SOUTH AFRICA: Banking the 'unbanked' proves viable

Analysis

Access by the poor to financial services is an important economic policy issue in all countries, but especially in developing and transition countries. Without access to transactional capabilities (deposit and withdrawal facilities), households are forced to rely almost exclusively on cash -- or even barter -- transactions. Informal, community-based 'rotating savings and credit associations' are common in many countries, providing limited mechanisms for households to accumulate savings to cover essential future 'lumpy' expenditures (such as durable goods purchases or funeral costs).

However, they are not an adequate substitute for direct involvement in the financial system. At the macroeconomic level, large-scale exclusion impairs the financial system's ability to mobilise savings and to promote growth, investment and job creation. Several reasons explain low access rates:

• In developing countries, the main demand-side reasons are income-related (income too low or irregular to make it worthwhile to have a bank account) or access-related (lack of identity documents, inaccessibility of banks, minimum balance requirements, high service charges, etc).
• Supply-side reasons include a belief by retail banks that provision of banking services to low-income groups is uneconomic.

Political salience. In post-apartheid South Africa, the issue of the 'unbanked' also has major political salience. While the financial system is highly sophisticated, the lack of access to financial services is seen as symptomatic of the continuing lack of empowerment of, and discrimination against, the (mainly black) poor. In 1994, an estimated 75% of all adults aged 16 and above were unbanked. Access to affordable financial services was thus a major policy issue, although controversy initially focused more on housing finance, than on banking service, issues (see SOUTH AFRICA: Pro-poor strategy a challenge for banks - October 1, 2002).

However, banks also faced commercial incentives to seek viable ways to enter the mass market: other market segments were overtraded and revenues were under pressure. Banks were assisted by the growing trend among their corporate clients to automate their payroll processes and cease paying wages in cash.

Early initiatives. There have been several mass-banking initiatives in the past decade:

1. E Plan. Standard Bank's E Plan product, introduced in 1994, offered simplified savings and electronic payment facilities within one card-based account, accessible through special ATM service sites, including in low-income areas. The sites were teller-free, but offered face-to-face customer education and support to overcome initial resistance to ATM cards. The account also offered a revolutionary death benefit, payable to next-of-kin.

   Take-up was rapid, albeit partly through 'cannibalisation' (customer migration) of other products. Despite the later introduction of a small monthly management fee (in addition to transaction charges), to eliminate the large numbers of dormant accounts with zero or near-zero balances, there were still 2.9 million E Plan accounts in 2003, available through 149 AutoBank E outlets, more than half in rural areas. The experiment proved that it was possible to provide a profitable low-cost, low-transactions volume facility with a 'bundle' of services targeted at the needs of low-income groups. Two of the other major banks, Absa and First National, subsequently launched similar offerings.

2. Community Bank. Also launched in 1994, Community Bank offered a low-end savings account, small mortgage loans, and small-business loans. Its structure distinguished between (potentially) profitable banking functions and 'developmental' operations, with the latter donor-funded. However, too rapid expansion, internal conflicts, inadequate understanding of the market sector, and unsound criteria for credit extension, led to the bank's collapse within two years.
3. PostBank.Early suggestions that the long-established state-owned PostBank, operating countrywide through over 2,000 post offices and agencies, should become a 'people's bank' were not taken up. Nonetheless, the bank has seen continued, albeit slow, growth in its mainly-rural customer base, which exceeded 1.2 million in 2003. Unlike the commercial banks, however, PostBank's offerings remained largely passbook-based.
4. Others.A range of other smaller -- and sometimes highly innovative -- initiatives, targeted at different sectors or niches within the mass market, were also launched, with varying success levels. These included village banks, projects aimed at rural and small-town markets, and regional outsourcing initiatives to use state-of-the-art technologies to replace traditional cash- and paper-based methods for channelling social grants safely to beneficiaries.

Financial sector charter. By 2001, this mass-market growth had begun to stagnate. In 2003, although an estimated 85% of full-time employees now had bank accounts, 54% of all adults aged 16 and over (some 15.5 million) remained unbanked. Against a background of increasing business-government tension over the pace of Black Economic Empowerment (BEE), a comprehensive financial sector charter was negotiated in 2003 (see SOUTH AFRICA: BEE financial charter sets big targets - November 6, 2003). In respect of access, the industry undertook to provide 80% of the poorest households with effective access, within a 20-kilometre (km) radius, to basic savings, transactions and credit services by 2008.

Mzansi account.In response, the main banks -- Absa, Standard, First National, Nedbank, and subsequently PostBank -- agreed on the core features of a basic, standardised, debit card-based account, which would be marketed as a distinct product by each bank. Known as Mzansi, the account's common characteristics include:

• an absence of management fees;
• one free monthly cash deposit;
• a debit-card facility for retail purchases; but
• no direct debit facility.

Initial deposit requirements, and branch transaction and ATM withdrawal fees -- which vary widely -- are at the discretion of each bank. Crucially, however, account holders may withdraw cash from any participating bank's ATMs without incurring additional charges, thereby creating a nationwide network of over 10,000 ATMs.

Performance. By last month, less than seven months after its launch, over 1 million Mzansi accounts had been opened. At that stage:

• over 91% of account-holders were previously unbanked (at least with their chosen institution);
• 83% of accounts had been used in the preceding 30 days; and
• 95% of accounts had a positive balance, with an average balance of 325 rand (50 dollars).

These data suggest that predictions of cannibalisation of other entry-level products and high levels of dormancy have so far proved unfounded.

Outlook. Although Mzansi has already brought an additional 4% of the population into the formal financial system, the banks are still a long way from their self-imposed 2008 targets of providing the majority of low-income households with an ATM within a 10 km radius and a full banking service within 15 km. Moreover, there can be no guarantee that Mzansi will continue to grow at the current daily rate of around 6,000 new accounts. Equally, there is no firm evidence yet that sufficient numbers of Mzansi depositors will, in due course, upgrade to more revenue-generating products.