Behind Capitec's successful model

There are few banks that can boast about sizeable profits and growth in the recession. Capitec is one. Andrew McNulty looks behind the successful model, what makes its CEO tick, how it is tapping into the mass market and whether it can sustain the momentum.

Capitec CE Riaan Stassen loves the thrills of racing - whether it's in business or satisfying his personal interests. When he went on holiday a few weeks ago, he flew to Sao Paulo to attend the Brazilian Formula One Grand Prix.

He makes these trips regularly. He has long been interested in motor racing and the people and organisations involved. Last year, he was in Shanghai, China, where he watched his favourite team, Ferrari, in action. "Ferrari has been inspirational for me," he told the FM in an interview.

"It is an organisation that really strives for perfection. I remember watching them at the Chinese Grand Prix, practising changing the tyres on a car over and over again, trying to do it faster and better."

Formula One motor racing and Capitec's innovative banking business may seem far apart but there are common threads, including a competitive culture and ability to achieve results through operational excellence and teamwork. These are key ingredients in Capitec's growth and its success in executing an innovative strategy.

The company is still a minnow compared with the big four banking groups, but it is making many traditional bankers sit up and take notice. It is also attracting new customers fast. It now has an active customer base of 2,1m, up by 74% in the past two years.

Capitec was founded in March 2001 and listed in February 2002, just nine days after Saambou collapsed, triggering a crisis for the small banks sector. It successfully weathered that crisis and, so far, has survived the present recession.

In fact it has more than weathered the financial crisis. While all the listed banks have reported weaker results this year, Capitec boasted a strong balance sheet, with headline earnings per share up 48% for the six months to August. Dividends rose by 83% and return on equity was 28%.

The share now trades around R62, up from 120c at the listing, and its market capitalisation is R5,23bn.

It started by acquiring a microlender from PSG Group. That gave it a platform from which it could quickly establish itself and expand. It has since transformed itself into a general retail bank, offering loans, savings accounts and transactions done through branches, cards, the Internet, ATMs or partners.

How is it achieving this growth, especially in a downturn?

There are two main reasons. First, its founders understand their customers' needs, particularly in the mass market and low-income sector. Second, they developed an innovative strategy and business model aimed at addressing those needs better than the established players. They have executed that strategy well. The second aspect is important because their main market insights were not necessarily original.

They recognised that though the SA banking sector is highly sophisticated, much of the population has no or limited banking facilities. Many people find bank products and services difficult to understand and expensive. Often they can't easily get the credit they need. They distrust banks. They mostly - or entirely - use cash rather than bank products. And they spend a lot of time waiting in queues to draw cash and settle bills.

This happens because banks have traditionally viewed the market through the prism of their own risk management needs and processes. As Capitec's 2009 annual report puts it, their approach has mainly been from the banks' perspective, focusing on administration and control, rather than the clients' perspective, focusing on ease of use. "Whatever the cause, it has resulted in procedures that are complex, cumbersome and inconvenient for the average customer."

This is where Stassen has turned the tables for Capitec. He may not have been the initial brains behind Capitec's business strategy, but he is certainly the brains behind making it a successful banking model.

He is different from the traditional banker - he says he is non hierarchical, consultative and often informal in his approach. Because he is not a natural reader, he says he learns a lot from observation and personal contact with the market and Capitec branches. There is no township in SA he has not visited, and he wants to visit at least half the branches every year. So, any slowdown in the company's growth rate is unlikely to be caused by a lack of personal contact with the market.

Capitec chairman Michiel le Roux attests to this: "Riaan's genius is that he has been able to understand the needs of customers in the market we identified and match them with the bank's business model and systems. He runs the business in a way that enables that model to work. I saw the gap in the market in terms of focusing on a segment, but not how to do it [make it work]."

There's no doubt Stassen brought an unusual combination of market insight and operational efficiency, but in many ways it has been a collaborative effort. Jannie Mouton's PSG Group was an early backer and remains the biggest shareholder, with 35,4%. Le Roux, the former CE of Boland Bank (and before that, CE of beverage group Distillers) was the first CE of Capitec and an intellectual anchor.

Capitec's distinctive approach is linked to the unusual backgrounds of its founders. Most top bankers have spent all - or most - of their careers in the banking industry. At SA's big four banks - Absa, Standard, Nedbank and First National Bank - the usual route to the top is to move up through the ranks. Much of the training takes place internally, and managers become steeped in the traditional banking culture. Innovative thinking, and ability to carry it out, is unusual, partly because the big groups are stuck with costly technology and branch networks established over years.

Stassen has been in banking for more than a decade, but it's his second career. He was educated in Stellenbosch at the 143-year-old Paul Roos Gymnasium, then completed a BCom at Stellenbosch University and qualified as a chartered accountant.

After a spell as audit manager at accountancy firm Coopers & Lybrand, he joined Distillers, which later merged with Stellenbosch Farmers Wineries (SFW) to form Distell, as operations manager.

At Distillers, part of the Rembrandt Group, Stassen was exposed to a culture closely attuned to marketing and what customers want. He recalls that Rembrandt founder Anton Rupert took a keen interest. "In those days Rupert personally approved all the labels and brands, and attended most of the quarterly marketing meetings," says Stassen.

In that environment there was a strong awareness of the value of driving the brands and understanding the market, adds Capitec marketing & corporate affairs executive Carl Fischer, who was at SFW at the time.

In the mid-1990s, Le Roux left as Distillers CE to start a banking venture backed by investor and entrepreneur Christo Wiese, who controlled Pep Stores, a retail chain pitched mainly at the mass market. They launched Pep Bank, which was linked to Pep Stores.

Soon afterwards, Wiese acquired control of Boland Bank. The new Pep Bank was merged into it, with Le Roux taking over as CE of the merged operation. He asked Stassen to join him.

Boland was then an unfocused, rural bank, trying to be everything to everyone, says Stassen. Its new management team sharpened its focus and increased its exposure to the mass market, a sector they understood well because of their background in the liquor industry. "From day one, Riaan's attitude has been to have absolute focus on a clearly defined market segment," says Fischer.

Experiences gained at Boland influenced the birth of Capitec in other ways, too. Boland was the first bank to build a significant microlending book. It grew to R1bn, which in the late 1990s was considerable exposure to a new and risky market. That book was later sold to African Bank Investments (Abil), a specialist in microlending.

Boland merged with two other medium-sized banks, the Natal Building Society and Board of Executors (BoE). Le Roux remained CE and he and Stassen were joined by several others from the beverages industry. At Boland they were part of a team that refined the thinking behind the Capitec strategy.

Later, after BoE had been merged with Nedbank, they took the idea to PSG Group, where Mouton and PSG director Chris Otto helped develop the thinking. Le Roux says it was PSG's backing that got the idea off the ground. "Without their support, it would all have remained just a dream," he says.

PSG backed the startup through intellectual support and encouragement, and by selling its microlending business, Keynes Rational, to the new company for a stake in Capitec. It has been well rewarded. Based on Capitec's present market value, PSG's 35,4% stake is now worth R1,89bn, or 43,5% of PSG's market capitalisation.

Several of the old Boland team are still involved in Capitec's senior management or board. Alongside Le Roux, Stassen and Fischer are business development manager Andre Olivier; operations head Gerrie Fourie, who was previously at SFW; IT head Christiaan Oosthuizen, who was IT head at Boland; and risk management head and company secretary Christian van Schalkwyk, who ran risk and legal at Boland.

"Together we developed interesting concepts, such as taking the bank to the customer instead of the other way round," says Stassen.

"The fact that our people came in from another industry has been an advantage," adds Le Roux. "It may be an advantage to grow up in an industry but there is also a danger that you can't see the wood for the trees."

An example Le Roux cites is the limited banking hours the big groups have retained for decades, though the retail industry has moved to longer hours, seven days a week. Capitec says they offer "extended banking hours beyond 8 am and 5 pm".

But what really sets them apart from the rest of the banking herd?

Among other things, there's still the strong liquor connection. Experience in the liquor industry influenced the way Capitec views its market. Stassen recalls that in the 1980s and early 1990s, there were strict liquor laws in SA. The middle class was much narrower than now. Yet 80% of liquor sold in the domestic market was consumed by blacks, many of them in the mass or low-income market.

Capitec targets the mass market (though not exclusively), as it has geared its business to volumes. But it defines its market by customer needs rather than income. "I prefer not to look at the market in terms of income or wealth. That's very traditional marketing. That's a lesson I learnt in the liquor industry," says Stassen. "I hate the idea of labelling people in terms of their income. We want to be status-neutral."

The company has recognised that many customers have similar needs and concerns about banks. With that insight, it's expanding its client base into the middle market - to affluent locations, such as Rosebank in Johannesburg. "If you go into a traditional bank at the end of the month, there is always a big queue at the inquiries counter. You have to ask why," says Stassen. "People want to be in control of their finances. The fact that so many people withdraw their cash from banks tells us they don't feel in control."

Capitec's business is built around four core principles:

  1. Affordability: fees and interest rates charged on its products are significantly lower than at other banks;
  2. Accessibility: achieved mainly through the branch network;
  3. Convenience: cash can be withdrawn, and purchases made, at retail partners such as Shoprite, Pick n Pay and Pep, or from ATMs; and
  4. Simplicity: transactions are quick and simple, with no paperwork.

Capitec's 371 branches are central to its strategy. The moment you walk into one of these branches, you know they are different from a typical bank branch. They are relatively small, at 180 m²-200 m², but are carefully positioned and low-cost. Branch costs are minimised, as none of the transactions other than deposits involves cash.

When customers deposit cash at the branches, it goes straight into a drop safe. Cash can be withdrawn at ATMs or at the partner retailers but not over the counter in the branches.

As branch staff don't have to worry about looking after cash, they can give customers more personal attention. It also reduces security needs and costs. There is no armoured glass in front of counters, so customers have direct contact with trained consultants.

Transactions are simple as customers never fill in forms; the branches are paperless. Customers use a single card and pin number, and are identified biometrically with cameras and fingerprints. And things happen quickly. The company says a deposit should not take longer than 60 seconds.

As the branches are relatively small and inexpensive, they can be targeted more precisely. In Bellville near Cape Town, there are two branches within 300 m of each other. One has a client profile in the middle-income market. The other, near the station, has clients mainly in the mass market.

At all the branches, processes are designed to give customers more control, while keeping costs down. Management noticed that when most people go to an ATM, the first thing they do is check their balance. Capitec's ATMs now give account balances automatically - at no charge.

It avoids pricing products on sliding scales, or offering different products for different markets. It also does not quote figures such as effective interest rates, which need explanations.

It also offers cheaper options than the "big four" on a transactional account - far higher interest rates and lower transactional fees (between R2,50 and R3,50 for withdrawals or transfers). Online banking is free. In a basic transactional account, Capitec pays 7% interest on balances of less than R10 000. That is remarkably high, but drops to 6,25% for balances of more than R10 000 (presumably Capitec does this to lower concentration risk in its deposit base: better to have a widely spread deposit base so chances of large-scale withdrawals are lower). The big four banks offer interest rates of less than 1% on most of their transactional accounts.

One of its biggest advantages, says Stassen, is that it offers a single, standardised product range that's relatively narrow. Most of the bank's loan book is short-term, though it has started offering 36-month loans.

Management has resisted the temptation to use the branches to sell other financial services. The bank provides free credit life insurance on six- to 36-month loans. It has also avoided going into products such as home loans, though that could develop later.

"Riaan is very disciplined. When you have a branch network, it is easy to get seduced by other opportunities and start diluting your focus. That hasn't happened. We prefer to offer fewer things and do them well," says Le Roux.

Much of the focus is on operational efficiency. All staff activities are managed on budgeted production time. When customers enter a branch looking for a loan, they are expected to be able to leave within 15 minutes, with the transaction completed. Transactions are closely monitored. "I can go to a computer now and tell you the hourly turnover for the bank and for each branch and consultant," says Stassen.

Le Roux adds that all Capitec's staff are trained in all of its products, which is not true of the bigger banks. Stassen says he likes working to an agreed methodology, in a disciplined organisation.

Overall, Capitec has shown considerable success at tapping into a large market that has not been well served by the traditional banking sector. Personal contact with clients and staff, innovation, delivering products that clients want and efficiency are all important parts of a formula that has so far worked well for the company and investors.

Its ability to continue the growth will depend partly on how well management maintains the focus and efficiencies. Capitec's performance may not yet have reached the standards shown by Ferrari's Formula One team, but Stassen does seem to be racing in that direction.

Useful resources:
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