Investigate Vehicles for Banking the Unbanked - … · Investigate Vehicles for Banking the...

Action Learning Project – Syndicate 2

BANKSETA IEDP

UGANDA AND UK 2012

“Investigate Vehicles

for Banking the Unbanked”


Syndicate Group Members

Edmund Jeneker (Absa Bank)

Tina Pieterse (Nedbank)

Marcia Gasa (Wesbank)

Steven Zwane (Absa Bank)

Khetha Mazibuko (Standard Bank)

Dimakatso Seete (Bankseta)

Vinod Naidoo (FirstRand)

Project Coach and Marker: Richard Cohen

19 October 2012

Investigate Vehicles for Banking the Unbanked


Table of Contents

Executive Summary 4

1. Introduction 5

2. Scope Statement

2.1. Opportunity Statement 6

2.2. Project Exclusions 6

3. Research Methodology 6 - 7

4. Literature Review

4.1. Defining the Unbanked 7 - 8 4.2. Challenges in banking the unbanked 9 - 10 4.3. Investigating the Mzansi Account – an overview 10 - 11 4.4. Assessment of the Stokvel market 4.4.1. Contextual overview 11 - 13 4.4.2. Practical Field research 13 - 14 4.5. Comparative International research

4.5.1. Uganda Market 15

4.5.2. United Kingdom Market 16

5. Our Proposal 17 - 19

6. The Business Case

6.1. The Business Case 19

6.2. The Base Case 20-21

6.3. The Bansela Scenario 22-24

7. Conclusion 24

8. Reference List 25 - 26



List of Figures

Figure 1: Stokvel growth chart 2009 -2011……………………………………………………………………………………………….…12

Figure 2: Mass Mart and Macro Stokvel shopping over the Festive Season…..……………………………………….…...13

List of Tables

Table 1: Banked vs. Unbanked percentage…………………………………………………………………………………………………….10

Table 2: Telephonic Interview Results 14

Table 3: Bansela + Proposal 18



Executive Summary

Millions of South Africans are either not serviced (as many as 13 million people) or are under-serviced by the banking sector and are therefore financially excluded. The exclusion of so many South Africans from the financial system, limits the ability of a material portion of the population to ultimately accumulate wealth and therefore achieve economic emancipation. Hence, we view that being “banked” is more than just about the possession of a formal banking product, more critically it is about the consumers’ ability to engage the financial system and develop a transactional profile that will ultimately assist in their ability to access credit and generate long term wealth The Financial Sector Charter has committed itself to substantially increase effective access to financial services to the unbanked. Vehicles such as Mzansi were recommended by the Charter, coupled with an increased number of access points (ATM’s and Branches) as a solution of penetrating the lower LSM unbanked market. The Mzansi initiative launched under the Charter and remains the most extensive vehicle implemented in South Africa, specifically aimed at banking the unbanked and increasing financial inclusion.

Through the Mzansi effort, it was proven that many people could be brought into the banking sector (6 million by end 2008). Mzansi was indeed a success as it significantly increased the number of adult South Africans with a bank account. However, as a vehicle for banking the unbanked, the Mzansi product was undermined by the significant levels of inactivity evident in the account base. Usage levels are only at around 58% and diminishing at an alarming rate. Many customers never activated their accounts and many converted back to utilising cash subsequent to activating their accounts. These clients are “banked”, but in reality are unbanked in their daily transacting behaviour [Bankable Frontier Associates, The Mzansi Bank account initiative in South Africa, 2009].

We contend that the Mzansi initiative did not adequately balance the focus between increasing the distribution of financial services as well as driving transactional usage by focusing on migrating entrenched financial activity into the formal financial system. Our investigation demonstrates that great success could have potentially been achieved through the Mzansi initiative had the approach been to focus on identifying activities that low income earners were already engaged in and then convert these entrenched activities into formal banking transactions.

We therefore have investigated the group scheme (Stokvel) as an existing vehicle through which individual activity could be stimulated. This is a group savings scheme and taps into the basic human hierarchy of needs in terms of belonging and aspiration. According to the Africa Response Research Report on Stokvels in 2011, there are 811,830 stokvels, comprising of 11,4 million members and their estimated investment is about R44 billion annually. Only 52% of this is banked through the formal sector. The bank institutions currently offer limited products linked to stokvel members’ individual transacting and saving needs and tapping into their need of belonging and contributing to the greater need of the community.

This document proposes developing a value proposition, which leverages the power of the group (i.e. Stokvels) to bring the lower LSM unbanked and under banked clients into the formal banking sector, by enabling them to contribute to the Stokvel as a whole through their individual transacting and savings behaviour. We propose that institutions focus their efforts on group schemes, and through this vehicle drive financial inclusion.



1. Introduction

The Banking Association of South Africa (BASA) refers to financial inclusion as having “access and usage of a broad range of affordable, quality financial services and products, in a manner convenient to the financially excluded, unbanked and under- banked, in an appropriate but simple and dignified manner with the relevant client protection and financial education”.

The current reality is that approximately 13 million, or a quarter of the total population, remains financially excluded. One of the core contributing factors to this level of exclusion was the systematic efforts of the apartheid regime which sort to limit access to education and therefore social and financial freedom to many South Africans. Access to financial services is thus a key priority for the new South African government as it recognised that access to financial services is critical to long term wealth accumulation and ultimately economic emancipation.

The Financial Services Charter, which is a voluntary agreement between amongst South Africa’s financial institutions, specifically sought out to make the South African financial system more inclusive, by fundamentally improving access to financial services. The Mzansi initiative launched under the Charter remains the most extensive initiative implemented in South Africa specifically aim at banking the unbanked and increasing financial inclusion.

The Mzansi account is a low cost entry-level bank account developed by the South African banking industry and launched collaboratively by the four largest commercial banks together with the state-owned Postbank in October 2004 (Bankable Frontier Associates, March 2009). By December 2008, more than 6 million South Africans gained access to the Mzansi account. In this sense, Mzansi was a tremendous success as it significantly increased the number of adult South Africans with a bank account.

However, as a vehicle for banking the unbanked, the Mzansi product was undermined by the significant levels of inactivity evident in the account base. By 2009, almost half (42%) of the total opened accounts at the four private banks were “inactive” according to the Charter definition [Bankable Frontier Associates, March 2009]. Therefore, though low income earners opened the accounts, many did not actually alter their behaviour and engage the financial system and many more actually reverted back to utilising other methods of transacting i.e. cash.

Since the Mzansi initiative there has been no other collective vehicle launched to bank the unbanked, however, financial institutions continue to individually pursue efforts to acquire low income earners. This paper investigates the key barriers that may have contributed to the ultimate lack of activity within the Mzansi customer base and further seeks to table a solution that could be implemented to augment initiatives such as Mzansi to ensure transactional inactivity and therefore true financial inclusion.



2. Scope Statement

2.1. Opportunity Statement

The project will focus on investigating a rewards-based product to reward the target groups for usage of transacting or savings accounts for their daily needs such as purchasing electricity, airtime, transport or food and leveraging the group schemes framework to entice the individuals into the market and uplift usage whilst contributing the group schemes account. An example would be to provide a food voucher for a stokvel, when all the individuals belonging to the stokvel transacts above a certain level on their individual accounts:

Specifically, the project will:

1) Firstly, investigate a Rewards Programme to encourage Transacting or Savings usage to create tangible value for the low income, unbanked client, leveraging the link with the group schemes framework. In order to do so, we would need to design a solution which is easily accessible and is priced at the correct level with added solution features that create value in the everyday lives of the Unbanked and Group saving schemes. The intended result is for the unbanked to switch from informal to formal banking vehicles that are commercially viable for the bank institutions and to increase usage on current inactive entry level accounts.

2) Thereafter, to recommend a framework that will ensure the success of the product, marketing,

distribution, pricing, cost management and profitability, while complying with necessary legal and regulatory requirements e.g. is FICA/Consumer Protection Act.

2.2 Project Exclusions o Social Grant recipients are excluded as there are developments underway to ensure that grants are

received through bank accounts. o The Unemployed are excluded as it is assumed that their requirements to engage with the bank

institutions are limited. o Foreigners are excluded on the basis of the high barriers to entry and concerns around strategic

relevance and the market view of foreign nationals. o Development of new channels to deliver products to the market, i.e. a bank branch. o Exclude those earning over R5000 a month. Exclude the delivery of a full product suite by focusing

exclusively on a transactional/savings product

3. Research Methodology

We have approached our research as follows:

Qualitative and Quantitative Research: - We have prepared structured questions for interviews with the defined unbanked market to

understand client needs and test the eventual proposal. This enabled us to conduct an analysis on the outcomes across our sample. The Sample consists of Low Income Unbanked or under banked clients, spread between Rural and Urban low income areas.



Desktop research: - Various resources were solicited as part of our Literature Review to understand the size of the

market, the extent of the challenge and possible interventions that have been developed with an aim of bringing the unbanked marketing into the mainstream of the economy, bank strategies and solutions to service the low end of the market.

- Study the Financial Services Charter aligned to the Mzansi account case with the aim of challenging and reviewing its successes and failure in serving the unbanked market.

4. Literature Review

The literature review is divided into the following topics:

4.1. Defining the Unbanked. 4.2. Challenges in banking the unbanked. 4.3. Benefits of banking the unbanked. 4.4. In depth look at Mzansi. 4.5. Unpacking the Stokvel market 4.6. Comparative International research

4.1. Defining the Unbanked

The South African Unbanked market of about 13 million low income earners refers to mainly to South Africans who have a need to save or move money on a regular basis, but are not utilising the formal banking system to do so. We have identified the following broad categories of unbanked segments:

o Low Income Earners – wages or salary earners o Social Grant recipients o Unemployed – no regular income o Informal Traders and micro-enterprises o Foreign Nationals – asylum and migrant workers o Cash recipients – People receiving money from others, for e.g. family o Youth – Pre-labour market

One of the critical factors that lead to the drafting of the Financial Services Charter and the improvement of banking access is the accepted recognition that long term wealth creation is primarily driven by the long term appreciation of asset portfolios, specifically stocks, properties and bonds and household’s ability to own such long term assets is intrinsically linked to their ability to access credit. As formal financial institutions rely on customers transactions profile as a key proxy for credit worthiness, access to credit is therefore highly depend on access to transactional products and solutions.

The ability of the consumers to engage the formal financial system and develop a transactional profile is critical therefore for social transformation. Hence, we view that being “banked” is more than just about the possession of a formal banking product, more critically it is about the consumers’ ability to engage the financial system and develop a transactional profile that will ultimately assist in their ability to access credit and generate long term wealth. Hence the specific focus on investigating Mzansi, as it remains the only vehicle that achieved wide scale distribution of a financial product, however wide spread adaption of transactional activities did not materialise.



To better aid our investigation, we have constructed a typical archetype of an under-banked Mzansi account holder, based on the multiple sources of data that we interrogated:

The above customer user case highlights that though this particular customer has a formal bank account, the customer’s usage of the features of the product and the channels of the bank are limited to a minimal set of transactions. The above customer only utilises three types of transactions from the bank:

o An electronic funds transfer (EFT) into the customer; o A single cash withdrawal; o And two electronic debit order transfers.

Further the customer case illustrates that the customer conducts several significant transactions utilising cash and informal financial products. The extensive use of cash by the customer exposes the key to several risks and disadvantages:

o Increased risk of cash theft; o Risk of personal security; o The customer’s financial institution has limited insight into the customer’s transactional usage and

this will ultimately limit the institution’s ability to assess the customer’s creditworthiness and therefore limit the customer’s access to credit in future.

My day to day:

• I look make sure my family has all the day-

today things - groceries, airtime, clothing,

home ware etc

• I shop mainly at Shoprite, Pick n Pay,

Truworths, Edgars, Woolworths, Foschini,

Spitz Stores

• I’m a busy mom, but I’m also very involved

with my church

My Banking

• I used to have an Mzansi, but now I have a

SmartAccount from FNB

• I mainly receive my salary and then

withdraw all the cash

• I feel the fees are too expensive

• I’m exactly sure about mobile banking

• I NEVER miss my stokvel meetings . Its

more than just about saving – the ladies are

my ultimate support

Who I am:

- Cythia Zulu, 33

- Born: Pimville, Soweto

- Currently living: “eDK” in Soweto

- Dependents: One child of her own in high

school and looks after sister’s child

• Occupation: Domestic worker earning R3

500 per month. Completed matric

My money

• Transactions I do:

• I use cash for all my shopping

• I buy airtime at the Spaza shop

• Taxi’s I have to use cash

• Mzansi account

• Monthly I pay for my Funeral Policy and

Education Policy through a debit order

• I save mainly through my Stovel



4.2. Challenges in enabling engagement with the formal financial system

We shall utilise the above customer use case to demonstrate the key constraints in enabling engagement with the financial system for unbanked and under-banked segment:

4.2.1. Cost of providing access

As a result of the lack of infrastructural investment in South African townships and rural towns by the previous government, new infrastructural investment is now required in order make formal financial channels accessible to communities. This requirement for capital investment therefore makes the provision of financial services to South African communications comparatively more expensive and therefore less commercially viable than providing this services in established urban areas. The total upfront cost of deploying infrastructure remains a key barrier for the established banks to extensively deploy financial services. Through the Mzansi initiative the financial institutions set themselves targets in terms of infrastructural deployment that were largely met. . The Minister of Finance, Mr Pravin Gordhan challenged the banks to work towards reaching a 70% banked population by 2013 and the National Planning Commission has set a target of 90% by 2030 [Financial Sector Charter]. Therefore again, Mzansi achieved some success in overcoming this barrier.

4.2.2. The cost to of access

Data collected on Cynthia reveals that for her to travel to the closest ATM in order to withdraw cash she spends approximately R25 on public transport. This correlates with the research conducted by Gaefis Foundation which estimates that South Africans earning below R10 000 per month, spend approximately R30 on public transport, and pay approximately R5.5 in cash withdrawal fees, bringing the total cost of access to funds to approximately R35.50. Further research indicates that the “banking language” in itself is largely inaccessible. Cynthia as an example indicated that she did not understand what an “ad valorem” fee was. This also highlights a need for financial institutions to play a more active role in educating their customers. As Mzansi implemented a simple pricing structure and also enabled the development of marketing collateral in different languages, it was once again a success in addressing this barrier.

4.2.3. Engaging new alternative channels

Concerted efforts in technology development, specifically in mobile, over the past 10 years have resulted in many new channels which are accessible and convenient for most Low Income earners. This includes channels ranging from formal branch infrastructure, In-Retailer Outlets, ATM’s to Digital/Mobile banking channels. However, as highlighted by our customer user case and further re-iterated by the Standard Bank research, the majority of under-banked customers are not yet fully comfortable with new technology, therefore limiting their ability to engage new alternative banking channels. Mzansi was unfortunately limited in its features and further limited in the channels to engage the product. Therefore, Mzansi did not adequately address this barrier.



4.2.4. Education and Trust

Aside from the lack of tangible value to the client, the Unbanked client is also uneducated as far as banking is concerned, which leads to clients opting not to make use of banking products for their needs and many urban myths exists around banks stealing their money. This in turn creates a lack of trust in the industry and something which would need to be addressed in the long term. This segment is also ignorant to the cost of not using a formal bank account. Clients do not see the value or need for a bank account and they use cash instead. New technologies create fear as clients are often illiterate and they are intimidated by ATM’s, Mobile capabilities etc. The OEDC are putting large focus on creating coordinated efforts on educating clients on financial literacy. Individual companies do this, but it needs to be a concerted effort. (Mass market focus group Nedbank 2011; Worker Remittances: Issues and Best Practices - Manuel Orozco; Qualitative Research: Downtown Jozi). [Keynote address: Mr Nhlanhla Nene, Deputy Minister of finance MP, Financial education for all 2011]. Financial literacy was a specific requirement of the Mzansi initiative; however the execution of various financial literacy programmes did not appear to have made a material impact in addressing this barrier.

Ultimately, though Mzansi appeared to have addressed the key barriers to enabling financial inclusion, the initiative still did not achieve sustainable activity. Indicating that there was a deeper critical factor not addressed by the initiative.

4.3. Investigating the Mzansi Initiative – an overview

The Mzansi account is an entry-level bank account, developed by the South African banking industry and launched collaboratively by the four largest bank institutions together with the state-owned Postbank in October 2004. The development and roll-out of the Mzansi account sought primarily to significantly improve access to banking for all South Africans. By December 2008, more than six million Mzansi accounts had been opened. Today, at least one in ten South African adults currently has an Mzansi account.

The experience with the Mzansi account to date can be summarized in the following statements:

o A total of 6 million new accounts were opened; two-thirds of whom had never before had a bank account anywhere.

o The percentage of adults (age 16+) banked in South Africa has increased from 46% in 2004 to 63% in 2008 (see Table 1 below). This increase indicates the pent-up demand for entry-level formal financial products among lower income people.

Table 1: Banked vs. Unbanked percentage

Category 2004 2008

Currently banked 13.2m (46%) 20.0m (63%)

Unbanked 15.8m (54%) 11.9m (37%)

Source: FinScope™ 2004 & 2008



o According to FinScope 2008, 3.5 million individuals were current users of Mzansi accounts and 42% of accounts opened became inactive.

o Mzansi has decisively shifted the frontier of access to financial services in South Africa. As a result, close to 80% of the population is now within reach of transactional banking services.

o Mzansi accounts started with a set of common minimum product standards across all the issuing bank institutions. These included the issuance of a debit card, the absence of monthly administration fees, ceilings on balances, KYC-driven ceilings on transaction value, restrictions on certain electronic payment services, and no difference in pricing between withdrawals on a bank’s own ATM and withdrawals using another bank’s ATM.

o The bank institutions report that there is little evidence that Mzansi has been a gateway through which new clients are accessing or paying for other types of financial services.

o The expectations of participating bank institutions were exceeded with respect to take-up, but not met in terms of revenue. The revenue per Mzansi account and the balances on the account are substantially lower than the banks’ nearest equivalent accounts.

[Bankable Frontier Associates, The Mzansi Bank account initiative in South Africa, 2009]

In conclusion bank Institutions have proven that they can acquire in lower LSM’s however the challenge remains that people even when taking up an account, do not use the account. Based on our investigation, it appears to us that though Mzansi focused and indeed achieved success distributing financial products, greater focus should have been applied to driving usage. More specifically, we contend that Mzansi should have begun by focusing on identifying activities that low income earners were already engaged in and then convert these entrenched activities into formal banking transactions

We therefore have investigated the group scheme (Stokvel) as an existing vehicle through which individual activity could be stimulated, specifically by leveraging the existing group behavior.

4.4. Assessment of the Stokvel market

4.4.1. Contextual overview

A survey by research company African Response found there are 811 830 stokvels in South Africa. The estimated value of this market is R44bn and local stokvels have a combined membership of over 11.4-million people.

Stokvels work as savings schemes, offering members collective savings and buying services. Most stokvels have a chairman and treasurer, who are responsible for administering the investment. Stokvels vary in size from 12 to 150 members and the members make decisions collectively about what they buy and where they make their purchases. Stokvel members contribute a set amount of money towards their club every month. Because the purchasing is done in bulk, significant saving are made and members receive more goods for their rands than if they had purchased individually from retailers.



The motives and benefits for the different types of group schemes are outlined below:

Type of Group Scheme Motive Benefit Required

Burial Protection or Cover Funeral cover, Cheap withdrawals of large funds, Good service

Groceries Savings & Growth in funds Interest returns, value back & informative

Potential Groups - other, i.e. Family celebrations, Investment clubs, etc.

Commitment to goal & Growth in funds

Value back, Interest

Not all stokvel members will be relevant for inclusion in this document, as 38% reside in LSM’s 6-10. There is however 4.9m (42%) of this market which falls in LSM 3-5 at the bottom of the pyramid. This market continues to grow as can be seen on the figure below, reflecting 1.1m growth from 2010 to 2011 (Figure 2).

Figure 1: Stokvel growth chart 2009 - 2011

The main drivers behind Stokvel success has been the physiological and social needs of people in the need to belong and maintaining bonds with family and friends.

The average stokvel will contribute between R2, 000 and R4,579 per month and the majority draw the funds only once a year. They mostly use the funds for savings, burial and groceries. [POPAI South Africa: The stokvel Story] 52% of Stokvel funds are banked with bank Institutions, the remainder are held in the informal markets. Even though some Stokvels have bank accounts, many of the individual members do not bank, whilst those who do have a bank account, usage is minimal. Some of the challenges faced in banking the stokvels are access to branches and the very manual process of opening and maintaining the account. It is not card driven, mostly runs on a savings book concept and requires 3 signing members. There are also limited benefits in banking funds, aside from the safe store of value. An opportunity exists for bank institutions to partner with retailers or to provide additional benefits to the stokvel groups.



According to the Massmart group update – December 2011, Stokvels members buy massive volumes of quality goods from wholesalers in South Africa each year. For the 2011 festive season stokvel purchasing from Makro Woodmead, contained the following volume of goods:

- 120 960 units of coffee creamer sold in 21 days - 34 560 units of washing powder sold in 7 days - 6 400 units of rice sold in 7days

Figure 2: Massmart and Macro Stokvel shopping over the Festive Season o

[Massmart Group Update, December 2011]; [POPAI South Africa: The stokvel Story]

4.4.2. Practical Field Research on Stokvels

4.4.2.1. Phase 1 - Stokvel Workshop held in Soweto

In order to gain a first-hand understanding of the Stokvel Market, the ALP Syndicate Group engaged with Ms Busi Skenjana, an expert in the Stokvel markets in South Africa.

Stokvel Workshop hosted by Ms Busi Skenjana

Venue: Walter Sisulu Square, Kliptown, Soweto

Date: 25 August 2012

Number of Stokvels in attendance: 25

Average no of members per stokvel: 12

Purpose: Conduct in-field survey about the behavior of stokvels and its individual membership.

Key Questions posed revolved around savings activity, usage and incentivizing stokvels.



4.4.2.2. Phase 2 – Telephonic Interviews

A series of telephonic interviews followed the Workshop:

Table 2: telephonic Interview Results

Stokvel Member Stokvel Bank Stokvel Members Members with bank

accounts

Nomathemba Mohau Litau (house wife)

No Bank Account -they keep money in their pockets

15 6 / 15

Thuli Dooka (Spaza shop owner) Nedbank 13 9/13

Kgali (Caterer) Absa 19 10/19

Stanely Rakganthso (Manager) Standard Bank 18

Joseph/Pascal Nedbank 29 29 work

Nokuthula Dindi Standard Bank 15 15

Ntombi Mabuthu Nedbank 12 8/12

Nhlanhla Standard bank 15 11/15

Nhlanhla Magwaza Absa 30 17/30

4.4.2.3. Key findings

The following were key findings:

Stokvels exist because of a need for financial support for burials, collective savings and investment, collective buying of groceries at yearend.

Stokvels would welcome an incentive scheme that will bring about value into their savings and investment scheme as a collective and individual level.

An opportunity exists to use the stokvels as a vehicle to bank the unbanked, as up to 40% of th stokvel members do not have a bank account.

A stokvel specific value proposition with a stokvel toolkit will make the bank a preferred bank for stokvels.

A stokvel education drive will assist the groups to be financially more aware and facilitate informed financial decisions in their lives.

According to Skenjana, the stokvel movement is continuing to grow and “that stokvel members need a paradigm shift in terms of how they perceive their stokvel and their roles as members”.



4.5. Comparative International Research

4.5.1. Uganda Market

Similar to the South African context, Uganda has a high portion of its population which are unbanked (70%). The major challenges faced by the unbanked include access, literacy and intimidation. Ugandan’s mostly utilize money transfer facilities for day-to-day transacting needs. Factors that play a part in the success of money transfers in the Ugandan context include:

a) An underdeveloped banking sector in which simple aspects such as inter-bank clearing capabilities do not exist.

b) Access to cash and banking in the form of branches and ATM’s are limited. c) High interest rates, hampering lending.

Money transfer deployment into the SA market, which is far more developed and do not suffer similar access constraints have proven less successful. [Empirical Research];[Interviews: Head Business Banking – Stanbic Uganda]

Similar to the South African Stokvel concept, Uganda has VSL (Village Savings and Lending). The group lending concept was established by FINCA and targeted woman on financial literacy and social responsibility. These groups contain 10-15 members. Group lending was prevalent from many bank institutions, as this created peer pressure and therefore some security, for repayment.

An interview with the bank manager from Orient bank highlighted concerns on Access to banking and a major learning was that their products were very catered for specific markets, i.e. lending products for the government employees, specific furniture loans or loans for education.

The approach of the Ugandan market to client centricity for this lower LSM market was evident. Some of the key learning included:

o Centenary bank’s Mobile bus concept is used in rural towns where it is too expensive to establish a traditional branch infrastructure.

o Orient bank caters for specific needs by developing loans such as the goodwill, student and civil servant loans.

o To bridge the illiteracy gap, FINCA has created ATM’s with biometrics, which allows clients to use their fingerprint for ID, which is supported by voice guidance to assist the client to complete the transactions.



4.5.2. United Kingdom Market

The unbanked population in the UK is significantly smaller than in South Africa at about 4 million of the 63 million total population, however, the reasons for people not banking are very similar in that they see little value in banking and would rather use cash. They do not trust bank institutions and prefer to stay outside the banking sector.

Retailers such as Tesco and Sainsbury seem to be more trusted brands, as they are linked to Retailers. Players such as Coop bank and Metro bank have created trust by involving the community and have been seen to be more successful. Local traditional banks are not deemed to have been successful in banking the unbanked and in certain cases there are still those that debate whether these unbanked people are viable to bank. Aside from Barclays, there does not seem to be any concerted effort to bank this market. General consensus are that the major players are waiting on the success of players such as Wonga.Com, and are expected to then buy out these players rather than try and bank the unbanked.

Mobile technologies are also seen as key in solving the issue of reaching the unbanked, with telecoms seen as a natural partner for bank institutions in future.

An interesting suggestion around loyalty and enticement into the market is the concept of a ‘universal promise’ and considering what an attractive universal promise would be to the unbanked market (Marks and Spencer policy). The aspect of leveraging your retailer partners to design an attractive offer for the unbanked, market was a prevalent thought.. There are not many examples of group savings, aside from building societies, in the UK context.

Therefore the key findings from the comparative research, relevant to our solution is the lack of perceived value and that group schemes, specifically in Uganda, are very common and is used to install behavior in individuals through peer influence.



5. Our proposal

Mzansi was the largest and perhaps most prominent vehicle established to bank the unbanked. Bank institutions acquired 6 million accounts through this vehicle. However, Mzansi lead to a large loss for bank institutions due to the low level of activity on accounts. As a result this lead to the reason why these customers were not utilising their accounts. We contend that the Mzansi initiative did not adequately balance the focus between increasing the distribution of financial services as well as driving transactional usage by focusing on migrating entrenched financial activity into the formal financial system. As highlighted many customers received their salaries through the Mzansi account, but withdrew the lump sum to transact in cash. This lead to the conclusion that ultimately there was a need to shift focus to unpack the “vehicle” Mzansi and its impact, rather than specifically identifying a new vehicle for banking the unbanked. Mzansi, therefore, did not ultimately bank the “unbanked” as customer usage was not changed. Stokvels (Group Schemes) have been identified as an existing vehicle to increase activity of individuals and the opportunity is threefold 1) entice new people into the formal sector; 2) stimulate usage on inactive accounts and 3) attract group scheme funds, currently in the informal sector into the formal sector.

The proposed solution: Bansela+ Bansela+ is a group loyalty programme that enables groups to save more, by transacting more on their individual accounts. We propose that banking institutions reward a group scheme R5 where a member of the group scheme completes 10 transactions per month.

o As an example, if three members in a group complete 10 transactions per month for a year, than the group receives a Bansela+ Bonus of R180 ((3 x R5) x 12months) at the end of the year.

We propose that financial institutions target their Stokvel club base, and provide the Stokvel club with a direct cash bonus for the transactions that the individuals perform. This facilitates two key benefits:

o The individual and the group receive relevant reward. In other words because individuals join Stokvels primarily to save, by providing a cash reward, the financial institution is therefore meeting the customer’s core need;

o The increased individual transactions enhance the bank institutions fee income as well as improve the banks total liability base.

The underlying assumptions in constructing the Bansela+ solution, is that group motivation can be an important force in driving individual behaviour. Therefore as a result of the incentive for the group to derive greater value, the individual members will motivate each other not only to obtain a financial product but more importantly to engage it. Therefore instead of specifically targeting the individual with a solution, we propose that institutions focus their efforts on group schemes, and through this vehicle drive financial inclusion. A strong education factor is required to enable members to understand the cost benefit to the member of utilizing a card and not cash i.e. a large cash withdrawal is more expensive than leaving the funds in the account and swiping a card or using a mobile phone for airtime purchases.

The table below depicts the “Bansela+ ” solution to address the needs highlighted in the table above with the aim of creating tangible value to both the group and individual:



Table 3: Bansela + proposal

Objective Group Individual Bank Institution

Saving

- R5 contribution to group schemes balance for every 5 transactions a group member does. This contribution is tiered dependent on number of transactions done.

- Discount when spending at selected Retailers at year end.

- No monthly Service fee. - One free withdrawal a

year. - Use of meeting room at

local branch. - Monthly Group Schemes

newsletter. Attendance by bank agent at group meetings to assist with financial advice.

- Save through my group and my transactions help our balance GROW

- Attract large deposit balances into banking sector.

Transacting - Combined behaviour of

group members contribute to the overall balance.

- Choice of best products from bank offering (which includes different types of loyalty rewards), as there would be a portfolio of types of clients joining the group. All accounts will be linked to group Schemes account.

- Cheaper transacting fee as behaviour shifts to card/mobile usage rather than cash. Ie cash withdrawal is expensive for large quantities and card swipe for groceries would be cheaper and safer for the client. Airtime purchase with mobile phone is free.

- Attract new individuals into the banking market sector.

- Stimulate usage on accounts currently inactive.

Personal

- - Creates sense of belonging

- Empowered to look after others and I am looked after.

- Tangible value from my bank account and I contribute to my group schemes aspirations.



It is important to note that the “Bansela Plus” proposal should be underpinned by effective education and marketing to ensure that the market understand the value proposition.

In essence the “Bansela+” product aims to 1) drive increased retail deposits, which could assist with Basel III requirements; 2) increase transactional activity of existing clients and therefore a better Cost to Income ratio for the bank; 3) entice new clients into the formal market; 4) enhance reputation of bank institutions in the lower income market and 5) increase financial literacy with both group schemes and individuals.

6. The Business Case

6.1. The Business case

The primary objective of the Bansela+ solution is to deliver value for both the financial institution and its customer. And this is achieved by providing the customer additional value for engaging their financial products and in turn enhancing the customer’s potential to augment their transactional profile. Secondly, Bansela+ creates value for the financial institution as the solution aims to stimulate transactional usage and therefore the related transactional fees. Further, as customers transact through their financial products more of the customer’s funds is likely to be retained in the customer’s account in order to facilitate the transactions and this therefore enhances the bank’s potential to retain customer deposits, which ultimately improves the banks liquidity potential and liability position.

Using a base scenario of an existing typical Stokvel, hereafter referred to as Group Scheme, account and

individual accounts of the individual members in the Group Scheme, we will illustrate that the Bansela+

solution can generate a potential additional R506 or 19% net income uplift through implementing the

Bansela+ solution. More importantly we also illustrate that members in a Group Scheme club utilising the

Bansela+ solution could generate an additional R360 in cash savings into their account over a ten month

period - this is essentially equivalent to an additional month’s interest.

To illustrate this incremental value creation, we have modelled the transactions of an existing Group Scheme

and then modelled the envisaged financial transactions of the same Group Scheme utilising Bansela+. The

comparative value creation could equate to over R25 million in additional revenue for a financial institution.



6.2. The Base scenario

Utilising real data obtained from a financial institution, the below table contains the key data utilised in

modelling the base case:

From the data above, we see that a typical Group Scheme contains approximately 10 members who

individually contribute approximately R209.96 per month to the Group Scheme, which accumulates into a

monthly deposit of approximately R2 100 into the Group account. In receiving this deposit that financial

institution grants approximately 2.10% to the group whilst the institution itself earns approximately 5%

interest on the funds received.

We have also gathered the data of the individual members within the Group Scheme and the data revealed

that on average this institution “banked” three of the individuals within the Group, typically the treasurer,

secretary and chairman of the club.

From the data above, we see that the three “banked” individuals within the Group Scheme generate

approximately 6 transactions individually per month which generates approximately R105 in revenue for the

financial institution.

Given the Non Interest Revenue earned from the transactions of the three banked individuals as well as the

Net Interest Income earned from the Group Scheme account, Annexure A outlines the detailed Balance Sheet

and Income Statement and Balance Sheet impact for the financial institution.

Stokvel: Existing Base Case

Members in Stokvel group 10

Individual member contribution ZAR 209.96

Monthly credit into Stokvel account ZAR 2,100

Individual stokvel average annual balance ZAR 20,996

Annual number of withdrawals 1

Percentage withdrawn 80%

Once-off cost to activate stokvel account ZAR 130

Monthly maintenance costs ZAR 473.04

Average interest granted on stokvel account 2.10%

Rate received internally by the bank 5.00%

Individual account: Base Case Base Transactor

Number of banked individuals 3 Fee Revenue

Monthly average balance ZAR 450

Transactions

Number of monthly ATM Withdrawals 2 ZAR 5 ZAR 10

Number of monthly Branch Withdrawals 1 ZAR 15 ZAR 15

Number of monthly Branch deposits 1 ZAR 8 ZAR 8

Number of airtime purchases on mobile 0 7.0% ZAR 0

Number of balance inquires on mobile 1 ZAR 0 ZAR 0

Debit card swipe 1 ZAR 2 ZAR 2

Total transactions 6 ZAR 35

ZAR 105



In summary therefore, we have modelled that the financial institution is able to generate approximately

R26,546 in deposits from the individuals and the Group Scheme. These balances could provide a cheap

source of funding for the bank to on lead as well as improve the bank’s overall liquidity position.

Further, given the level of transactional activity as well as the Net Interest earned on the balances, the

financial institution is able to earn approximately R2 671 in net cash inflows over a period of one year,

assuming a weighted cost of capital of 15%.

Balance sheet drivers

Stokvel account balance 25,196R

Individual account balances 1,350R

Total liabilities 26,546R

Income Statement

Net interest income

Stokvel account 8,189R

Interest expense (3,439)R

Individual accounts 810R

5,559R

Non interest Revenue

Individual Transactions 1,260R

Stokvel Transactions 15R

1,275R

Operating Income 6,834R

Operating Costs

Stokvel maintenance costs (473)R

Individual account maintenance cost (1,414)R

Inactive account loss -R

Once-off: Stokvel (130)R

Once-off: Individual (130)R

(2,147)R

Profit before Tax 6,964R

WACC 15.0%

Net present value 2,671R



6.3. The Bansela+ Scenario

As mentioned, one of the underlying assumptions in constructing the Bansela+ solution is that group

motivation can be an important force to driving individual behaviour. The assumption therefore is that as

result of the incentive for the group to derive greater value, the individual members will motivate each other

not only to obtain a financial product but more importantly to engage it. Therefore, given the existing three

members who were already banked, we have modelled an additional three members opening a bank

account. Further given the incentive to complete 10 transactions a month, we have modelled these six

members conducting 10 transactions per month. The table below provides a comparative overview of the

transactors in the Base Case Scenario as compared to the transactors in the Bansela+ scenario.

As a result of this increased activity, we have modelled that the financial institution will be able to generate

an additional R1 770 in deposits from the individuals and the Group Scheme:

By implementing Bansela+ we have modelled that the financial institution will benefit from more

transactions being conducted by more customers within the Group Scheme. This results in an incremental R1

324 in Net Profit as compared to the Base Case.

Individual account: Base Case Base Transactor Group Transactors

Number of banked individuals 3 Fee Revenue 6

Monthly average balance ZAR 450

Transactions

Number of monthly ATM Withdrawals 2 ZAR 5 ZAR 10 2 ZAR 10

Number of monthly Branch Withdrawals 1 ZAR 15 ZAR 15 1 ZAR 15

Number of monthly Branch deposits 1 ZAR 8 ZAR 8 1 ZAR 8

Number of airtime purchases on mobile 0 7.0% ZAR 0 2 ZAR 0

Number of balance inquires on mobile 1 ZAR 0 ZAR 0 2 ZAR 0

Debit card swipe 1 ZAR 2 ZAR 2 2 ZAR 4

Total transactions 6 ZAR 35 10 ZAR 37

ZAR 105 ZAR 222

Balance sheet drivers

Stokvel account bal 25,196R

Acqusition uplift 420R

Individual accounts 2,700R

Total liabilities 28,316R

Uplift compared to Base Case 1,770R



Further we have also modelled that the each of the six members who maintain 10 transactions per month are able to earn a collective Bansela+ Bonus of R360 for the Group Scheme annually.

What is compelling about the Bansela+ solution is that when compared to the existing Base Case scenario, a financial institution implementing this solution could generate an additional R506 per account in Net Cash Flow, in just one year, assuming a weighted cost of capital of 15%. This equates to a 19% increase to a financial institutions bottom line. Given that the financial institution we observed had approximately 52,000 Group Scheme groups of this profile, this would equate to a R26 million increase in annual net cash inflows.

Importantly for the customer as well, Bansela+ offers relevant rewards that are intrinsically linked to the core

need of the customer i.e. the need to save for an event in the future. Critically in addressing the barriers

concerning financial solutions we feel that the construct of Bansela+ will be simple for customers to

understand. Importantly the Bansela+ Bonus is customer driven, there is no complicated formula the

customer needs understand – the more transactions collectively done on individual accounts, the greater the

opportunity for additional reward.

Income Statement

Net interest income

Stokvel account 8,420R

Interest expense (3,536)R

Individual accounts 1,620R

6,503R

Non interest Revenue

Individual Tx 3,384R

Airtime margin 1,000R

Stokvel Tx

4,384R

Operating Income 10,887R

Operating Costs

Bansela bonus (360)R

Stokvel maintenance costs (473)R

Bansela costs (130)R

Individual Acc maintenance cost (1,414)R

Inactive account cost -R

Once-off: Stokvel (111)R

Once-off: Individual (111)R

(2,598)R

Profit before Tax 8,289R

Uplift compared to Base Case 1,324R

WACC 15.0%

Net present value 3,177R

Value created: Through one Club 506R

19%

Value created: 52 000 Club 26,301,793R



The assumptions utilised within this model would be up to the discretion of the bank institution developing the solution and further benefits could be added through leverage of Retail partners etc. The solution could also be made more attractive by adding the pay-out amount to the group scheme balance monthly, however this would depend on the financial viability of disbursing a higher amount.

Aspects around the logistics of disbursing year end funds to groups where looked at, but is outside of the scope of this document. A pre-paid card disbursement was discussed as the most relevant method to enable Retail discounts at Retailers.

7. Conclusion

We view that being “banked” is more than just about the possession of a formal banking product, more critically it is about the consumers’ ability to engage the financial system and develop a transactional profile that will ultimately assist in their ability to access credit and generate long term wealth. As a result it is critical for a vehicle aimed at banking the unbanked to adequately balance the focus between increasing the distribution of financial services as well as driving transactions by focusing on migrating entrenched financial activity into the formal financial system.

The Bansela+ Solution aims to achieve this balance as the focus is on leveraging existing entrenched behavior to deliver a financial reward for both the financial institution and its customer. We propose that institutions focus their efforts on group schemes, and through this vehicle drive financial inclusion.

Therefore the “Bansela +” solution proposed, in essence aims to address the following: 1) Drive increased retail deposit; 2) Increase transactional activity of existing clients and therefore a better Cost to Income ratio for the

bank; 3) Entice new clients into the formal market; 4) Enhance reputation of banks in the lower income market and; 5) Increase financial literacy with both; group schemes and individuals.

This research project, therefore hopes to contribute to the ideals espoused by BASA, as follows:

Informed and financially educated customers benefiting more from financial services

Financial inclusion contributing to economic development and growth

Improving the lives of low-income and poor people through financial access



8. Reference List

Books

Skenjana, B. (2009): Move! Stokvel Guide, Paarl: Media24. P7.

Cain, R. (2005): The unbanked and financial education: Improving Financial Literacy – Analysis of Issues

and Policies. OECD Press, 77 – 84.

Reports

Banking Association of South Africa, Tetyana, L. (2011): Financial Inclusion – A Priority for Financial

Sector Deepening and Development, Johannesburg.

Bankable Frontier Associates, (2009): The Mzanzi Bank Account Initiative in South Africa, Finmark

Trust, Johannesburg.

Standard Bank Financial Inclusion Research Document, (2012): Market research on Low Income loyalty

Programmes, Johannesburg.

Gaefis Foundation - Nitin Garg, Jagdeep Dahiya, Vartika Shukla, Jaspreet Singh and Chris Linder (2011):

Market-led solutions for financial services

Nedbank Research, (2011): Worker Remittances: Issues and Best Practices, Johannesburg.

Absa Research - Coetzee, GC (2010): Absa Case Study – Financial Services at the Base of the Pyramid,

Johannesburg.

African Response (2011): The Stokvel Story, POPAI South Africa, Johannesburg.

Massmart Group Update, (2011): Stokvels get more for their money at Massmart Stores. Shop Talk

Publishing, Johannesburg.



Conference Paper

Nene, N. (2011): Financial Education for All 2011, OECD Conference on Financial Education, Cape Town,

Ministry of Finance, Republic of South Africa.

Legislation

Government Gazette, (2012): Financial Sector Code, Department of Trade and Industry, Republic of

South Africa, Vol 561, No. 35092.

Investigate Vehicles for Banking the Unbanked - … · Investigate Vehicles for Banking the...

Documents

Transcript of Investigate Vehicles for Banking the Unbanked - … · Investigate Vehicles for Banking the...