Investigate Vehicles for Banking the Unbanked

Investigate Vehicles for Banking the Unbanked

BANKSETA IEDP

UGANDA AND UK 2012

“Investigate Vehicles

for Banking the Unbanked”

Action Learning Project – Syndicate 2

Syndicate Group Members

Edmund Jeneker (Absa Bank)

Tina Pieterse (Nedbank)

Marcia Gasa (Wesbank)

Steven Zwane (Absa Bank)

Khetha Mazibuko (Standard Bank)

Dimakatso Seete (Bankseta)

Vinod Naidoo (FirstRand)

Project Coach and Marker: Richard Cohen

19 October 2012

Table of Contents

Executive Summary 4

1. Introduction 5

2. Scope Statement

2.1. Opportunity Statement 6

2.2. Project Exclusions 6

3. Research Methodology 6 - 7

4. Literature Review

4.1. Defining the Unbanked 7 - 8

4.2. Challenges in banking the unbanked 9 - 10

4.3. Investigating the Mzansi Account – an overview 10 - 11

4.4. Assessment of the Stokvel market

4.4.1. Contextual overview 11 - 13

4.4.2. Practical Field research 13 - 14

4.5. Comparative International research

4.5.1. Uganda Market 15

4.5.2. United Kingdom Market 16

5. Our Proposal 17 - 19

6. The Business Case

6.1. The Business Case 19

6.2. The Base Case 20-21

6.3. The Bansela Scenario 22-24

7. Conclusion 24

8. Reference List 25 - 26

List of Figures

Figure 1: Stokvel growth chart 2009 -2011……………………………………………………………………………………………….…12

Figure 2: Mass Mart and Macro Stokvel shopping over the Festive Season…..……………………………………….…...13

List of Tables

Table 1: Banked vs. Unbanked percentage…………………………………………………………………………………………………….10

Table 2: Telephonic Interview Results 14

Table 3: Bansela + Proposal 18

Executive Summary

Millions of South Africans are either not serviced (as many as 13 million people) or are under-serviced by the banking sector and are therefore financially excluded. The exclusion of so many South Africans from the financial system, limits the ability of a material portion of the population to ultimately accumulate wealth and therefore achieve economic emancipation. Hence, we view that being “banked” is more than just about the possession of a formal banking product, more critically it is about the consumers’ ability to engage the financial system and develop a transactional profile that will ultimately assist in their ability to access credit and generate long term wealth

The Financial Sector Charter has committed itself to substantially increase effective access to financial services to the unbanked. Vehicles such as Mzansi were recommended by the Charter, coupled with an increased number of access points (ATM’s and Branches) as a solution of penetrating the lower LSM unbanked market. The Mzansi initiative launched under the Charter and remains the most extensive vehicle implemented in South Africa, specifically aimed at banking the unbanked and increasing financial inclusion.

Through the Mzansi effort, it was proven that many people could be brought into the banking sector (6 million by end 2008). Mzansi was indeed a success as it significantly increased the number of adult South Africans with a bank account. However, as a vehicle for banking the unbanked, the Mzansi product was undermined by the significant levels of inactivity evident in the account base. Usage levels are only at around 58% and diminishing at an alarming rate. Many customers never activated their accounts and many converted back to utilising cash subsequent to activating their accounts. These clients are “banked”, but in reality are unbanked in their daily transacting behaviour [Bankable Frontier Associates, The Mzansi Bank account initiative in South Africa, 2009].

We contend that the Mzansi initiative did not adequately balance the focus between increasing the distribution of financial services as well as driving transactional usage by focusing on migrating entrenched financial activity into the formal financial system. Our investigation demonstrates that great success could have potentially been achieved through the Mzansi initiative had the approach been to focus on identifying activities that low income earners were already engaged in and then convert these entrenched activities into formal banking transactions.

We therefore have investigated the group scheme (Stokvel) as an existing vehicle through which individual activity could be stimulated. This is a group savings scheme and taps into the basic human hierarchy of needs in terms of belonging and aspiration. According to the Africa Response Research Report on Stokvels in 2011, there are 811,830 stokvels, comprising of 11,4 million members and their estimated investment is about R44 billion annually. Only 52% of this is banked through the formal sector. The bank institutions currently offer limited products linked to stokvel members’ individual transacting and saving needs and tapping into their need of belonging and contributing to the greater need of the community.

This document proposes developing a value proposition, which leverages the power of the group (i.e. Stokvels) to bring the lower LSM unbanked and under banked clients into the formal banking sector, by enabling them to contribute to the Stokvel as a whole through their individual transacting and savings behaviour. We propose that institutions focus their efforts on group schemes, and through this vehicle drive financial inclusion.

1. Introduction

The Banking Association of South Africa (BASA) refers to financial inclusion as having “access and usage of a broad range of affordable, quality financial services and products, in a manner convenient to the financially excluded, unbanked and under- banked, in an appropriate but simple and dignified manner with the relevant client protection and financial education”.

The current reality is that approximately 13 million, or a quarter of the total population, remains financially excluded. One of the core contributing factors to this level of exclusion was the systematic efforts of the apartheid regime which sort to limit access to education and therefore social and financial freedom to many South Africans. Access to financial services is thus a key priority for the new South African government as it recognised that access to financial services is critical to long term wealth accumulation and ultimately economic emancipation.

The Financial Services Charter, which is a voluntary agreement between amongst South Africa’s financial institutions, specifically sought out to make the South African financial system more inclusive, by fundamentally improving access to financial services. The Mzansi initiative launched under the Charter remains the most extensive initiative implemented in South Africa specifically aim at banking the unbanked and increasing financial inclusion.

The Mzansi account is a low cost entry-level bank account developed by the South African banking industry and launched collaboratively by the four largest commercial banks together with the state-owned Postbank in October 2004 (Bankable Frontier Associates, March 2009). By December 2008, more than 6 million South Africans gained access to the Mzansi account. In this sense, Mzansi was a tremendous success as it significantly increased the number of adult South Africans with a bank account.

However, as a vehicle for banking the unbanked, the Mzansi product was undermined by the significant levels of inactivity evident in the account base. By 2009, almost half (42%) of the total opened accounts at the four private banks were “inactive” according to the Charter definition [Bankable Frontier Associates, March 2009]. Therefore, though low income earners opened the accounts, many did not actually alter their behaviour and engage the financial system and many more actually reverted back to utilising other methods of transacting i.e. cash.

Since the Mzansi initiative there has been no other collective vehicle launched to bank the unbanked, however, financial institutions continue to individually pursue efforts to acquire low income earners. This paper investigates the key barriers that may have contributed to the ultimate lack of activity within the Mzansi customer base and further seeks to table a solution that could be implemented to augment initiatives such as Mzansi to ensure transactional inactivity and therefore true financial inclusion.

2. Scope Statement

2.1. Opportunity Statement

The project will focus on investigating a rewards-based product to reward the target groups for usage of transacting or savings accounts for their daily needs such as purchasing electricity, airtime, transport or food and leveraging the group schemes framework to entice the individuals into the market and uplift usage whilst contributing the group schemes account. An example would be to provide a food voucher for a stokvel, when all the individuals belonging to the stokvel transacts above a certain level on their individual accounts:

Specifically, the project will:

1) Firstly, investigate a Rewards Programme to encourage Transacting or Savings usage to create tangible value for the low income, unbanked client, leveraging the link with the group schemes framework. In order to do so, we would need to design a solution which is easily accessible and is priced at the correct level with added solution features that create value in the everyday lives of the Unbanked and Group saving schemes. The intended result is for the unbanked to switch from informal to formal banking vehicles that are commercially viable for the bank institutions and to increase usage on current inactive entry level accounts.

2) Thereafter, to recommend a framework that will ensure the success of the product, marketing, distribution, pricing, cost management and profitability, while complying with necessary legal and regulatory requirements e.g. is FICA/Consumer Protection Act.

2.2 Project Exclusions

o Social Grant recipients are excluded as there are developments underway to ensure that grants are received through bank accounts.

o The Unemployed are excluded as it is assumed that their requirements to engage with the bank institutions are limited.

o Foreigners are excluded on the basis of the high barriers to entry and concerns around strategic relevance and the market view of foreign nationals.

o Development of new channels to deliver products to the market, i.e. a bank branch.

o Exclude those earning over R5000 a month. Exclude the delivery of a full product suite by focusing exclusively on a transactional/savings product

3. Research Methodology

We have approached our research as follows:

Qualitative and Quantitative Research:

- We have prepared structured questions for interviews with the defined unbanked market to understand client needs and test the eventual proposal. This enabled us to conduct an analysis on the outcomes across our sample. The Sample consists of Low Income Unbanked or under banked clients, spread between Rural and Urban low income areas.

Desktop research:

- Various resources were solicited as part of our Literature Review to understand the size of the market, the extent of the challenge and possible interventions that have been developed with an aim of bringing the unbanked marketing into the mainstream of the economy, bank strategies and solutions to service the low end of the market.

- Study the Financial Services Charter aligned to the Mzansi account case with the aim of challenging and reviewing its successes and failure in serving the unbanked market.

4. Literature Review

The literature review is divided into the following topics:

4.1. Defining the Unbanked.

4.2. Challenges in banking the unbanked.

4.3. Benefits of banking the unbanked.

4.4. In depth look at Mzansi.

4.5. Unpacking the Stokvel market

4.6. Comparative International research

4.1. Defining the Unbanked

The South African Unbanked market of about 13 million low income earners refers to mainly to South Africans who have a need to save or move money on a regular basis, but are not utilising the formal banking system to do so. We have identified the following broad categories of unbanked segments:

o Low Income Earners – wages or salary earners

o Social Grant recipients

o Unemployed – no regular income

o Informal Traders and micro-enterprises

o Foreign Nationals – asylum and migrant workers

o Cash recipients – People receiving money from others, for e.g. family

o Youth – Pre-labour market

One of the critical factors that lead to the drafting of the Financial Services Charter and the improvement of banking access is the accepted recognition that long term wealth creation is primarily driven by the long term appreciation of asset portfolios, specifically stocks, properties and bonds and household’s ability to own such long term assets is intrinsically linked to their ability to access credit. As formal financial institutions rely on customers transactions profile as a key proxy for credit worthiness, access to credit is therefore highly depend on access to transactional products and solutions.

The ability of the consumers to engage the formal financial system and develop a transactional profile is critical therefore for social transformation. Hence, we view that being “banked” is more than just about the possession of a formal banking product, more critically it is about the consumers’ ability to engage the financial system and develop a transactional profile that will ultimately assist in their ability to access credit and generate long term wealth. Hence the specific focus on investigating Mzansi, as it remains the only vehicle that achieved wide scale distribution of a financial product, however wide spread adaption of transactional activities did not materialise.

To better aid our investigation, we have constructed a typical archetype of an under-banked Mzansi account holder, based on the multiple sources of data that we interrogated:

The above customer user case highlights that though this particular customer has a formal bank account, the customer’s usage of the features of the product and the channels of the bank are limited to a minimal set of transactions. The above customer only utilises three types of transactions from the bank:

o An electronic funds transfer (EFT) into the customer;

o A single cash withdrawal;

o And two electronic debit order transfers.

Further the customer case illustrates that the customer conducts several significant transactions utilising cash and informal financial products. The extensive use of cash by the customer exposes the key to several risks and disadvantages:

o Increased risk of cash theft;

o Risk of personal security;

o The customer’s financial institution has limited insight into the customer’s transactional usage and this will ultimately limit the institution’s ability to assess the customer’s creditworthiness and therefore limit the customer’s access to credit in future.

4.2. Challenges in enabling engagement with the formal financial system

We shall utilise the above customer use case to demonstrate the key constraints in enabling engagement with the financial system for unbanked and under-banked segment:

4.2.1. Cost of providing access

As a result of the lack of infrastructural investment in South African townships and rural towns by the previous government, new infrastructural investment is now required in order make formal financial channels accessible to communities. This requirement for capital investment therefore makes the provision of financial services to South African communications comparatively more expensive and therefore less commercially viable than providing this services in established urban areas. The total upfront cost of deploying infrastructure remains a key barrier for the established banks to extensively deploy financial services. Through the Mzansi initiative the financial institutions set themselves targets in terms of infrastructural deployment that were largely met. . The Minister of Finance, Mr Pravin Gordhan challenged the banks to work towards reaching a 70% banked population by 2013 and the National Planning Commission has set a target of 90% by 2030 [Financial Sector Charter]. Therefore again, Mzansi achieved some success in overcoming this barrier.