Only Tyme will tell if SA has room for two more banks

Two serious new players, Tyme Bank and Discovery Bank, are about to enter the banking market in SA amid, it must be said, some scepticism. Will they succeed?

I have to say I’m moderately optimistic despite SA’s history of banking crises, on the stipulation that the economy as a whole remains more or less intact. If it does not and there is a good chance it won’t then all bets are off.

But all else being equal, here is my argument for being fairly positive.

First, both banks are setting out their stores in interesting new ways. Tyme is aiming at the low end of the market and linking itself closely with Pick n Pay, which I think is very smart. Millions of South Africans are now enormously reliant on the state cash handout system, which we for some reason call “social pensions”. That cash is spent largely in supermarkets.

Bringing these financial services and supermarkets more or less under the same roof is a way for Tyme to get its foot in the door. It also fits in an odd way into global banking trends. Banks are becoming less isolated blockhouses on the main street and more transactional devices that sit in the cloud.

Tyme will also have no monthly charges, and though it is a first in SA banking, I suspect it’s much less of a drawcard now since they have been coming down fast for all banking customers. It is fairly common knowledge that Discovery Bank, will be wielding all the accumulated knowledge about its Vitality loyalty system to lure customers in and keep them there once they have arrived.

What the bank does with Vitality will be really interesting, because it works well in the context of health care. It gives rewards when you improve your lifestyle, which then helps reduce health-care costs, which helps Discovery.

In banking, the volution is precisely the opposite. The truth about banking is that it’s not the responsible things you do that help banks make money, it’s the irresponsible things, such as running up your credit card.

Loyalty schemes in banks are there to provide you with some extra impetus to act irrationally. And they are a cost to the bank without any downthe-line benefit to bank expenses. This is why they are very hard to manage. They have to be noticeable enough and large enough to encourage customers to be spendthrift, but not so expensive that they hurt the banks.

It’s also worth mentioning that though Vitality is perhaps the most popular loyalty scheme in SA, many of the banks have loyalty schemes themselves that are pretty effective. In other words, Discovery Bank won’t have this field completely to itself.

What it will have is its existing 300,000 or so creditcard customers and a full suite of other banking products. Anyway, worth watching.

Second, comparing crucial ratios of SA’s banks, they appear a little high by international standards. That means that there is some space perhaps not as much as Discovery and Tyme are hoping for increased diversity.

It must be said, this is a very tricky thing to do because banking businesses are enormously complicated things, so the numbers could be off in a hundred different ways.

But consider this for a start. SA has been more or less growth static or growth negative for the past decade. Over the past five years, when the crisis has been pretty intense, the banking index is up 30% while the all share is up about 15%. Over a 10-year span, the numbers are about the same. Something is giving banks a bit more resilience than the economy as a whole. I suspect that’s because, oddly enough, commercial banks have a very strong hold over their customers.

That may be changing. Almost everyone in SA’s middle class is now multi-banked. But for the time being, banks have been able to effectively insert themselves into the flow of money through the economy.

If you look a little closer at the numbers, the relative advantage of SA’s banks over banks in the developed world becomes even clearer.

The return on equity of SA banks is about 23%, according to a study by research firm Bankscope in 2016. In the US, it’s about 13%; in the UK, Germany, France and Spain it varies between 4% and 2%. Of course, that’s not quite comparing apples with apples.

The country I like to compare SA with is Malaysia because many of the demographic variables, and some political variables, are more or less comparable. It also helps that the market caps of Malaysia’s two largest banks, Maybank and Public Bank, are more or less the same as SA’s two biggest banks, FirstRand and Standard.

The Bankscope survey shows Malaysian banking return on equity to be about 13%. Investors are also much less convinced about the prospects of Malaysia’s biggest banks. Maybank, for example, has barely matched inflation over the past decade.

The third reason I think they have a chance is that banking is going through the first stages of a massive revolution, and it is responding, generally speaking, very badly. In an era when technology changes have driven down the cost of banking, amazingly or perhaps not banks cost-to-income ratio has

An’EY survey of 200 banks stayed more or less static. around the world found that while their aggregate costs have fallen a little more than 10% in the past five years, they are still more than 25% over their 2008 cost base. Average cost-toincome ratios have barely budged. Banks blame litigation and increased compliance costs, which may be partly true, but looking at the cars that emerge from bank parking lots, I suspect they are just paying themselves more.

One corner of the banking industry shows how much change is in the air and that is fintech providers of money transfer and payment services. The same EY survey suggests that the adoption of fintech providers for money transfer and payment services rose from 18% in 2015 to 50% in 2017.

I’m not sure if this is true, but a telecoms operator told me once that the cost of a single Swift transaction, the most common bank-to-bank crossborder transfer, costs the customer about $25. The cost to the bank is 20c.

Tyme and Discovery will have their hands full against established operators with wide moats. But the odds are slightly more in their favour, I suspect, than most believe.