  • Establishing alternatives to branches to reduce capital costs, such as mobile offerings, carve outs/in-retailer models, 'access agents', self-service devices (cash accepting ATMs) and kiosks.
  • Movement away from a credit only focus to an increased range of basic products covering all financial services (transactional, savings, credit and insurance, and transactional) to better serve the entry-level market.
  • Adopting below-the-line marketing strategies to differentiate bank entry-level offerings from their traditional offerings and attract the entry-level market.

Please click here to download the full report (PDF, 1.7MB)

Please click here to download the stakeholder workshop (PDF, 3.05MB)

What brought about the shifting landscape?

 

Starting in the early 2000s a series of events took place that lay the foundation for a changing financial services landscape in South Africa. Namely:

  • Mzansi account uptake reflected market demand. In an effort to redistribute the concentration of wealth and extend large industry services to the previously excluded population in South Africa, the new democratic government negotiated industry charters that were designed to obtain commitment from traditional providers to extend their services into the underserved and unserved markets. Why did the government do this? Read the review of Mzansi and Zimele Accounts here.
  • Socio-economic factors improved viability of entry-level accounts. The new opportunity that the banks were witnessing in the entry-level market converged with two socio-economic trends that were shaping the wider landscape of South Africa: rapid urbanization and formalization of the economy. These two factors made previously excluded clients more accessible and viable for the banks.
  • Disruptors demonstrated opportunity. Capitec was the first bank to enter the banking sector in 20 years, and along with African Bank and Ubank, disrupted the traditional model of the existing banks (the Incumbents - Absa, FNB, Nedbank and Standard Bank). The Disruptors (Capitec, African Bank and Ubank) demonstrated profitable opportunities in the low income market beyond the middle and upper income models which the Incumbent banks had been targeting until that point.

 

Capitec

 

Figure 1: Capitec Bank in Rosebank Mall, Johannesburg, South Africa 

 

What were the emerging trends observed in the Entry level bank branch market during this time?

  • Substantial customer growth in the entry-level market. The figure below indicates that from 2010 to 2011 the Incumbents entry-level customer base grew by 18% from 16.7 million to 19.7 million customers. During the same period the customer base for the Disruptors grew by 20% from 6.1 million to 7.3 million customers. In the Figure below, entry-level customers refer to low-income account holders and while the number of banked individuals are increasing, many people are likely becoming multi-banked.
  • Incumbent bank branches more than doubled between 2010 and 2011. Unlike the Disruptors, the Incumbent banks needed to tap into the appeal of the entry-level market and differentiate their new branches from their traditional ones. The result was substantial investment in entry-level branches and non-branch infrastructure to extend the reach of the banks off a low base.

 

Entry-level bank branches figure 1

 

Figure 2: Growth in entry-level bank customers

 

What common elements of a successful entry-level bank branch strategy should be adopted?

  • Innovation in attracting entry-level clients. Bank placement plays a critical role in attracting large volumes of customers into entry-level bank branches. However, it is not the only option. Banks have adopted a more aggressive approach to attracting new clients though a layered marketing approach: (i) promotional activities (ii) on-boarding (iii) education and (iv) personal interaction. Marketing has to speak to both the value of products as well as the brand status of having a specific type of account.
  • Technology coupled with human interaction is key to the value proposition. Technology has played a critical role in enabling low-cost access to financial services. However, the drive to substitute over the counter services with technological equivalents needs to be complemented with a human interaction component to ensure adoption.
  • Introduction of 'one-stop-shop' to deliver full-service banking to the entry-level segment. The riskiness in the high-margin unsecured lending market encouraged banks to extend their other retail banking offerings to the entry-level market. Banks have introduced a comprehensive set of simple products (credit, insurance, savings and transactional) and aim to provide a one-stop-shop for full-service banking. However, not all banks have adopted the same approach.

What are the key considerations for entry-level bank branches going forward?

  • Diversification in product offerings beyond credit is key. The unsecured credit market is becoming saturated, putting pressure on the performance of many banks whose strategies still depend largely on credit; such as Capitec and African Bank.
  • Progress in rural areas, but still underserved. Rural communities have low customer volumes and are more costly to serve, limiting the extension of entry-level bank branches thus far.
  • Increased competition and choice. The study highlights the move of the Incumbent Banks towards the entry-level market, but Capitec and African Bank are also moving into the middle-income markets looking for new customers. The upper lower income market are therefore seeing increasing levels of competition and choice in financial services.

Additional Info

  • Country: South Africa
  • Institution: FinMark Trust, Genesis Analytics
  • Date Published: 2013
  • Document Type: Landscape Study

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The Study of the Emergence of Entry-Level Bank Branches in South Africa

Over the last decade the provision of bank accounts in South Africa has grown from 30% in 2003 to 46% in 2011. Technology and branchless solutions play key roles in improving access to financial services. Physical bank branches are however often critical to persistent high value take up and use of financial products as it plays an educational role and can build trust with the consumer beyond what is possible with technology alone. The increasing role out of low-cost, high volume branches (referred to in this study as entry-level branches) to the previously excluded market segment is therefore of particular interest. To gain a better understanding of what this shift means for the financial services landscape, Cenfri on behalf of FinMark Trust commissioned Genesis-Analytics to review the landscape of entry-level branches and identify successful elements of an entry-level banking strategy in South Africa.

 

The study revealed that serving the entry-level market required a focussed approach to reduce operational and capital expenditures as well as innovative means to acquire and effectively serve high volumes of clients in the new target market. Across the banks this translated into four changes in entry-level banking strategies: change in bank branches, change in composition of infrastructure, change in products and services and a shift in promotional activities. Across the four changes adopted by banks, common strategies to serving the entry-level market emerged, that include: 

  • Introduction of cashless bank branches that substantially reduces the cost of infrastructure and eliminates the cost of cash handling.
  • Smarter staffing to reduce staff costs such as employing fewer staff with lower qualifications and offering a lower basic and high commission remuneration structure.
  • Extending operating hours to serve commuters effectively.
  • Establishing alternatives to branches to reduce capital costs, such as mobile offerings, carve outs/in-retailer models, 'access agents', self-service devices (cash accepting ATMs) and kiosks.
  • Movement away from a credit only focus to an increased range of basic products covering all financial services (transactional, savings, credit and insurance, and transactional) to better serve the entry-level market.
  • Adopting below-the-line marketing strategies to differentiate bank entry-level offerings from their traditional offerings and attract the entry-level market.

Please click here to download the full report (PDF, 1.7MB)

Please click here to download the stakeholder workshop (PDF, 3.05MB)

What brought about the shifting landscape?

 

Starting in the early 2000s a series of events took place that lay the foundation for a changing financial services landscape in South Africa. Namely:

  • Mzansi account uptake reflected market demand. In an effort to redistribute the concentration of wealth and extend large industry services to the previously excluded population in South Africa, the new democratic government negotiated industry charters that were designed to obtain commitment from traditional providers to extend their services into the underserved and unserved markets. Why did the government do this? Read the review of Mzansi and Zimele Accounts here.
  • Socio-economic factors improved viability of entry-level accounts. The new opportunity that the banks were witnessing in the entry-level market converged with two socio-economic trends that were shaping the wider landscape of South Africa: rapid urbanization and formalization of the economy. These two factors made previously excluded clients more accessible and viable for the banks.
  • Disruptors demonstrated opportunity. Capitec was the first bank to enter the banking sector in 20 years, and along with African Bank and Ubank, disrupted the traditional model of the existing banks (the Incumbents - Absa, FNB, Nedbank and Standard Bank). The Disruptors (Capitec, African Bank and Ubank) demonstrated profitable opportunities in the low income market beyond the middle and upper income models which the Incumbent banks had been targeting until that point.

 

Capitec

 

Figure 1: Capitec Bank in Rosebank Mall, Johannesburg, South Africa 

 

What were the emerging trends observed in the Entry level bank branch market during this time?

  • Substantial customer growth in the entry-level market. The figure below indicates that from 2010 to 2011 the Incumbents entry-level customer base grew by 18% from 16.7 million to 19.7 million customers. During the same period the customer base for the Disruptors grew by 20% from 6.1 million to 7.3 million customers. In the Figure below, entry-level customers refer to low-income account holders and while the number of banked individuals are increasing, many people are likely becoming multi-banked.
  • Incumbent bank branches more than doubled between 2010 and 2011. Unlike the Disruptors, the Incumbent banks needed to tap into the appeal of the entry-level market and differentiate their new branches from their traditional ones. The result was substantial investment in entry-level branches and non-branch infrastructure to extend the reach of the banks off a low base.

 

Entry-level bank branches figure 1

 

Figure 2: Growth in entry-level bank customers

 

What common elements of a successful entry-level bank branch strategy should be adopted?

  • Innovation in attracting entry-level clients. Bank placement plays a critical role in attracting large volumes of customers into entry-level bank branches. However, it is not the only option. Banks have adopted a more aggressive approach to attracting new clients though a layered marketing approach: (i) promotional activities (ii) on-boarding (iii) education and (iv) personal interaction. Marketing has to speak to both the value of products as well as the brand status of having a specific type of account.
  • Technology coupled with human interaction is key to the value proposition. Technology has played a critical role in enabling low-cost access to financial services. However, the drive to substitute over the counter services with technological equivalents needs to be complemented with a human interaction component to ensure adoption.
  • Introduction of 'one-stop-shop' to deliver full-service banking to the entry-level segment. The riskiness in the high-margin unsecured lending market encouraged banks to extend their other retail banking offerings to the entry-level market. Banks have introduced a comprehensive set of simple products (credit, insurance, savings and transactional) and aim to provide a one-stop-shop for full-service banking. However, not all banks have adopted the same approach.

What are the key considerations for entry-level bank branches going forward?

  • Diversification in product offerings beyond credit is key. The unsecured credit market is becoming saturated, putting pressure on the performance of many banks whose strategies still depend largely on credit; such as Capitec and African Bank.
  • Progress in rural areas, but still underserved. Rural communities have low customer volumes and are more costly to serve, limiting the extension of entry-level bank branches thus far.
  • Increased competition and choice. The study highlights the move of the Incumbent Banks towards the entry-level market, but Capitec and African Bank are also moving into the middle-income markets looking for new customers. The upper lower income market are therefore seeing increasing levels of competition and choice in financial services.

Additional Info

  • Country: South Africa
  • Institution: FinMark Trust, Genesis Analytics
  • Date Published: 2013
  • Document Type: Landscape Study

Search news, publications and events