Old Mutual: South Africa SME lenders increase competition for incumbent banks

By David Whitehouse
Posted on Wednesday, 24 November 2021 15:30

Lebogang Mokgabudi, a non-executive board member at Old Mutual Alternative Risk Transfer (OMART). Photo supplied.

The emergence of fintech providers of financial services mean that South Africa’s established banks face growing challenges to their market leadership, Lebogang Mokgabudi, a non-executive board member at Old Mutual Alternative Risk Transfer (OMART), tells The Africa Report.

Fintechs that cater for the small business lending such as Lulalend, Retail Capital, Merchant Capital and Yoco Capital are “fundamentally changing the lending landscape”, Mokgabudi says. The OMART unit manages Old Mutual’s partnerships with fintech start-ups.

According to McKinsey, small and medium-sized (SMEs) enterprises make up over more than 98% of South African businesses, and employ between 50% and 60% of the workforce. They are hampered by lack of access to finance. McKinsey says that most private-equity funding goes to established businesses, with about 90% of funding going to businesses that are over five years old.

  • Lulalend bills itself as the country’s first online automated provider of short-term business funding.
  • Merchant Capital provides finance to retail, wholesale, manufacturing, and services-based businesses. The company in 2020 partnered with Standard Bank to offer a Shari’ah-compliant funding solution.
  • Retail Capital, backed by Triodos Investment Management, has lent $300m to SMEs and aims to lift that to $534m by 2023.
  • Yoco, which provides a platform for merchants to access offline payments, in July raised US$83 million in Series C funding to develop its platform and expand internationally.

Mokgabudi is confident that South Africa’s adoption of a rapid payments system in 2022 will spur the development of both SMEs and the fintech sector. Initiating payments through proxies such as mobile phone numbers will simplify the process for consumer payments, she says. The “Request to Pay service” for micro-businesses will remove friction and complexities associated with having multiple acceptance terminals, she says.

  • Cash still dominates, and has hampered attempts to broaden financial inclusion, Mokgabudi argues. The business model of the traditional payment acceptance tools is expensive for small merchants and has “not provided any incentives for merchants to accept digital payments,” she says.
  • The Vodacom VodaPay app that enables e-commerce for retailers has created fierce competition for incumbent banks, she adds.
  • South Africa may eventually see the digital payment growth experienced by Lipa Na Mpesa in Kenya, where “informal traders selling vegetables on the street can accept digital payments with ease,” she says.
  • More products are still needed. Solutions that enable the micro-business to create a digital record of sales and expenses and B2B solutions that streamline supplier relationships would increase data points for credit scoring, Mokgabudi says.
  • South Africa also needs a regulator which “frequently engages with innovators” to adjust policies.

Underbanked retail market

Despite the fact that over 80% of the South African retail market is banked, significant opportunities remain. Mokgabudi points to figures showing that only 38% of black women and 44% of black men are formally banked, versus over 90% for all whites.

Recent entrants to South Africa’s banking market include TymeBank, Discovery Bank, Bettr Bank and Bank Zero. Incumbents such as Standard Bank have responded by seeking to create new physical and digital distribution channels. Standard Bank in July partnered with retailer Pick n Pay to open branches within retail stores.

  • Financial inclusion should not only be about creating access to a store of value, but needs to meet the needs of the underserved consumers, Mokgabudi says.  This can be done by giving access to accounts which earn interest, without charges that “nullify the point of the saving product.”
  • There needs to be more access to credit to purchase land or build a home, and the pandemic showed that more medical insurance products are needed, she adds.
  • “Competition will come from fintechs that help consumers and businesses have a financial safety net or protect against future financial shocks.”

Bottom line

South Africa’s underserved SME and retail markets leave ample scope for new entrants to achieve scale.

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