My wife banks with Capitec Bank. She was snatched away from Standard Bank by the 15-year-old retail lender almost five years ago.
Today she is one of the 7.3 million customers who have flocked into the open arms of Capitec, which has consistently built its reputation on being the cheapest bank to transact in South Africa.
She tells me that four of her colleagues recently dumped their banks to start a love affair with Capitec after suffering through years of exorbitant banking fees.
Therefore, it comes as no surprise that Capitec was named the world’s top-ranked bank by the inaugural Lafferty Bank Quality Ratings index, outshining multinational banks such as HSBC, Deutsche Bank, UBS, Wells Fargo, Goldman Sachs and JPMorgan Chase.
The index – compiled by Lafferty Group, a global banking advisory firm – rated 100 quoted banks from 28 countries across the globe using indicators such as strategy, culture, customer satisfaction and executing brand promises to determine the quality of banks.
Capitec ticked all the boxes.
The lender crowned the Lafferty’s top ranking this week with a 26 percent jump to R3.2 billion in its full-year earnings after it attracted a million new clients in one year. This is a remarkable achievement considering the economy is stagnant and possibly heading towards a recession. It is clear that hard-pressed consumers are in want of an affordable bank in these economically trying times.
Very few people will recall that Capitec underwent a metamorphosis from a microlender into a retail bank out of its headquarters in Stellenbosch, Western Cape. Capitec was born in 2001 in the middle of the lending crisis that led to the demise of second-tier banks such as Saambou, BoE, and Unifer, a microlender once owned by Absa Bank.
From day one, Capitec came up with a business strategy that was bound to turn the local banking industry on its head and threaten the stranglehold enjoyed by the “big four” commercial banks, namely First National Bank (FNB), Standard Bank, Nedbank and Absa.
Capitec entered the market offering unsecured loans to low-income earners in urban and rural markets. On the back of its microlending business, it secured a banking licence to convert itself from a microlender to a retail bank. However, Capitec had to come up with an innovative, unique hook to lure customers away from traditional banks. And so it positioned itself as a low-cost operator that made banking easier, faster and cheaper to low-income consumers.
Business model
How did a start-up bank like Capitec manage to underprice its established rivals? The answer lies in Capitec’s business model, which is similar to the business model of a typical retailer: underprice your competitors and pass on the savings to your customers. Capitec was able to undercut the big banks by having one “back office” administration that supported all its branches.
On the other hand, the established banks had not caught up with the future and were still doing “back office” administration at branch level, which meant they had to charge high fees to cover their bloated overheads comprising the “back office” employees in their branches.
Capitec went a step further to differentiate itself from its established rivals. It offered just one transaction account – the Global One account – which customers utilise to save, transact and access credit.
Customers pay the same fees on the account irrespective of their level of income and there is no discrimination against high-income earners paying more than low-income earners for the same services.
Even the ambience inside its outlets was different and refreshing. Capitec took the notion of a paperless bank to another level as customers did not have to fill in transactional forms. There were no thick security glasses separating Capitec consultants from customers. This made interaction easier and friendlier as consultants tried to understand the needs of customers.
Middle-class customers
Once Capitec started catching fire in the low-income, blue-collar market, it turned its attention to the customers with fatter wallets – the middle class. Around 2006, Capitec outlets started appearing in high-end shopping malls, where middle- and high-income earners shop. In its early days, Capitec strategically placed its branches along transport routes commonly used by low-income earners – taxi ranks, high streets in small rural towns, bus and train stations.
In 2007, I asked a senior banking executive of one of the big four banks if they worried about Capitec eating their lunch. The executive was dismissive of the threat posed by Capitec.
“Does Capitec offer home loans? Does Capitec offer vehicle finance? Does Capitec offer funding to small businesses? I can go on. Don’t compare us with a microlender,” the executive responded.
But Michael Jordaan, the former FNB chief executive, was watching the lightning emergence of Capitec with a mixture of envy and admiration.
He saw the danger and decided to take Capitec head on as the Stellenbosch-based lender was threatening to become too disruptive.
As one an FNB executive once confided to me: “Once you lose a customer to Capitec… you won’t get that customer back.”
In 2006, FNB sent its mystery shoppers to spy on Capitec’s pricing of short-term loans. The spies – who were referred to as “researchers” – found that Capitec was charging interest rates of between 78 percent and 258 percent on 12-month loans with a value of R1 000 to R10 000.
According to FNB at the time, these rates were much higher than its interest rates of between 39 percent and 196 percent on its 12-month loans in the same range.
Cutting interest rates
Capitec was caught out as an expensive provider of loans even though its transactional fees were the lowest in the market.
FNB said Capitec’s expensive loans subsidised its low fees. A displeased Capitec described the FNB research as an unfair low blow by a competitor.
Needless to say that after this debacle Capitec started aggressively cutting the interest rates on its loans as it feared losing clients.
In 2010, FNB landed a pre-emptive strike against Capitec when it launched its own low-cost branch network, known as EasyPlan, but this venture never got too far as it could not match or catch up with Capitec in the unsecured credit market.
EasyPlan was quietly discontinued after it failed to get traction in the market.
Capitec’s latest results show that the company is making South Africa’s fragile economy its ally in winning over more clients. Consumers become bargain hunters when times are tough and Capitec is on hand to offer them its low-cost services and products.
The lender is also rescheduling loan repayments for distressed customers dealing with cash-flow crises. This is an excellent customer retention strategy that will ensure Capitec remains one of the leading banks in South Africa for a very long time.
* Andile Ntingi is the chief executive and co-founder of GetBiz, an e-procurement and tender notification service.
** The views expressed here do not necessarily reflect those of Independent Media.
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