As new banks with radically different cost structures enter the market in an economic environment that is unlikely to provide much support for top-line growth, the question is whether South Africa’s large banks are well placed to respond to the digital onslaught.

African Rainbow Capital’s TymeBank officially entered the market in February, with Discovery Bank and Bank Zero expected to follow soon.

While it was widely known that TymeBank would have no bricks-and-mortar infrastructure of its own (it operates through kiosks and till points at Pick n Pay and Boxer stores), arguably the standout number from its recent investor presentation is that it runs with 125 full-time employees and that the number probably won’t change much at scale. It had 80 000 clients at the end of February. Breakeven point is projected for 2022 with around two million customers.

What do these changes in cost structures mean for traditional banks? Are the big four in a good position to respond to the digital onslaught?

Broadly speaking, roughly 20% of clients are responsible for about 80% of profits at South Africa’s big banks, says Jan Meintjes, portfolio manager at Denker Capital. The most profitable clients have several products at the same bank, which probably include a home loan, car loans, a current account and insurance. It is highly unlikely that these clients would cut ties with one of the traditional banks to save around R40 in costs on an entry-level transactional account.

Yet this doesn’t mean that the big four can rest easy, as newcomers will likely follow in Capitec’s footsteps and may attract price-sensitive clients on the transactional side.

‘Not an immediate risk’

“The entry-level banks are not an immediate risk for established banks, but at the margin they will have an impact on the growth of client numbers in the long run.”

At the same time, the benefit of a significant capital base at established banks shouldn’t be underestimated, Meintjes says. New entrants must lure clients and establish themselves, while traditional banks won’t be sitting still. “By offering product and service bundles, traditional banks can entice clients to stay.”

Nedbank is in a “very good position” to compete with digital entrants, its CEO, Mike Brown, said after the release of its annual results on Tuesday.

With eight million customers and three million primary client customers, incumbents like Nedbank have a huge advantage, he added. Nedbank reported full-year headline earnings growth of 14.5% to R13.5-billion. The improvement was boosted by the turnaround at Ecobank.

Brown says the bank has been careful to invest an appropriate portion of profits in its technology platforms, including R2-billion/year in new technologies over the last three years, and it will be difficult for some of the new competitors to offer a significantly better customer value proposition.

The Nedbank Money app, which was relaunched about 18 months ago, has been downloaded 1.5 million times and has added on average one new service per week since launch.

About five years ago, Nedbank realised that it was simply too hard for customers to sign up with traditional banks. “You go into a branch, there is too much paper,” says Brown. “We sign everybody up by product, so every time you want a new product, it feels like you are starting again.”

To address this, Nedbank will be launching a new customer “onboarding platform” in the first half of 2019 where customers only sign up once, with new products offered as a drop-down set. Its new loyalty and rewards programme will be launched during the second half of the year.

Nedbank Group revenue grew 6% to R54.8-billion. Its total assets surpassed the R1-trillion mark for the first time in 2018. It declared a final dividend of R7.20, taking its full year dividend to R14.15, an increase of 10.1%. Its share price closed 0.22% higher at R272.