Digital newcomers spark price war among SA banks

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The incumbent banks still have an advantage, as digital banks need time to build trust.
The incumbent banks still have an advantage, as digital banks need time to build trust.

The emergence of new digital banks in SA has ignited a price war among financial institutions, with the incumbents slashing their banking fees one after the other.

The new digital banks that are shaking up the South African market are TymeBank, Bank Zero and Discovery Bank.

Co-founded by former First National Bank (FNB) CEO Michael Jordaan and banking innovator Yatin Narsai, Bank Zero launched last year and is described as “a unique and fresh approach to banking without any legacy systems”, and is expected to offer added control and transparency, as well as a fresh take on banking.

TymeBank, which bills itself as SA's first digital-only bank, wholly-owned by billionaire Patrice Motsepe's African Rainbow Capital, launched to the South African public in the second week of November.

During the same month, insurer Discovery unveiled what it describes as the “world's first behavioural bank”, a fully digital bank that anyone with a smartphone can join, starting operation from March 2019.

TymeBank has already shown massive growth in its first four months of full operation, reaching 400 000 customers at the end of May.

Snowball effect

Since TymeBank went live, Capitec shaved 50c off its Global One account’s monthly fees. Nedbank also followed suit, cutting the monthly account fee on its pay-as-you-use account in April.

Earlier that month, Nedbank rolled out Unlock.Me, a zero-fee digital product aimed at customers younger than 25. In November last year, Nedbank launched a no-fee mobile wallet account, MobiMoney.

In May, Standard Bank unveiled its MyMo account, which carries a monthly fee of R4.95, undercutting Capitec’s Global One by 5c.

In a similar move, FNB recently announced that from 1 July, its customers can look forward to reduced monthly fees for Easy Pay As-You-Use (R5.75 to R4.95), Easy Account Smart Option (R65 to R59) and Gold Fusion (R155 to R109).

Commenting on the price war, TymeBank CEO Sandile Shabalala says: “Our intention has always been to disrupt the retail banking environment. Our competitors’ recent fee reductions are evidence of an industry that is ripe for change; one just has to ask why it’s taken so long.”

Despite the big banks’ incremental adjustments, they still do not compete with TymeBank when comparing fees using the methodology of the annual Solidarity Report which ranks banks according to a basket of transactions.

Shabalala notes that when comparing 12 transactions across the banks, TymeBank is far more affordable, costing a consumer just R12. This, versus African Bank’s R20.60, FNB’s R34.75 and Capitec’s R36.60.

“We have been meticulous with our pricing to ensure that every fee, even traditionally high-yield penalty fees, are priced with the consumer’s pocket in mind,” he notes.

“We can afford to do this because we are a digital bank that has its ‘back office’ in the cloud. This gives us a massive cost advantage over our competitors, and we are determined to pass these savings on to our customers.”

TymeBank has no branches and its core banking system is hosted in the cloud.

Meanwhile, Bank Zero has implemented its EFT payments capabilities and started end-to-end beta testing ahead of the bank’s launch in the second half of 2019.

The digital bank is now processing payments and debit orders, as well as facilitating purchases of prepaid items such as data, airtime and electricity.

Discovery Bank says South African banks largely competed in three major areas: fees, rewards and interest rates, and it is looking to be competitive across all three of these areas.

TymeBank CEO Sandile Shabalala.
TymeBank CEO Sandile Shabalala.

Big backers

As the price war hots up, Byron Lotter, portfolio manager at Vestact Asset Management, believes the new entrants stand a chance.

“I think they [digital banks] will do well. All the newcomers have big backers and experienced teams,” he says.

“Their biggest advantage is that they are not stuck with legacy technology and benched. They can go completely branchless with great apps and Web sites to service their clients. Low costs can make retail banking very profitable.”

Dominique Collett, head of AlphaCode and RMI investments executive, says there is no doubt the new banking entrants are going to have an impact on the market with their cheaper fee structures.

“We have already seen how Capitec disrupted the retail banking market in SA by offering cheaper, more transparent fee structures.”

According to Collett, Capitec is now the biggest bank by customer number with 11.4 million clients. She notes this is testament to the fact that South Africans are gravitating towards banks that have lower fees.

“The digital players will also likely focus on a great digital customer experience, which is critical in converting customers. Customers don’t just look for the lowest price – they also look for the best service offering. Again, Capitec managed to disrupt the market by aggressively rolling out service centres and making the branch experience friendlier and more customer-centric.”

Dominique Collett, head of AlphaCode and RMI investments executive.
Dominique Collett, head of AlphaCode and RMI investments executive.

Incumbents’ advantage

However, Collett says the incumbent banks still have a significant advantage. “Most notably, they have advanced credit products which are critical to converting a customer into a primary bank account.”

She explains the new entrants (TymeBank and Bank Zero) do not seem to have an established credit capability or offering, which might limit their ability to fully compete with the large banks.

“Capitec’s solid unsecured lending offering has been critical in their growth story; so it is questionable how successful these banks can be without a full bank offering. The incumbent banks also have rich historical data on their customers and strong brand loyalty.

“Customers may not always like their bank and may become frustrated but they trust the big bank brands and it is notoriously difficult to get customers to switch their bank accounts. This is where new entrants like TymeBank and Bank Zero may struggle because they are new brands and it will take time to build trust (although not impossible – consider the rise of Capitec over the last 10 years).”

Collett points out that Discovery Bank has a distinct advantage as it is an existing, trusted financial services brand.

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