With the Protection of Personal Information Bill (POPI) expected to be promulgated this year, the focus on protection of consumers’ personal information is becoming increasingly important for the local banking sector which handles and stores thousands of clients’ personal information on a daily basis.

Paul Greeff, Head of the Banking Sector for Global Credit Ratings (GCR) talks with the Publisher of TheSALeader about micro-financiers and unsecured lending in South Africa.

• Giving a distinction between micro-financiers.
• Where you find exploitation and reckless lending within the industry.
• How credit is controlled to protect the end consumer.
• How micro-financiers and governed and are governing themselves. 
• How Basel III will affect the commercial banks in South Africa and why they are looking at unsecured loans to alleviate the affects of these regulations.
• The change of the financial demographic profile of the end users taking out unsecured loans and how the National Credit Act has affected this change.

The debt industry portal, theDCI recently announced its support for initiatives by the authorities to address a ‘rising flood’ of unsecured debt that threatens to swamp embattled consumers.

 

Initial steps by Finance Minister Pravin Gordhan and National Treasury are welcome, but further action is required, theDCI lead a recent campaign that forced credit providers to suspend their Voluntary Debt Mediation Solution as it was judged to be in violation of the National Credit Act (NCA).

 

The recent meeting between the Minister, Treasury and banking leaders is the first implicit acknowledgement that unsecured lending is a problem and the scourge of millions of South Africans.

 

The authorities stopped short of calling it a ‘bubble’ and highlighted the rapid increase as a ‘concern’. Whether it’s a ‘bubble’ or a rising flood of unsecured debt depends on your choice of words.

 

Thankfully, the authorities are starting to listen to debt counsellors (DCs) and now acknowledge the distress we see daily. Millions are ensnared in debt and it is high time banks reviewed their lending practices. DCs know of numerous abuses and are eager to assist the authorities by providing details.

 

At the end of the banking indaba, Treasury said banks “could do more to ensure they lend responsibly”.

 

Reserve Bank statistics indicate unsecured loans rose 21% to R381 billion in the year to June. This category of lending includes personal loans, credit card debt and credit from retailers.

 

Ramped-up personal debt offsets weak corporate demand for credit while charges on unsecured loans can be five times higher than other categories.

 

Until the NCA’s introduction, banks drove up profits by giving multiple housing bonds to better-off customers. Then the economy hit trouble, higher earners became over-exposed and the NCA tightened up lending criteria on credit.

 

As a consequence banks then proceeded to aggressively market the lucrative unsecured loans sector. Millions of families now face the consequences. Reckless lending is a far bigger issue than what is currently being acknowledged.

 

Figures from the National Credit Regulator suggest 9.3 million South Africans are behind with credit instalments. The outstanding amount totals R1.36 trillion.

 

About 6400 consumers a month apply for debt counselling, the NCA-backed process that helps over-indebted people repay debt.

 

Demand for affordable ways of handling debt has risen so dramatically that theDCI, in collaboration with a leading broker and underwriter, recently launched its own group life insurance product, enabling debts owed by consumers to be provided for in the event of the death of the consumer, in a one cost-effective package.

 

The debt counselling industry works hard to assist debtors, but prevention is better than cure. We must combat reckless lending and credit extension abuses and there are many. We see cases where credit consultants don’t check application forms for obvious misstatements and lies. They focus solely on obtaining new business.

 

There are cases where instead of advising clients to get a bond at affordable rates a lender’s marketing staff encourage them to take out multiple unsecured loans. The reason? Banks make up to 32% and more in profit on these deals.

 

Contrary to misleading statements in the press of late, it is cheaper for consumers to go into debt review than to take out another loan. Debt review is a real solution that works.

Lack of bandwidth is not the only factor hampering the development of e-commerce and online business in Africa, says Peter Harvey, founder and MD of PayGate: The continent also needs a much more sophisticated financial infrastructure.

 

“To make e-commerce happen you need a complex ecosystem for making and processing online payments,” says Harvey. “Africa’s bandwidth problem is well on the way to being solved, but the online payments system still has a long way to go.”

 

Banks are one critical part of the ecosystem, says Harvey. “The first step in an online transaction is a person with a valid credit or debit card – so we need our issuing banks to speed up the rate at which they are rolling out cards to their customers. Debit cards are likely to dominate, because most Africans have little experience of handling credit and credit cards carry huge risks for banks.”

 

Next, says Harvey, the continent needs a cadre of acquiring banks that are prepared to accept online payments on behalf of their merchant customers. “At the moment, the business case for making the necessary investments is still difficult. An acquiring bank who wants to get into e-commerce will need to buy the appropriate licences from the card associations like Visa and Mastercard, install card processing systems, hire skilled staff to manage those systems, and understand and manage its risk of being exposed to fraud.”

 

It’s a big ask, notes Harvey. “Whoever takes the lead is going to incur a cost, and it’s not yet clear whether the returns will be worth it. But there is hope: As the retail sector expands and starts to offer point-of-sale card transactions, more cards will come into circulation and there will be more consumer demand for online shopping. Sooner or later, the balance will tip”.

 

Visa and Mastercard are both interested in the African market, adds Harvey, but are likewise struggling to find a business case. “It’s easier to find a bank that will issue cards than one that will acquire transactions, which leads to a big imbalance between supply and demand. Tourists arrive expecting to be able to use their cards, and more and more locals want the same – but it’s still hard to find merchants who will accept them.”

 

Harvey says payment service providers (PSPs), who offer the payment gateways that link customers, merchants, banks and the card associations, are vital connectors in the ecosystem. “As PSPs we obviously have an interest in growing the whole network,” he says. “If we do our job properly, we can play an important facilitating role that includes educating merchants, helping them to find acquiring banks and helping to manage their relationships with those banks.”

 

One of the big hurdles is the desire of many African banks to make exclusive agreements, Harvey adds. “If you take Kenya as an example, even though it’s one of the most advanced countries in Africa for e-commerce, MPESA is only available for one bank, over one network. If there were four or five acquiring banks and a similar number of PSPs, there’d be a lot more activity. Trying to tie people to exclusivity arrangements stifles the whole market.”

 

Until Africa’s e-commerce ecosystem reaches the point of sustainability, says Harvey, the continent is losing out. “The merchants who can afford to put in the time and resources, register a business offshore and use banks outside Africa. That means money leaves local economies, which nobody wants. The other alternative is for smaller businesses to use payment aggregators or ‘super merchants’, but they pay a premium for the service.”

 

In the long run, concludes Harvey, the best hope for success is for governments to take the lead. “Rwanda is an excellent example of a country where there is high-level government commitment to promoting e-commerce. They are putting pressure on the banks where necessary, and creating the legal frameworks that are needed to provide security. Those who follow that example will be the first to reap the rewards. Africa is a billion-person market with massive growth potential.”

SA property investors who require short-term liquidity for commercial purposes are increasingly being turned away by banks. This is due to banks tightening up even more as their margins are being squeezed and is subsequently preventing banks and bond brokers from providing property owners and investors with finance.

Gary Palmer, CEO of Paragon Lending Solutions, says that, “Stricter control measures and tougher lending criteria has resulted in the major banks being unable to process and approve loans as quickly as they would like and we are currently in a situation where investors do not have access to immediate cash flow.”

South Africa’s major banks are primarily focused on unsecured lending. But there are growing concerns at the rate of which unsecured lending has been managed to the extent that the National Credit Regulator is in discussion to amend loopholes in the National Credit Act to reduce the rate of unsecured lending.

Furthermore, stricter guidelines in terms of Basel regulations require banks to hold more capital and the increased costs of holding capital has resulted in banks’ profit margins becoming tighter than they were before the recent interest rate cut.
Palmer says, “The rate cut is likely to further contribute to a decrease in banks’ financial results and the outcome has caused a knock-on effect whereby bond brokers are now battling to secure finance for their clients who require lending to develop properties and invest in further developmental projects.”
He says that what this means for the property investor is that they are finding themselves between a rock and a hard place. “For example, an investor requires short-term immediate finance for working capital, the purchase of an investment property or funding a development. However, due to a bank’s lengthy processing times, the investor can find himself out of pocket due to the delay in approving the loan, and can result in the investor losing out on the investment.”
Palmer suggests that second tier lenders play a crucial role in short/medium term finance for the property investor. “Second tier lenders are not restricted by the major banks when it comes to finance as the investor, who has a valuable asset, can utilise these alternative sources to acquire short-term finance in order to be able to take advantage of investment opportunities. The investor puts their valuable asset up for security with the second tier lender while they are waiting for finance from the major banks.”

He explains that reputable second tier lenders, who usually have good working relationships with the banks and brokers, are then able to structure a short-term loan with the investor, providing them with a bank guarantee in a short space of time. “An experienced lender in the property space will be able to advise on the actual cost of a development and can advise investors on how to arrange the finance that is necessary.

“By doing so, the investor can rest with the confidence that his or her needs are being met. Short-term liquidity allows him or her to continue to finance their investment, without the risk of losing their investment while waiting for finance by a first tier bank, or lose out if their application goes awry.”

Palmer concludes that property developers and investors need to be aware that they have alternative options and should consult a reputable second tier lender for an assessment.

The financial results of South Africa’s four major banks for the six months ended 30 June 2012 have remained resilient despite the recent global economic uncertainty, according to a report issued by professional services firm PwC.

“Although in most cases not directly, our banks have had to cope with another six months of global financial instability, particularly in Europe. The downside risks in Europe remain elevated, which is weighing heavily on market sentiment and it appears that will be the case for some time,” says Tom Winterboer, Financial Services Leader for PwC Southern Africa and Africa.

Despite these difficult economic circumstances, the four major South African banks (Absa, FirstRand, Nedbank and Standard Bank) posted combined headline earnings of R21.3 billion, up 17% from the comparable period last year and average normalised return on equity (RoE) of 15.9%. This compares favourably to a benchmark group of Western global peers that recorded average RoE for the 2011 financial year in the range of 2.1% for US commercial banks and 14.7% for Canadian banks.

“This was a strong performance by South African banks compared to the Western world. Even more interesting is the composition of earnings for local banks when compared to other countries, which shows that our banks have an enviable non-interest revenue mix and continue to operate at favourable efficiency ratios,” says Johannes Grosskopf, PwC Banking and Capital Markets Leader for Southern Africa.

These are some of the findings from PwC’s South Africa Major Banks Analysis Report. The report analyses the results of South Africa’s major banks for the six months ended 30 June 2012.

Capital levels continue to be a strength. Total qualifying capital and reserve funds across the major banks showed moderate growth. However, the combined total capital adequacy ratio of the major banks declined marginally by 50bps to 14.9% from 15.4% at the second half of 2011.The slower growth in capital and decline in capital adequacy levels reflect the capital challenges faced by the major banks. This is a result of six months of Basel II.5 implementation as well as the prospect of Basel III regulations set to be implemented on 1 January 2013.

“The major banks have all indicated that the transition to the higher capital requirements anticipated by Basel III will take place without significant difficulty or deterioration in regulatory capital levels. This can largely be attributed to ongoing risk-weighted asset optimisation initiatives of the major banks, a prudent approach to business as well as the relatively prudent regulatory capital regime adopted by the regulator over the years,” says Grosskopf.
However, there is some uncertainty over key aspects of the regulations, such as countercyclical buffers, domestic systemically important banks surcharge and the finalisation of the recovery and resolution regime that will affect the final capital landscape.

Furthermore, it is expected that all of the major banks should be able to comply with the Liquidity Coverage Ratio (LCR) envisaged by Basel III requirements, supported by the committed liquidity facility that the Reserve Bank recently announced it would make available to mitigate potential liquidity shortfalls.

The most sensitive areas underpinning the results continue to be the banks’ ability to grow revenue, contain their bad debt charge and manage their cost base.

Total income, up by 12%, shows a focus on margin protection and transactional revenues. Compared to the prior period, banks’ operating expenses increased by only 1.5%, while total operating income increased by 4.8%. Consequently, their combined cost-to-income ratio improved from 58.1% in the first half of 2011 to 55.9% for the same period of 2012.

Salaries, which continue to represent about half of the total expense bill, grew at a rate of 12.6% in the first half of 2012, when compared to the same period for 2011. This increase reflects annual salary increases as well as the increased short- and long-term incentive awards associated with the improved operating performance of the banks.
“We have already seen that the next generation of productivity improvements will come from responding to changes in customer expectations by deploying strategic technology solutions,” he says. Leveraging distribution in the world of social media will require making further improvements in the use of customer analytics to unlock value. The key being able to integrate all the levers at the banks’ disposal to further improve customer engagement. These include rethinking product solutions in a Basel III world, harnessing technology for customer convenience, optimising internal centres of excellence and improving operational efficiencies.

Total balance sheet impairments increased 12.2% to R52 billion for the first half of 2012, compared to R48.8 billion at the end of the second half of 2011. Total income statement impairments increased 33.5% from the first half of 2011 to R14.2 billion at the end of the second half of 2012. Grosskopf points out that the banks have focussed on their NPL portfolios and the adequacy of their specific impairments on these portfolios. This focus will continue given the size of the NPL portfolio (which is in excess of R100 billion) and the state of the housing market.
Grosskopf concludes: “While there are some headwinds in the domestic economy and significant uncertainties from Europe, the banks continue to demonstrate the capability to manage and adapt. Compared to its international counterparts, the South African banking sector remains sound; being profitable, well capitalised and maintaining good returns on equity.”

The thing about social media is that, say what you like about it, it’s social. To be precise, it’s the pulse, conscience and graffiti wall of society. To give you an exact idea of what I’m talking about, let me give you an example.

Say you want to change your ISP. So you go on Twitter and ask: “Who is the best ISP in the Gauteng area?” Pretty soon (if you are followed by the gods of Geek) someone very influential like or could respond, together with a few other geeky types, and tweet back an answer. At best they all agree. At worst you now have a shortlist to investigate. Problem solved, because all you need to do is look at the responses, intuit the level of geeky influence or social cred and choose the best answer.

Twitter, and most other social media, should be viewed as word of mouth on steroids. Because of the network effect, digital word of mouth is the most powerful marketing tool in a brand champion’s arsenal, yet it’s the most difficult to control. How do you ensure that people only say nice things about you? Bearing in mind that bad news always travels faster and further and faster than good!

An excellent case in point is . This unassuming and young brand (well in banking terms anyway) has built up such a solid reputation amongst its clients that it’s South Africa’s fastest growing retail bank. From a microfinance lending institution founded less than 12 years ago, it has grown to take on the “big boys”, signing up a record 877 000 new clients in the last financial year.


In 2010 it was the only African brand to be listed by Credit Suisse as one of their “Great Brands of Tomorrow” - along with Facebook, Apple, Polo, Swatch, Hyundai, Mahindra, and Amazon.com.

From the outset, Capitec has differentiated itself from its competition in four ways: Accessibility, Affordability, Simplicity and Personal Service. For example, branches are open for longer hours than other banks (including Sunday mornings).There is a mobile banking terminal that brings the bank to the workplace, for bigger groups.

It was the first to use fingerprint biometric identification for signing in. There are tellers and managers who speak the vernacular of the area. Documents have been simplified so that they are easy to understand. Branches are located near main public transport hubs. Bank charges are kept low: comparative surveys done by MoneySmart show that Capitec beats all other banks on most fees and charges.

I could go on, but then I might sound like a PR for a particular banking company, which I’m not. But I think these are indicators of a different mind-set, especially for a bank, and the rewards are evident: people appreciate a bank that seems to care about them, and put them in control of their money. Not just empty slogans, but really making an effort to serve.

In an era when banks and their marketing are viewed by many with suspicion and mistrust, Capitec has stepped outside of the mould and provided innovation and a personal touch. This has resulted in many of their clients becoming brand ambassadors, which must account at least in part for their phenomenal growth.

It’s clear to see that Capitec is an intelligent brand. It doesn’t shout from the roof tops, it has an understated CEO, it promises small and delivers big. There’s a lot here that others could learn from, if their intelligent brands.

For more about intelligent brands go to www.ornico.co.za or follow Oresti on . You can also read Oresti’s blog at http://zamarketinginsider.wordpress.com/

Read more: Moneysmart infographic comparing SA banks’ various cheque account plans: http://www.bandwidthblog.com/2012/08/20/infographic-how-does-your-cheque-account-compare/