Wealthy but disgruntled customers

Capitec hopes to lure fed-up customers from big four banks, writes Sure Kamhunga

SURE KAMHUNGA
Published: 2012/01/31 08:52:11 AM

THERE is a saying that the best way to eat an elephant is one bite at a time, which best describes the strategy being used by Capitec Bank to chip away at the edges of the big four banks’ retail market share.

Capitec is making good on its promise to give the big four a run for their money in the fight for retail customers.

Not only is Capitec consolidating in its dominant entry-level segment, but it is now increasingly encroaching into the middle-to upper-income market where it is undaunted by the lack of some of the value-add products that wealthier clients usually associate with a high street bank. For a start, Capitec is opening branches in some of the affluent areas where it is under-represented, compared to the big banks which are entrenched.

The hope is that it will lure customers from the big banks whose patience has been worn thin by sloppy service and high charges. It is also offering comparatively higher deposit rates than those marketed by rivals.

"I think they can win in terms of their simple product offering and attractive interest rates," says Avior Research analyst Harry Botha.

But he cautions that Capitec might struggle to gain customers in the upper-income segment where the big banks have always been comparatively better placed to offer long-term products such as home and vehicle loans.

Capitec CEO Riaan Stassen is modest about the progress the bank has made, pointing out that banking is a marathon rather than a sprint to become market leader.

Capitec, so far, has about 3,5-million customers, the bulk of them in the middle-to lower-income segment, and is adding up to 100000 a month. Analysts say these are not entirely new customers as there is already a lot of cannibalisation in the banking sector, where banks and other credit providers such as microlenders are grabbing customers from each other.

"SA is such a multi-banked market that sometimes you wonder about the accuracy of the customer numbers published by banks, or more precisely, which of these accounts are actually active," says an executive at a rival bank.

Capitec’s strength, so far, has been its dominance in the middle-to lower-income market where the big banks have always been active, but are now intensifying their fight for more customers.

Mr Stassen appears unmoved with this activity by the big banks, believing in the power of Capitec’s brand and the financial support it is receiving from shareholders. These include controlling owner PSG Group — with a stake of about 34,6% — whose CEO Piet Mouton recently told Business Day he expects Capitec to continue to stay "ahead of the curve" and keep a gap between itself and its rivals.

PSG last year supported Capitec’s rights issue when it raised more than R1bn, and also threw its weight behind a decision to issue shares to raise nearly R800m, mostly from institutional investors. The bulk of the funds are for branch expansion and the rest is to strengthen its core tier 1 capital under Basel 3 rules.

Capitec’s strategy is to gain access to longer-term capital to match the extended tenure of its unsecured loans which can now be repaid over up to 60 months.

The bank is expanding its national footprint based on a new "designer" branch that was launched last week, and plans eventually to add 200 branches to the existing network of 500 in the next three years.

Capitec’s expansion — including adding more staff — will put pressure on its cost-to-income ratio, says Mr Botha.

"They announced two to three years ago that they will be building more branches and we are seeing it coming through their high cost-to-income ratio, which is higher relative to their (peer group which includes) African Bank," he says.

Analysts also caution that Capitec might battle to entrench itself in the middle-to upper-income segment in the same way it has succeeded in its core market.

"We must remember that some of these customers have built over time relationships and also have other benefits such as car and housing finance which Capitec Bank does not offer, and this is a major weakness it faces," says another analyst.

Capitec has, however, announced plans to launch its own credit card.

As it expands, it is safe to say only time will tell if the elephant will eventually be consumed.

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