Virgin Money has turned one. The newborn got off to a brilliant start. But, its toddler years might prove to be a bit more challenging.
So far, Virgin has signed up 180 000 card holders. This is ahead of its original business forecast of 150 000 cards in the first year and compares well against other new entrants, such as Kulula, Voyager, MTN and Vodacom, all of which entered the credit-card market last year and each of which is averaging about 50 000 to 60 000 card holders.
In the first three months, Virgin signed up 50 000 card holders mostly on the back of the Richard Branson hype and a, hip new offering to the South African market. CE John Maxwell said this was achieved with no cold calling or through buying personal lists. It was simply a good product offering with an edge.
Virgin Money had brought some fresh air to the banking scene. It had rattled cages and exposed areas where South African banks were getting fat on fees. Annual credit-card fees had started to come down and people were questioning the true benefits and costs of banks’ loyalty programmes.
Surveys conducted by Virgin showed that 54% of South Africans were aware of the brand.
But is Virgin making money and where does it go to from here? Maxwell said that, although Virgin Money was not in a profit stage yet because of immense set-up costs, it was ahead of forecasts and its business partners were happy.
It had the second-highest transactions per card in the industry after FNB. This was important because, with no annual fees, Virgin Money relied on income from transactions and interest on outstanding balances.
But, Maxwell admitted, the business had started to hit headwinds. First the flood of other credit-card providers ahead of the National Credit Act (NCA) meant there were fewer customers to go around. It was feeling the bite of the NCA as affordability became an issue.
Although the medium-term outlook economically was positive, in the short-term borrowers had been hit by a 250 basis point rate hike and higher petrol prices, which meant their disposable income had been reduced, making consumers less likely to qualify for new credit.
“Credit cards are usually used for luxury purchases and tend to be at the end of consumers’ financial needs.” Though there were no definite numbers, Maxwell said there was anecdotal evidence of a general slow-down in credit extension.
He said one of the issues was double accounting. For example, an applicant would fill in how much she spent on groceries and, in the next column, how much she spent on her credit card, although often she used her credit card for the grocery purchases.
The NCA meant that Virgin Money had to postpone the introduction of its home-loan product, which was expected to have come on to the market earlier this year. The banks, including Absa which hosts Virgin Money, had been so focused on meeting compliance of the NCA that little innovation had taken place, said Maxwell.
He expected the home loan product to reach the market by January and said Virgin Money was working on several other product initiatives.
Because of its R5 000 minimum salary requirement, Virgin had attracted the higher LSM market, but it had huge appeal among 18- to 24-year-olds. This was a new market Virgin could tap into with a hip brand.
There had been a big demand for debit cards and Virgin was looking at product offerings that appealed to the younger market, said Maxwell.
Unlike other credit-card providers, Virgin had focused on the deposit market by offering money-market rates for positive balances. A card holder received 7% for any money deposits. Maxwell said this had helped to build up deposits to tens of millions of rands, which was positive for margins on lending because borrowers did not have to go to Absa for all their funding needs.
While Virgin challenged the loyalty programmes of other banks, its own loyalty programme had a bumpy start. Although still able to offer upfront discounts on other Virgin group services and products, both Primi Piatti and Levi had pulled out of the programme because they felt they were not getting value for money.
Maxwell said Virgin Money would focus on one-off special deals for customers rather than ongoing loyalty partners.
Virgin Money still needed to spread its wings to become a fully fledged player in South Africa’s financial markets and rattle more than just the credit-card market. But, Maxwell said, as it stood, the credit card alone was a viable business, despite the slow-down in momentum.