When Capitec Bank opened its doors in 2001 as South Africa's first new retail bank in 20 years, it was unable to raise a R100 000 loan from financial institutions to buy a pool motor vehicle for its northern areas of operation. Today it has about R3 billion in surplus funds invested with the very same institutions that saw Capitec as a non-starter. And confidence in the bank’s future is underscored by the fact that it has been able to borrow R3 billion to fund its extraordinary growth.
In having surplus funds, Capitec has not only shown what poor judges the big institutions were, but it has also shown up those banks in the way they do business. Most importantly, Capitec has been able to take the presumed high-risk, lower end of the income market and make it a success. So much so that people in the middle- and upper-income levels, fed up with the poor service and high costs of the Big Four, are now streaming in to become customers.
The evidence is in the 2.5 million customers who have joined Capitec since it was launched in 2001. And customers continue to sign up at an astounding rate of 70 000 a month.
Capitec’s success gives the lie to the repeated claims by the Big Four banks that they cannot afford to make banking cheaper because they have to service a very costly low end of the market.
Capitec not only manages to bring low-cost banking to all its customers, it is doing so with extraordinary success for its shareholders. Profits for the year ending February 28, 2010 increased by 45 percent to R435 million, with a final dividend of 155 cents a share. The share price has gone from 90 cents a day after listing on the JSE in 2002 to 15050 cents on November 25, 2010. Its extraordinary share-price performance last year earned it the company of the year award in the Sunday Times Top 100 Companies 2010.
But Riaan Stassen, the chief executive of Capitec, does have some understanding for his competitors. He says modestly that Capitec had the advantage of being a start-up operation.
Stassen says it is similar to how a motor mechanic and a heart surgeon need to perform. A motor mechanic works his wonders when the motor has stopped; a heart surgeon has a more difficult job – the heart has to keep working while the wonders of surgery are performed. In other words, an established bank has to re-invent itself while still serving its existing customer base.
But others have also started and failed. In fact, Saambou, which aimed at being a savings and loans operation like Capitec, failed six days after Capitec listed on the JSE.
However, part of the reason for Capitec’s success is that it has confined itself to savings and loans. “We are not trying to sell VW Golfs and Rolls Royces,” Stassen says.
Those early months were not easy, Stassen says. One month the directors even had to provide the bank with personal loans to pay staff salaries. But, he says, “this taught us a lot of discipline – how to manage liquidity within the bank and how to conserve capital. It is a discipline that has become a culture in the bank and it enabled us to escape the credit crisis.”
Spartan approach
The culture Stassen talks of is evident when you walk into his frugally furnished office in the Stellenbosch Technopark. The office is no more than 15 square metres, and three senior executives share a secretary. This almost Spartan approach is instilled throughout the bank. There are no huge banking halls, no opulent offices for executives, no flying first class, no staying in five-star hotels and no entertaining in fancy restaurants. You are more likely to bump into Stassen walking the streets of a township and enjoying a burger with customers at a local Steers.
Stassen and his executives like to keep their feet close to those of the ever-growing number of customers walking into their 431 branches. For example, he and his senior executives have been at the opening of nearly every one of the ever-expanding national network of branches. He spends one week a month visiting branches, observing customers and finding out what they want.
A major part of the success of Capitec has been that the bank has looked to the interests of its clients first and to profits for its shareholders second. It has simple, understandable products, particularly when it comes to costs. And not only are the costs simple, they are also significantly lower and less complex than those charged by the Big Four.
Capitec has been cashing in on these advantages in the hard-hitting advertising campaign it has been running for the past year, telling potential customers that they will save in costs and in hassles and they will get better service by switching their accounts.
In the words of the campaign’s suave Capitec customer: “Imagine a bank that offers the easiest access to your money, the highest interest on savings and the lowest bank charges ... well, I’ve found a bank that doesn’t waste my money or my time, a bank that does innovative things to simplify my life.”
Part of the success can probably be attributed to the fact that Stassen and Michiel le Roux, co-founder of the bank and now chairman, are not born-and-bred bankers. They and key members of their team came from the liquor industry.
As one analyst quipped, it is probably just as well they left Distillers Corporation, because if they had the long-term success there that they are having in banking, we would be a nation of alcoholics.
Stassen says Capitec uses exactly the same marketing and brand strategies that are used in the liquor industry, focusing on clients’ needs while also recognising the potential of the black consumer market.
In taking the Capitec brand from nowhere to where it is today, the bank has also achieved the distinction of being the only African brand recognised this year in the Credit Suisse research list of 27 “great global brands of tomorrow”.
Le Roux was managing director and Stassen was group financial manager of Distillers when Pepkor chairman Christo Wiese asked Le Roux in 1995 to take over at the troubled and now defunct Boland Bank, headquartered in Paarl.
It was in the brief period that they were at Boland that they spotted the opportunity to provide a simple savings and loans offering. A bank was launched at the Pepkor retail outlets under the brand Pepbank.
But Le Roux, Stassen and other top members of the Capitec team left at the time of the controversial mergers and de-mergers of Boland and the now also defunct NBS and independent trust company BoE – all of which were to land up within the Nedcor/Old Mutual stable.
Even the Boland information technology team has landed up in Capitec as a consequence of Boland Bank’s IT offices being downscaled by Nedbank. And it is technology, Stassen says, that has largely contributed to the success of Capitec.
Capitec Bank started off as a division of the Stellenbosch-based financial services company PSG. It was called Keynes Rational and focused on micro-lending.
In 2001, PSG obtained a retail banking licence and a year later Capitec was listed on the JSE. It aimed at three things: creating an innovative and adaptable technology base, which in turn would have a simplified, focused and low-cost product range delivered through low-cost channels.
Capitec is unapologetically a simple savings and loans bank serving individuals. It does not try to make money by packaging fancy investment products or selling life assurance or anything else.
You can have a transactional account that doubles as a loan account and savings account. That is it. The costs and interest rates (paid and received) are simple in structure and easy to understand.
Assurance that your debt will be repaid if you die or are unable to work due to disability or retrenchment is included in your borrowing costs – and is not added on top purely to generate additional fees.
Zero expectation gap
Stassen says that Capitec aims to have a zero gap between the expectations of customers and what they receive. This benefits customers. It also means that there is no cost to the bank in having to deal with long queues of anxious or upset customers wanting to query what is wrong with their accounts.
For example, he says, watch people around payday at an ATM of a competing bank. Too often you will see them attempt to make a cash withdrawal and then get an account inquiry (at additional cost). The reason is that the amount reflected on their bank balance is not the same as on their payslip. And often the reason for this is that they have been charged fees for a debit order and then for a rejected debit order. When funds come into the account the charges are applied, resulting in a difference between expectations and reality. The next step is to join a queue in the bank to find out what has happened.
The mainline banks have complex charges for internal and external debit orders, and far higher charges for returned debit orders. These charges can be outlandish, depending on the type of bank account and the number of unpaid debit orders, even on rejected amounts as low as R50: FNB charges up to R105, Nedbank up to R120, Absa up to R50 and Standard Bank up to R115. Most on low-entry accounts charge R5 from the second rejection.
Capitec has a simple debit order structure: R2.75 for the debit order and R3.75 if it is unpaid.
And to avoid any double-charging when Capitec customers use a Capitec ATM, the first thing they see when they log in is their bank balance. They know immediately what is in their account, at no cost.
Capitec is upfront about its fee structures. Its documentation and website are designed to provide you with important information, such as bank fees, easily and accurately.
You will struggle to find details of the bank charges of a Big-Four bank on the internet and, when you do, you will find a confusing array of cost options.
Interestingly, the 2009 Horwarth Forensics Study commissioned by financial magazine Finweek has shown that, obscurely, the reason people who want to pay lower charges do not change their bank accounts is because they do not understand the complex fee structures of the traditional banks.
Capitec has one set of costs for all its customers. There are no options.
Stassen says the reason the traditional banks have so many variations on the same theme is purely to maximise fee income, whether it is transacting, saving or borrowing.
He says Capitec succeeds because, as its logo states, “simplicity is the ultimate sophistication” – and it is not a hollow phrase; it strives to live up to it.
The simplicity extends to all Capitec’s products, which are designed to meet expectations.
A Capitec bank account is based on a simple three-legged structure (transactions, savings and loans) wrapped up in what is called the Global One facility.
You open a transactional account, which provides you with access to loan facilities and a choice of various inter-connected savings accounts.
There is a daily access savings account, term-targeted accounts with monthly contributions, and fixed-term deposits.
Generally, most people open a savings account with the hope that their money will grow. But too often at traditional banks they are in for a rude surprise when they discover that the costs outweigh their interest earnings.
Capitec takes a novel approach to savings. It pays interest on a scaled basis and does not rip you off with charges for keeping your money with the bank. The lower you are on the scale, the more it pays. This, Stassen says, encourages savings, particularly among lower-income groups.
Another novel approach is in targeted savings with up to four savings plans, again with scaled interest. For example, you could have a sub-account to pay for the education of your children. You can sign up for a fixed-term (maximum two years) savings plan for each or any of your sub-accounts. If you find you cannot afford the contribution in any one month you are not penalised. However, you cannot access your money before the maturity date.
Lower earners targeted
The Capitec Bank savings products have been designed to at least meet the savings requirements of middle- to lower-income earners.
Stassen says the difference between lower-income and wealthy people is that the wealthy can afford to invest for the longer term to make more money, whereas those with lower incomes tend to achieve their financial goals by saving a portion of what they earn rather than investing it.
Research by Finmark Trust shows that lower-income groups have shorter-term savings horizons. This means that things such as life assurance endowment policies with minimum five-year investment terms and severe penalties if premiums are skipped are unsuitable for these groups.
With its products, Capitec not only tries to encourage saving but also encourages disciplined saving without the downsides of life assurance products, which are widely sold by its competitor banks.
Changing individual behaviour is not restricted to savings. Stassen says that Capitec is succeeding in changing the historical patterns of handling cash, despite most of its customers living in a cash-driven environment, where they have to pay cash for taxis and trains and at shops in townships.
The first step was to encourage employers to pay employees via individual Capitec bank accounts. This reduces the risks and costs of handling cash for both employers and employees.
So far, the bank has signed up more than 70 000 employers, from government departments to micro employers. The bank has about 100 mobile units using wireless transmission travelling around the country, with staff speaking to employers and setting up accounts for employees.
The next step is to encourage customers to use shopping retailers, such as Pick n Pay, Shoprite and Checkers, to draw money.
Last year, Capitec went on a major drive encouraging customers to use retailers, offering zero-cost cash withdrawals at till points. Stassen says this is a major advantage for retailers because it reduces the amount of cash they have to handle and reduces their bank cash deposit fees.
The retailers charge Capitec for the service but Stassen says he is trying to negotiate a cheaper rate that will be passed on to the bank’s customers.
The normal rate for a retailer cash withdrawal is one rand, as against R3.75 at a Capitec ATM.
Capitec cash withdrawals from retailers grew at 65 percent a month from March to September 2010 compared with 15 percent in ATM withdrawals.
Stassen says customers are also being encouraged to withdraw smaller amounts by having wider access to cash withdrawal facilities for more hours a day. There are benefits for both customers and the bank. For the customer, there is greater security in withdrawing money at a retail outlet rather than at an ATM. The bank benefits because customers leave larger amounts in their accounts, and it has to provide fewer ATMs.
Stassen says ATMs have become a major problem because they are targeted by thieves who blow them up to steal the money. This is a double whammy for banks in that cash is stolen and ATMs have to be replaced – at the considerable cost of about R300 000 each.
Further inducements for Capitec customers to use retailers are cost-free debit card purchases and no annual fee for the debit card.
Stassen says there is a definite indication of a change of withdrawal patterns, with money remaining in accounts for longer periods.
He says the same simplicity of approach to saving is taken on the lending side.
Capitec is now the largest provider of unsecured loans in the country, and many banks – even those with large secured loans – would be envious of its low default ratio.
The provision for doubtful debts as a percentage of the R8.6 billion loaned to customers as at August 2010 amounted to 7.1 percent.
If you default on a Capitec loan, you are immediately shown the door and you will never be able to borrow from Capitec again.
If you apply for a loan from Capitec, the first thing that is decided is the term of the loan. The amount is secondary to the term. And the first thing that is considered when deciding the repayment term is not your ability to repay the loan but your employment and, more particularly, your employer and the sector in which your employer operates. In other words: what are the chances of you losing your job and your income, and not being able to repay the loan?
If the borrower is employed in the government sector, the term of the loan is likely to be longer than, for example, someone employed by a bakkie builder.
Stassen says the term, which ranges from one month to a current maximum of 48 months, is important for lower-income borrowers because the consequent lower monthly repayments make the debt more affordable.
Capitec also charges a lower interest rate on longer-term loans. But interest rates are high because the loans are unsecured, with a consequent increase in risk for the bank.
Once the term has been decided, the affordability and the size of the loan is taken into account, with R100 000 being the maximum.
Stassen says longer-term lending, for example by providing home loans, is not in the bank’s plans. He says comparatively few people, particularly in the lower-income end of the market, want home loans.
Streamlined operations
Stassen says that information technology has been key to streamlining the bank's operations and ensuring a high level of security at its branches. Importantly, it enables central control. No one in a branch makes a decision about the granting of a loan. The branch merely feeds the information into the computer system. This enables the bank on busy days to process more than 4 000 loans an hour.
At any time of the day the executives in Stellenbosch can see exactly how much money has been saved and lent, and how many loan repayments are outstanding.
Stassen says: “If there are any hiccups, we can spot them and where they are immediately, allowing for quick corrective action.”
The computer system was developed by an Australian company (now owned by the giant Indian industrial company Tata) and is used by the Indian National Bank, which has 50 million customers.
No one in a branch has to balance up the books at the end of the day, with a side benefit that the bank stays open for longer than its competitors. Most branches are open from 8am to 5pm (Saturdays 8am to 1pm), with some in high-volume areas open from 7am to 7pm.
The branches are where the customers are: near railway stations, taxi ranks, in townships and shopping centres.
The almost 4 000 branch staff are drawn from local communities and they speak to their customers across tables, not through bullet-proof screens. The reason is that cash is not handled in the bank branches. You cannot make a cash withdrawal (this has to be done at an ATM), although you can make a cash deposit, which goes straight into a drop safe.
Capitec also aims at a paperless environment by using computer technology. Open an account and the information is centrally recorded and stored in digital format. Biometrically recorded finger prints and digital photographs overcome the problems of fraudulent identification documents and make it easier for Capitec’s less literate customers.
You need identification, proof of address and a R10 deposit to open an account. There are never any forms to complete, whether you are applying for a loan or opening an account – and it is all processed in less than 10 minutes.
Once you have an account you can also transact via the internet and on your cellphone. You can even get information via Twitter.
Capitec has also used technology to bring cashless banking to remote rural areas. In 2004, Capitec, with Mastercard, launched a world-first pre-authorised debit card with an embedded chip that enables customers to buy from retailers. Retailers can download the transactions – which are guaranteed – once a day. A small personal portable balance reader allows customers to keep track of their finances.
Of the future, Stassen sees Capitec making more inroads into the market share of traditional banks.
“We left everyone with the misapprehension that we were a bank for the unbanked and the under-banked. We are not. We are a bank for anyone who wants simplified, cheap banking.”
This article was first published in the 1st quarter 2011 edition of Personal Finance magazine.