SHINGIE CHISORO-DUBE<\/h3>
In 2017, the South African Reserve Bank issued three new banking licences to Discovery, Bank Zero and TymeDigital. These are the first licences issued to new banks in more than a decade since the issuing of a bank licence to Finbond Mutual bank in\u00a02001<\/a>. In the State of the Nation address in 2018, the South African president hailed this as an opportunity to ensure competitive rivalry in a highly concentrated\u00a0sector<\/a>. However, the potential for entrants to bring disruptive competition with substantial benefits to consumers needs to be assessed in the context of challenges in the banking industry in South Africa. To become an effective rival and provide benefits to customers takes an extended period of time for entrants. Capitec took almost eight years from entry in 2001 to make an impact as an effective\u00a0rival<\/a>. Capitec has grown strongly, from less than 5% of retail deposits in\u00a02014<\/a>\u00a0to competing with Standard Bank as one of the two largest banks in South Africa with a fifth of retail deposits in\u00a02017<\/a>. This article explores the potential competitive effects of the entry of new banks and the challenges that limit growth of entrants into the banking industry.<\/p> Health insurance\u00a0group<\/a>, Discovery Limited, and TymeDigital, a South African fintech company providing money transfer\u00a0services<\/a>, were granted licences to operate retail banks in 2018. Bank Zero, an app-driven bank founded by technology and banking entrepreneurs, Michael Jordan and Yatin Narsai, was also granted a provisional licence to operate a mutual savings\u00a0bank<\/a>.<\/p> A key difference between the above entrants and existing traditional banks is that the new banks will operate as full service digital-only banks without physical bank\u00a0branches<\/a>. This is possible because of the use of new technologies to provide simple, faster and convenient banking services for improved customer experience. Growth in the use of smart phones and associated digital technologies facilitates the use of digital-only banking models. In 2017, 51% (19.9 million) of the adult population in South Africa owned\u00a0smartphones<\/a>\u00a0and this is expected to grow.<\/p> In this model, digital banking is no longer a mere add-on feature but a fundamental system of banking. This involves the move to online banking of all traditional banking activities and processes that historically were available to customers in a bank\u00a0branch<\/a>. Customers are able to open a bank account, make payments and conduct all communication online without submitting paperwork or visiting a bank branch.<\/p> Digital technology platforms enable entrants to overcome the high fixed and maintenance costs involved in operating bank branches and ATM networks. These costs are key barriers to entry that underpin market concentration in retail\u00a0banking<\/a>.<\/p> Access to financing has also been a major challenge for entrants into the banking sector. Capitec during its inception years, struggled to raise capital finance to invest in bank branches and ATM networks despite having a micro-lending customer base and established financial backer,\u00a0PSG<\/a>. For the greater part of the early years, Capitec was self-funded and issued one-month loans in order to quickly recoup capital and generate profits while retaining and re-investing approximately 70% of the\u00a0profits<\/a>. With regard to bank branches, Capitec leveraged PSG\u2019s acquisitions of major micro-lending businesses, SmartFin and Finaid, which owned bank branches across every major city in the\u00a0country<\/a>.<\/p> Although the digital banking system requires less capital in terms of investing in bank branches and ATM networks, it still requires access to financing to invest in substantial digital banking technology systems. Discovery and TymeDigital have a competitive advantage in terms of access to financing through existing businesses and well-resourced parent companies. Discovery is leveraging vast resources from its healthcare and insurance businesses to invest into the new bank. To date, Discovery has spent R1.2 billion on hiring banking personnel and building banking systems and is expected to reach R1.5 billion during\u00a02018<\/a>. This is evident in the group\u2019s official notice to shareholders regarding how the increased investments into the banking initiative have affected the group\u2019s profitability since\u00a02016<\/a>. Similar to Capitec, TymeDigital\u2019s acquisition by Commonwealth Bank of Australia gives it a strong financial backer. Commonwealth Bank of Australia is one of the leading financial institutions in Australia and a large global bank by market\u00a0capitalisation<\/a>. Given the lower capital requirements in banking infrastructure and access to financing, the new digital banks are therefore capable of operating low cost-base models and providing clients with lower banking fees and potentially more competitive interest rates than traditional banks.<\/p> Product offerings, target markets and competitive advantage of digital banks<\/strong><\/p> TymeDigital is targeting retail customers and small, medium and micro enterprises within the low to middle income class. This puts TymeDigital in direct competition with Capitec, which has grown significantly within the low-income segment of the market. TymeDigital plans to use new technologies to provide simple, competitively priced, and accessible banking services using a growing network of partners. TymeDigital through TYME (Take Your Money Everywhere) currently operates Money Transfer, in partnership with Pick n Pay (PnP) and Boxer Superstores and recently entered into a ten year strategic relationship with\u00a0PnP<\/a>. Money Transfer, is a simple and instant point to point money transfer system that uses technology at self-service kiosks to authenticate and verify individual\u2019s\u00a0details<\/a>. The service has grown to attract more than 200 000 customers since inception in 2016 and is expected to further grow following the acquisition of Tyme by Commonwealth Bank of\u00a0Australia<\/a>.<\/p> Discovery, on the other hand, plans to offer financial services to a large client base covering private banking to wealth management services and unsecured lending although this is planned to happen over an extended period of time. This puts Discovery Bank in direct competition with all the major banks – Absa, FNB, Nedbank, Capitec, and Standard\u00a0Bank<\/a>\u00a0including specialist banking and investment companies such as Old Mutual and Investec. The bank will use the Discovery Card joint venture with FNB as a base to leverage for full banking\u00a0services<\/a>. The Discovery Card launched in 2004, is one of the largest non-bank cards in issue with more than 230 000 primary card\u00a0holders<\/a>. Discovery will also adopt the behavioural model used in the group\u2019s life and health insurance services into its banking model to reward members for their\u00a0choices.<\/p> Similar to Capitec, which leveraged its micro-lending client base into transactional banking\u00a0clients<\/a>, Discovery can leverage the client base in its existing financial services business to gain a foothold into the banking industry. The group has a large client base in healthcare and life insurance markets including savings and investment markets to expand into the banking industry. Discovery Health is South Africa\u2019s largest healthcare insurance provider managing fourteen medical schemes. This includes South Africa\u2019s largest open medical system, Discovery Health Medical Scheme with more than 2.6 million\u00a0customers<\/a>. The other products Discovery Life, Discovery Invest and Discovery Vitality have a combined total of 2.3 million\u00a0members<\/a>.[1]<\/a>\u00a0To date, Discovery covers over 5.1 million clients in\u00a0South Africa<\/a>. It is clear, however, that Discovery\u2019s attractiveness to both markets (insurance and banking services) gives it a competitive advantage over competitors. Although TymeDigital has been able to build a client base through its Money Transfer service, this client base is still very small.<\/p> TymeDigital and Discovery also have experience and expertise operating in the South African financial services markets and have existing products and brands. TymeDigital\u2019s competitive advantage lies in its in-house \u2018know your customer\u2019 accreditation solutions used to authenticate and verify customer details at the Money Transfer kiosks. This system allows customers to easily open a simple bank account using their mobile phone. Similarly, Discovery has extensive experience in providing a range of financial products. This enables Discovery to adopt and apply a tested model, the behavioural model from the group\u2019s credit, health and insurance services, into the banking business with increased chances of success.<\/p> Furthermore, directional selling by Discovery whereby it links different rewards and discounts in its network to certain products and services is a powerful incentive for attracting and retaining customers. Discovery\u2019s rewards are linked to flights, grocery shopping, hotels, fuel garages and transport services such as Gautrain. For example, Discovery rewards customers for boarding flights with selected airlines such as British Airways, Kulula.com, Emirates and Qantas. Customers are also rewarded for buying fuel at selected fuel suppliers such as BP and Shell. Generally, directional selling may affect competition in the different markets by channelling customers to use certain brands, products and services over other competing offerings, but this has not been evaluated in previous competition cases.<\/p> Unlike Discovery and TymeDigital, Bank Zero will operate as a mutual savings bank and not a retail\u00a0bank<\/a>. A key difference between a mutual savings bank and a retail bank lies in the ownership structure. A mutual bank is owned by its members who subscribe to a common fund while a retail bank is generally owned by shareholders, who may not be customers of the\u00a0bank<\/a>. As such, a mutual savings bank is much smaller and does not provide the full suite of banking products that are offered by commercial or retail banks. The core aim of mutual banks is to create\u00a0savings, a market that is claimed to be underserved in South Africa.<\/p> Although, Bank Zero is targeting a niche market, it is still in direct competition with traditional and other formal (non-bank) institutions, which are largely driven by the need to provide\u00a0credit<\/a>.\u00a0 To be competitive in the savings market, Bank Zero will need to offer competitive deposit rates. Bank Zero\u2019s strategy is to create easy ways for financial communities like clubs, families and businesses to save individually or together. The bank will use technology to provide secure and affordable products with increased financial transparency by adopting a simple fee\u00a0structure<\/a>. The Bank Zero model also allows customers to become shareholders, based on the type of savings they hold with the\u00a0bank<\/a>. This is important in terms of creating a sense of joint ownership with customers and serves to retain customers.<\/p> However, to thrive and grow into effective rivals in the banking industry, entrants need to overcome customers\u2019 reluctance to switch. Capitec overcame this constraint by developing a simple, cheap and transparent product in order to counter the complex fee structures and a lack of price transparency of other\u00a0banks<\/a>. The ability to overcome customers\u2019 reluctance to switch is particularly important in the context of South Africa\u2019s banking industry where a significant percentage of the population is already multi-banked (77% were banked in\u00a02015). This raises an important question regarding the value added in the entrants\u2019 offerings relative to the incumbent banks\u2019 offerings to facilitate customer switching. The traditional banks currently provide a range of digital services as well, which is a key feature of the new banks, although perhaps less accessible to low-income consumers due to high costs of data. This aspect is likely to also constrain the growth of the new entrants. However, there is a larger scope for the new banks to improve the quality and cost of their offering to facilitate customer switching. Discovery has an advantage in this regard. Given customers\u2019 reluctance to switch to an unknown brand, Discovery\u2019s strong brand will help it to overcome customers\u2019 reluctance to switch.<\/p>