App-only bank aims to cut you in

On Hill Street in Grahamstown, not too far from the university town’s well-known cathedral, is one of the country’s oldest but much less famous banks.

Most South Africans have never heard of the 141-year old GBS Mutual Bank but the institution has almost R1.3-billion in assets, a tidy sum for a bank that only operates in Grahamstown, Port Alfred, Cape Town and Port Elizabeth. It is one of just three mutual banks in the country, according to the South African Reserve Bank’s website. The others are Finbond and VBS Mutual Bank.

But newcomer Bank Zero, co-founded and chaired by Michael Jordaan, the former chief executive of FNB, is set to join this list by the end of the year. Chief executive and fellow founder Yatin Narsai, who worked with Jordaan during his time at FNB, will head it.

One of the defining differences between a mutual bank and a commercial bank is that mutual bank depositors are typically the shareholders —the owners — of the bank.

The managing director of GBS, Anton Vorster, said listed banks are owned by the shareholders, who earn a dividend according to the company’s performance.

But mutual banks are owned by share depositors, who get a guaranteed return according to their class of share.

The portfolio manager of Denker Capital, Jan Meintjes, said that although mutual banks are typically smaller and their operations are more conservative, the interests of shareholders and depositors are better aligned. Once the expenses and running costs of the bank are paid, the shareholder-depositors share in any profits the bank has made.

GBS has three categories of shareholder, each subject to different rules. Shareholders own the bank and its reserves and will benefit in the event of a buy-out or if it is wound up, provided there are surplus reserves, Vorster said. They are also invited to and vote at events such as annual general meetings.

According to Vorster, the three types of share products are fixed-period shares, which are five-year instruments, after which the mutual bank buys them back, indefinite period shares and subscription shares, which have a minimum period after which they can be repurchased by the bank at par value.

The shares can be sold at other prices to third parties but “this hardly ever happens in our case”, Voster said.

For Jordaan, the decision to launch a mutual bank is a way to promote a savings culture in South Africa.

“We want to make our customers shareholders,” Jordaan said, adding that it will be “an additional reward” for banking with Bank Zero.

The exact details about shareholding will be revealed at the launch, which is expected to be towards the end of the year, he said. “But the principle is that we want to share the benefits of Bank Zero with customers.”

These will come from the bank’s low cost base. As an app-only bank, it will have no head office, branches or legacy systems to pay for, Jordaan said. Running a bank using current technology, much of which is open source and proven, comes to a fraction of the cost of running a traditional bank.

“We won’t have a head office, but we also won’t have a wine collection or a canteen … this will be a truly, truly low cost bank.”

Bank Zero’s directors and its employees are its shareholders and all have “skin in the game”, said Jordaan. Its reserve capital is about R50-million, well above the R10-million minimum required by the South African Reserve Bank.

Although mutual banks can provide credit and loan products (VBS famously lent a reported R7.8-million to President Jacob Zuma to pay for his Nkandla home), Bank Zero will not be offering these products. Instead, its focus will be on savings and transactional products. A clear gap in the market are affordable banking services for businesses, which pay far too much in banking fees, Jordaan said.

But Bank Zero is just one of a number of new banks that are due to be, or have recently been licensed, including TymeDigital, the long-awaited Postbank and Discovery’s new banking platform.

Jordaan acknowledges that the competition is fierce and that he is up against the likes of Discovery, which has a huge potential customer base, already incorporated into its existing rewards “ecosystem”. But central to Bank Zero’s existence will be the smartphone and customers’ interactions with mobile technology.

“There is a generation that will be interested in this [offering], the smartphone generation, people who have grown up on Snapchat and Instagram,” he said.

There is the question of where Bank Zero’s revenues will come from if it is charging low or no fees and paying customers better interest rates on savings products.

Jordaan said there are many revenue streams that are unknown to bank customers, for example, commissions paid to banks by cellphone providers for selling airtime. The low cost base and these other income streams means profitability is unlikely to be a concern, he argued.

The mutual bank framework is ideal for an app-driven bank, Jordaan said.

“We don’t want to do corporate finance or lending, we only want to be an app.” As such, it does not need what a commercial bank licence provides.

Concerning the belief that a mutual bank could be riskier than a commercial bank, Jordaan said, in reality, it’s the opposite, and particularly in relation to Bank Zero.

Lending is the major risk to banks everywhere and Bank Zero will not be doing that, he said. Its deposits will be invested only in the highest-rated instruments.

It is also low risk from a technological perspective, he added, because it will be banking through a single channel — the app.

Smartphones are not as vulnerable to the type of hacking that personal computers are and, thanks to biometric verification methods such as fingerprint and facial recognition software, the bank will know who it is transacting with, Jordaan said.

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Lynley Donnelly
Lynley Donnelly
Lynley is a senior business reporter at the Mail & Guardian. But she has covered everything from social justice to general news to parliament - with the occasional segue into fashion and arts. She keeps coming to work because she loves stories, especially the kind that help people make sense of their world.
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