Digital newcomers out to disrupt South African banking

Armed with low-cost operating models, three South African digital banks are betting on aggressive pricing and data analytics to attract tech-savvy, price-conscious consumers when they launch next year in a rare challenge to the old guard.

It will be first time the US$30 billion industry has faced competition since the early 2000s, when Capitec Bank muscled into a sector dominated by Absa , FirstRand , Nedbank and Standard Bank .

The mobile banking newcomers, Discovery Bank, TymeBank and Bank Zero, all expect to have substantially lower cost-to-income ratios than the big five lenders, giving them scope to disrupt the pricing of retail banking products in South Africa.

“We are here to shake up the status quo. Much the same as Uber did in the taxi industry,” Sandile Shabalala, chief executive of TymeBank, a financial technology company controlled by tycoon Patrice Motsepe, told Reuters.

While the newcomers’ focus is South Africa, Bank Zero, for one, said it may look at other emerging markets in due course, and investors say because all three have strong IT platforms and use digitalization, it should be easier to expand.

The challenge in South Africa is to make inroads in a market where over 80 percent of the population already have bank accounts. Elsewhere in Africa, 350 million people have no form of bank account and lenders such as Standard Chartered and Ecobank are testing the waters with digital banks.

With fewer employees, lower administrative expenses and less need for costly back-office technology, the South African challengers hope they can woo customers with fees as low as zero, higher rates on savings and cheaper credit.

While all three declined to put a figure on their expected cost-to-income ratios, four industry executives who spoke on condition of anonymity said they had worked out efficiency ratios of 25 percent to 30 percent.

That compares with nearly 60 percent for the incumbents.

“I have been dumbfounded at how low the cost can be,” said Bank Zero’s co-founder Michael Jordaan, best known for turning FirstRand’s retail banking operation into the most profitable in South Africa. “Our technology cost is 1 percent of 1 percent of the annual tech budget at one of the big banks.”

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