Traditional financial services are no longer confined solely to the ‘big fish’ or the conventional banking sector
Alan Finlay
With the hostile bid by Nedcor to acquire banking rival Stanbic dominating the headlines a few months ago, one might be forgiven for thinking that the health of the sector is entirely dependent on what the big players do or don’t do.
For the person in the street names like Cadiz Investment Bank, Cashbank, Real Africa Durolink Investment Bank, The Business Bank or Ons Eerste Volksbank might not ring a bell. But, despite last year’s volatility in the niche banking sector, many analysts agree that bigger is not necessarily better, and that several of the smaller players offer financial services that the larger fish simply can’t afford to.
There are more than 34 locally owned and registered banks in the country; and if you include registered branches of foreign banks, you have about 60 banks to choose from offering varied and often highly specialised services. On the desk of the Registrar of Banks awaiting authorisation is another foreign player: the China Construction Bank. Add to that foreign banks with representative offices in South Africa and you have more than 120 brand names in the country.
“While it’s important for the big players to become part of the global economic mainstream, this leaves open potential niches which are not covered and the demand for small financial operations develops. The more an economy grows, the greater the demand for specialisation,” says Dawie Roodt, chief economist at PLJ Financial Services.
“Broadly speaking one needed to create competition. There’s more risk with some of the niche players, but the systemic risk from just having big banks is greater,” says Mike Schussler, an economist at FBC Fidelity Bank (under curatorship, and now to be merged with Nedcor’s People’s Bank).
“There are a number of good niche banks around, for instance Brait Merchant Bank and the Cape of Good Hope Bank. If you have a hundred banks operating and one or two fall over it’s not a problem for the economy. So it’s a trade-off between systemic risk and individual risk.” And with FBC Fidelity under curatorship after liquidity problems last year, Schussler is literally singing from the trenches.
The fact that Nedcor recently acquired FBC means at least that the big players consider the smaller banks serious contenders for market share.
There are three main factors that led to the growth of the niche banking sector. Firstly, a need for extensive and intensive knowledge of a product or service, for instance banks which service the oil industry. From a service point of view, Cadiz claims to offer the latest and best in financial technological tools for its clients – including acquiring the exclusive rights to software – that give the group “significant leverage” in the marketplace. MLS Bank, an online bank, is the only local bank devoted exclusively to the needs of medical and dental practitioners.
Secondly, there was a need for banks that operate on a regional basis, like the Cape of Good Hope Bank. Among other things, these banks no doubt offer an understanding of regional economies and trends that the larger banks don’t have time for.
Thirdly, there was a need for banks that offer tailor-made services for the very individual investor. Here, there is more risk-taking.
One simply needs to cast one’s eyes over the mission statements of some of the banks to get a sense of how specialised they are and how they aim to celebrate the individual.
Brait Merchant Bank, for example, says: “With significant management ownership and free of the dictates of a controlling shareholder, Brait’s people are empowered to make decisions … [in] financial partnerships which go beyond the norm. More importantly, Brait’s real strength lies not so much in what it does, but in who does it, and the way they do it.” Brait offers everything from legal support and lending to fund management.
The Cape of Good Hope Bank encourages “a flat management structure where everyone is accessible to [their] clients”. It refers to its “exceptionally loyal client base” and offers, among other things, personalised banking services and financing for joint business ventures. It has placed an emphasis on developing information technology systems.
“Niche banks are willing to take higher risks with smaller companies,” Schussler explains. “Smaller banks might have 10 experts in the oil or science and tech field; bigger banks might have the same number of experts, but they’re spread across the country and its harder to find them for the customer.”
PSG offers, among other services, an assortment of unique funds and stock options, corporate lending to specialised insurance, as well as financial risk management services to importers and exporters.
Real Africa Durolink Investment Bank provides financial and investment banking services, including structured finance and corporate finance advisory services, treasury services, and securities broking services, among others. It also has high hopes: “By the year end 2007, on our 20th anniversary, we will be the top-rated investment banking group in Southern Africa,” it crows.
The RAD Way, as the bank likes to put it, is to “focus on niche businesses where we can add value through the application of intellectual capital so as, over time, to dominate or near dominate those chosen business niches”.
Mercantile Bank sees itself as the “banking group that’s big enough to take care of all your financial needs but small enough to offer you the very highest levels of personal service excellence.” It offers a full range of domestic and foreign services.
Many niche banks also offer lower lending and higher savings interest rates to attract customers. In part this is made possible by the internet, which cuts overheads and makes start-up operations cheaper.
But traditional banking services are not being confined to the banking sector. Woolworths offers a unit trust for as little as R125 a month. Pick ‘n Pay offers quirky financial services, including access to its Money Fund and a Pick ‘n Pay debit card. You can draw up to R1E000 cash a day on the card, at the till or at any ATM. If you draw from Boland Bank or NBS ATMs it’s free of charge. You can get discounts on the issuing of cheques and pay your bills using the card. Pick ‘n Pay also offers an education savings plan.
Then we have the explosion of the number of micro-lenders in the country, offering small loans at high interest rates. “There are many grey areas,” says Roodt. “Inititatives like these will soon begin to challenge the accepted definition of what a bank is.”
The opening up of the sector, although good for the economy, means more volatility and the risks remain. Some economists warn that, despite some new recruits, the niche bank sector is still in for a shake-up. “In times of rapid or financial growth, one creates room for lots of niche banks; but when there are periods of stringency, strong, well-capitalised companies have better chances of surviving that undercapitalised and under-resourced companies with inadequate systems,” says SG Frankel Pollak Securities’s Nico Cypionka. “We will see some more consolidation in the niche bank area, some takeovers and some disappearing.”
Schussler remains optimistic. “Don’t forget that in a global sense, banks like Nedcor and Stanbic are niche banks. Smaller players become the bigger players of the next round. That’s the history of banking.”