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28 Sep 2012 00:00
About 10-million South Africans receive social grants. Net1’s plan to harness them as customers with loans and insurance products could turn it into one of the largest retail banks in the country. (Madelene Cronjé, M&G)
Behind the legal storm raging over the recent awarding of a R10-billion South African Social Services Agency (Sassa) contract, a far greater prize is at stake: the chance to load microloan and insurance products on to the R105-billion the government pays in social grants annually.
Net1 UEPS, the New York-listed parent of winning bidder Cash Paymaster Services, told shareholders it plans to "leverage" the social grant payment contract by selling financial instruments to about 10-million people who receive state grants. Net1 said profits from this would be critical to its short-term bottom line.
Industry observers suggest the plans could dwarf the value of the contract.
But it appears Net1's plans are in conflict with South African law, Sassa policy and Cash Paymaster's contract with the agency – although Net1 disputed this.
Meanwhile, some in the lending industry complained that Net1 is poised to benefit unfairly as "player and officiator" because it is both selling financial products and controlling the flow of money.
In January, Sassa awarded the contract for the distribution of grant money to Cash Paymaster.
Cash Paymaster, Sassa and losing bidder AllPay are appealing the ruling.
In official statements to investors, Net1 said its grant payment infrastructure would give it access to "a critical mass" of beneficiaries. "[This] should allow us to use this infrastructure to provide users, at a low incremental cost to us, with a wide array of financial products and services for which we can charge fees."
The prospect excited investors commenting in an online Net1 investor forum. Said one: "Do you realise that with nine million accounts, [Net1 is] essentially the largest retail bank in South Africa? Insurance products, loans, prepaid airtime or electricity. There's no limit to what additional revenue they can generate from this base."
Another said: "The fact that Net1's competitors are fighting this so hard only serves to reinforce my conviction of how important this contract was. It's of course a golden opportunity to open up the cross-selling of other financial products to millions of additional customers. It gives Net1 the critical mass they need to be a real powerhouse."
But it is unclear how Net1 can lawfully "leverage" the Sassa contract.
For a start, current legislation – which aims to ensure grant beneficiaries receive their full grants – does not allow deductions from social grants except for limited funeral insurance premiums.
Secondly, Net 1 told investors its financial products would be "based on our understanding of [beneficiaries'] risk profiles, earning and spending patterns, demographics and lifestyle requirements". Upfront, this would contravene Cash Paymaster's contract with Sassa, which forbids it from using beneficiary data for any purpose other than the payment of grants.
Thirdly, Net1 announced it would launch a pilot microlending operation this month. Yet a recent Sassa directive – part of a Sassa drive to regulate loan sharks – bans deductions from social grants for loan products sold after June 1.
Why any loan deductions will be allowed at all, despite the provisions of the Social Assistance Act, is unclear. But Sassa spokesperson Lumka Oliphant said the agency is "in the process of cleaning up the system" and has issued a temporary directive allowing lenders to deduct up to 25% of a social grant for existing policies.
Fourth, Net1's new insurance subsidiary SmartLife said: "Our model is direct marketing at pay sites, where we promote or advertise our product." But Oliphant said: "No marketing is allowed at pay points [and regulations prohibit] persons enforcing debts from being [within] 100m of any pay point." Net1 subsequently said it sticks to these rules.
Despite regulations, Oliphant said microlenders have been "abusing the system".
She said lenders could previously install debit orders for grant beneficiaries who used regular bank accounts, deducting money after the grant was paid. Sassa had no control over this.
However, Cash Paymaster's new smart cards – through which grants are accessed – do not allow deductions other than those the agency has authorised, Oliphant said.
According to Sassa, this is a good thing: "No service provider can bypass rules and set up any debit and stop order since Sassa has not allowed any other facility on the card except deposits of pensions and withdrawals."
Oliphant said the agency needs to authorise grant deductions before Cash Paymaster can make the deduction, either for its own benefit or for that of a third-party lender or insurer.
Bypass the rules
Cash Paymaster is bound to implement any Sassa-authorised third-party deductions and it may not charge other lenders and insurers any fee.
In theory, then, the playing field should be level. However, SmartLife managing director Chris van der Walt's explanation contradicted Oliphant's. According to him, when beneficiaries apply for a SmartLife funeral grant, "[the beneficiaries] authorise us to use Cash Paymaster and through them [affiliated bank] Grindrod".
Cash Paymaster has a partnership with Grindrod to provide every beneficiary with a basic account into which the grant is paid.
Van der Walt said SmartLife does not make a direct deduction from the grant: "We simply stand in line to get a deduction against the bank account."
If Oliphant's version – that Sassa must first authorise premiums before they are directly deducted from grants – is correct and SmartLife debits directly from the beneficiaries' Grindrod accounts, then it is possible that the company could "bypass the rules".
Net1 said: "[The company] has no intention of offering or providing any financial services in conflict with or in breach of the Social Assistance Act, the regulations promulgated thereunder, the contract between Cash Paymaster and Sassa, and directives currently in force. In as much as the Net1 group markets any financial services to beneficiaries it does so legally and on the same basis as all other service providers."
Oliphant said Sassa would penalise Cash Paymaster if it violated its contract.
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