Presently, South Africa has a flourishing and fast growing banking system; however, its growth potential is stymied by limited household savings. While a large number of South Africans embrace the banking system, 57% remain skeptical and have either chosen not to save or save very little. The flourishing financial system is exemplified by Capitec, which is one of the fastest-growing and most innovative banks in South Africa. It has experienced a fourfold revenue increase since 2009 and has the second largest market share for unsecured lending, with 26% of the segment. However, it only holds a 4.5% share of the retail household deposit market, meaning there is considerable room for growth. Capitec generates profit through transaction fees and through the interest spread between the rate at which it lends and borrows. Lagging in the capture of retail household deposits encumbers Capitec’s growth potential, as deposits fuel lending and drive greater interest income. Moreover, beyond increasing Capitec’s capital base, a greater number of deposits would increase bank visits and lead to greater transaction fees.
Capitec has both fixed and flexible savings accounts that target both revenue models. Deposits in flexible savings accounts are mostly invested in money markets to keep them liquid, such that they rely on transaction fees. Alternatively, fixed accounts are lent to short-term, less liquid, borrowers and rely on higher interest income, but lower transaction fees. Regardless, an increase in total deposits will allow for faster long-term growth for Capitec.
Increasing total deposits can result from some combination of increasing the deposits per customer currently banking with Capitec and through adding new customers to the bank. Capitec holds over $3.2B USD in deposits, which equates to an average of $482 USD deposited by each customer. The low to middle class in South Africa has an average annual income of $7,000 USD, and with 61% of that spent on household consumption, it is clear that there is money to be formally saved. Therefore, Capitec stands to gain a considerable number of deposits, on which it can generate returns, by targeting its existing customer base. However, Capitec faces an uphill battle resulting from a general distrust of banks in the country. Further, banks are not well integrated into the daily lives of South Africans, resulting in many more forgoing saving altogether. Therefore, there is considerable room to employ theories of behavioral economics to entice greater savings by existing customers.
Banking on Texts
Capitec should develop a system whereby clients set a specific weekly savings goal and each saver is sent a weekly SMS message from a bank officer reminding him or her of the savings goal. In addition, the saver should be encouraged to name three to five confidantes to also receive weekly SMS messages of the saver’s progress, which can be expressed in percentage terms to protect privacy. The inclusion of family members and close friends would create positive social pressure for the saver to achieve the weekly target, increasing deposits. If a customer meets his or her yearly savings target, he or she would receive a gold appreciation card signed by the CEO that allows him or her preferred access in Capitec branches. Preferred access would take the form of line by-pass and more personalized treatment. In the event that gold appreciation cards become more prevalent as South African’s are encouraged to save, Capitec can offer higher tiers of cards indefinitely that require further savings and offer better rewards. This will encourage savings through positive reinforcement and foster aspirations amongst the client base to become preferred members.
Africa is Texting
Although Sub-Saharan Africa is not a wealthy region, it has one of the highest mobile phone adoption rates in the world. South Africa’s mobile phone penetration stands at 133% of the population, meaning the SMS recommendation could achieve high penetration. Furthermore, South Africa has a unique culture in which social pressure is very effective in influencing individual action. Social pressure does not need to be actively enforced, and simply knowing that others are monitoring their savings activity can pressure customers to deposit more. This informal savings mechanism is incredibly popular in the country, and the participation rate is high due to positive social pressure. Therefore, involving family and friends of savers would encourage effective commitment. While social pressure can help drive greater savings from current customers, it can also be harnessed to attract new customers.
Referrals can be used to encourage people who are currently not with Capitec to join the bank, which would increase deposits. Given that South Africans are strongly influenced by social pressure, a friend or family member could entice a person to switch from a competitor or to join the formal banking sector. Furthermore, South Africans have low confidence in banks and many are reluctant to deposit. However, Capitec has a network of over 6M people that can be used as brand ambassadors to present a friendly face to non-customers to improve confidence. This is an advantage to the referral program that is mostly impossible for Capitec to replicate through other means of advertising. In order to entice existing customers to refer others, some sort of benefit would need to be provided. Fully banked customers transact an average of 32 times per year, so it is reasonable that newly referred customers would do so at least half of that. With an average transaction cost of R5, Capitec would receive $5.37 USD annually from each new customer. There would be an obvious cost associated with such a program, although it would be outweighed by the benefits from new customers. By offering R50, or $3.58 USD per referral as a cash payment to referrers, Capitec would enjoy an 8 month payback for each incremental customer. Moreover, Capitec would benefit by using a tiered rewards system that incorporates behavioral economics. Under this system, the referrer would receive a higher lump sum payment into his or her account for each marginal customer he or she successfully referred. Additionally, if he or she were also one of the new customer’s contacts in the SMS savings program, there would be an additional reward. The referral system would lead to more customers and help to overcome the hurdle of a lack of confidence in banks; however, Capitec must also take additional steps to ensure it is more trusted.
Capitec should introduce a no-cost program where experts are placed in branches and customers can book one-on-one meetings or group sessions to learn about the importance of saving. These sessions should be used to not only explain why an individual should deposit with a formal bank, but also how the mechanics of depositing, reserves, and lending function. Specifically, an emphasis should be placed on communicating the social benefits of a formal banking system through increased economic activity. Additionally, a broader community outreach program should be established where Capitec would sponsor local events. This sponsorship would allow the savings representatives to speak more informally with members of the public and offer a glimpse of a more human side of the bank. This outreach, coupled with the savings experts, would improve the perception of Capitec and help to lay the groundwork for more significant engagement in deposits. Together, all the recommendations would lead to greater deposits at Capitec.
Success through Saving
Capitec is a successful bank and a leader in South Africa that has enjoyed tremendous profit and share price appreciation. However, Capitec must alter its strategy in order to attract more deposits that will allow it to continue to grow. By using behavioral economics in SMS and referrals, as well as building a better brand, Capitec will be making the necessary strategic deposit today to ensure it sustains success tomorrow.