Capitec banks success in a hotly contended banking sector is a credit to the company’s model
Capitec bank is a company that I am sure has gotten used to the praise it receives at the end of each financial year, and why not? The company has grown in leaps and bounds since its founding in 2001.
The South African bank market is not what you would call an easy egg to break for new entrants. The dominance of the four major banking companies (First National Bank, ABSA, Nedbank, and Standard Bank) is well documented, and a solidified fact of South African life. However, the small bank touting “simplicity” and low-pricing as its chief attributes has managed to sneak in and grab a large part of the market from underneath the noses of the South African giants. More than that, it has managed to survive the pressures that inhabit the banking industry, including the 2008 financial crisis and following recession. A good question to ask is, how?
All the banking, none of the frills
If you’ve ever walked into a Capitec banking branch you will already be aware of the toned down style adopted by the firm. Unlike your major brands, the environment in a Capitec branch seems focused and easy to understand. The advertisements seen plastered on the wall or tv portray the small variety of choices the bank offers its customers, a change from the perpetual “flavour-of-the-month” accounts that the major banks tend to bombard you with.
And this is the special sauce that makes the Capitec recipe so good. Their emphasis on simplification of banking is more than a clever branding tool. It’s a concerted attempt to create a more comfortable experience for customers, and to shy away from over-burdening the customer with the latest lexicon developed at global banking conferences.
This extends even towards understanding the practical ways Capitec has chosen to challenge the branding of their elite competitors. Extending branch hours of service, understanding where to position branches in terms of ease of access to priority customers, simplifying the approach traditionally taken by banks to attract low-income customers. Capitec has used all these tools and more to bridge the gap between them and their clients to indicate that they care deeply for their financial welfare.
But the simplicity of the Capitec brand has a lot to do with their targeted customer group. As a firm primarily focused on providing the lowest rates and charges for banking, it is easy to define the Capitec target market as the base-of-the-pyramid consumer. Base-of-the-pyramid (BOP) consumers are those customers located at the lowest level of income. But the way the bank has used this market as a jumping board to propel itself into the more mainstream banking scene is an impressive story.
Doing business at the bottom
Capitalizing on this market can be a tricky thing to do. Being the lowest paid workers in the market, these individuals usually have very little in means to spend on products of any kind. And loans extended towards these customers have an innate difficulty for the company collecting the returns.
In the banking sector this is especially evident as, up until the entry of Capitec, not much innovation had occurred in this corner of the market. However, as is documented in various books, the base of the pyramid is a market that can yield great rewards if the approach to the market is aware of the economic context beyond what has been traditionally believed. Internationally, this has been shown through the growth of more formalised micro-financing businesses that have sought to introduce low-income workers to a personalised banking option, when for so long they have been given none.
This is why Capitec began its early business by focusing efforts on one product offering: 30-day loans charging 30% interest.
These loans became the basis of much of Capitec’s business in its earlier years and also proved especially pertinent to the growth of the business. By continuingly growing their base of 30-day loan customers, the bank was able to carefully lift its profit profile and establish a foundation to move beyond this practice.
This is clearly shown by the evolution of the bank’s product offering. As Capitec matured, so did their brand. This happened as the bank began to offer loans with longer maturation dates (6-month and 12-month), which opened the bank up to the mainstream banking market. Capitec then restructured its financial base over these years of growing profits to include a lower emphasis on the micro-financing market that had brought it such success. By 2012 the 30-day loans made up only 6% of the business’ total outstanding loans.
Doing this is a lot harder than it seems, and stands as a testament to the competencies of Capitec’s management. It was as a result of their stewardship during Capitec’s transition that the company has become the major player it is now. And do not doubt it, Capitec is slowly becoming a bank of some heft in South Africa’s financial markets.
The release of Capitec’s interim financial reports for the last financial year indicates another big boom in the bank’s customer base. In 2010 investors lauded the bank’s announcement that it added 70 000 new customers every month in the 2009/10 financial year. That was a 37% increase in its customer base year-on-year, placing it at 2.1 million clients.
But by 2017 Capitec has moved that figure all the way up to 7.9 million clients, surpassing established banking brands such as FNB and Nedbank. Furthermore, the bank could further announce that it was now adding 120 000 clients per month.
This kind of growth obviously can’t last forever, but it also indicates that Capitec is now something much more than the little-bank-that-could. Furthermore, as described by the firm’s management, the bank’s clients are mostly government employees. Gathering from Finance Minister Pravin Gordhan’s budget speech at the start of this year, government will not be looking to make dramatic cuts to the public wage bill. This is great news for Capitec as it implies that a large part of their customer base will continue to have secured incomes, and therefore have a higher probability of meeting their loan payments.
Stil boasting considerable profit margins, the bank remains a popular investment option (Total divedend per share rose by 18% year-on-year). The bank still hosts some of the cheapest banking products on the market, especially those aimed at middle and low-income customers. And as times get tougher for the South African economy, belt-tighteners will surely find their way to the bank’s branches.
What does the future hold?
Capitec’s story up until now has been one of disruption. By pricing lower than their competitors, and taking advantage of their sluggish response times as a result of their size, the bank has snuck in and snatched a large part of the market. But what of the banks long term prospects?
Well, now that the bank has taken its place as a prominent player in the market, its management team must now navigate a rapidly modernizing industry, growing operating costs as well as create a sustainable path for expansion. Announcements have already been made of the bank’s intention to open an international service.
Capitec’s base of loans, that primarily support mortgage payment and home improvement demands from their low-income customers, is a secure place to leverage its weight from. However, the other banks are not going to sit back and just watch their customers flee to cheaper shores.
Capitec’s competitors have quickly realised the threat it possesses and have been busy introducing products that directly compete with their offering, sometimes outrightly copying its products. Even though this attempt hasn’t staved off the growth of the business, it must surely be a concern for the firm’s hopes of expansion.
FNB has already shown to be an exceptionally aggressive competitor, often leading to some embarrassing moments for Capitec. According to reports, a particular incident in 2010 involved FNB sending researchers to secretly assess Capitec’s 12-month loan products. The researchers then found the loans to have interest rates considerably higher than their FNB counterparts, outing Capitec as a more expensive loan option. Capitec promptly lowered these rates and mostly avoided losing customers, but it’s clear to see that the story could have had a worse ending for the bank.
Above all else, Capitec bank has proven that even with the sluggish pace of the South African economy, and the declining state of its citizens’ financial security, effective disruption and success is still possible.
With a potential downgrade for South Africa’s credit status, a weaker rand, Brexit, and the impact of Donald Trump’s protectionism on the global market all waiting on the horizon, the banking sector might still be in for some bumpy roads. An emphasis on servicing the traditionally perceived “un-serviceable”, and the careful management of growth are lessons that most businesses could benefit from. And being that Capitec bank has won international awards for its model of operation, and the tacit acknowledgment by the other big banks of its potential threat, it seems that this lesson is one that might be learned.