By Adam Ikdal, Senior Partner and Managing Director, BCG South Africa
South Africa is a country of both promise and peril. Despite being the largest economy on the African Continent, the nation is plagued by high levels of unemployment, a poor education system and staggering income inequality. Underscoring the country’s struggle to translate its rich natural resources and other assets into social benefit, South Africa ranked 149th out of 162 in its ability to convert wealth into well-being1, according to BCG’s most recent Sustainable Economic Development Assessment (SEDA).
While financial inclusion—the adoption, usage and sustainability of financial services—generally is linked to socioeconomic development, driving financial inclusion as a way to improve well-being faces numerous challenges in the South African context.
The nuanced cultural and historical reasons South Africans do not regularly use formal banking channels:
BCG recently undertook extensive research into the process of financial inclusion in South Africa. This primary research which is based on surveys, interviews and a fresh analytical approach, yielded several interesting themes about the country’s use and perceptions of formal..
- South Africa has some of the highest banking fees in the world
The fee structure of SA banks is up to 4x higher than economies such as Germany, Australia and even India. This is partly due to the high operating costs of banks and the proliferation of cybercrime. In 2015, cybercrime cost South African businesses approximately R5.8 billion ($450 million), and while all businesses have taken proactive measures to combat this threat, banking spend on IT security is triple that of non-financial entities of the same size.
High fees are a significant contributor to the low usage of banking services in the country. While 70% of adults have transaction accounts only 24% make more than three monthly transactions such as withdrawals, deposits or card swipes. Many people are willing to run the risk of loss and theft associated with cash to avoid these costs, resulting in more than 60% of all sales transactions being conducted with paper currency.
- There is a general sense of mistrust in the motive of banks
The low-income population segment possesses a deep mistrust towards the formal financial sector, which is rooted in fears of exploitation. Past abuses involving the inappropriate marketing and selling of financial products have shown that poor people are highly susceptible to rapacious commercial interests. For example, South Africa recently started paying social grants directly into bank accounts, which quickly opened an avenue for financial institutions to target grant recipients with products like funeral coverage and micro-loans, whose costs are then automatically deducted from the recipients’ account. Many grant recipients were then left with very little to survive on, causing a public outrage and subsequent investigation into the legality of the financial institutions’ activities. South Africa’s poor are particularly vulnerable due to widespread financial illiteracy, exacerbating the sense of mistrust and levels of exploitation fostered by these practices. However, this is a systemic education problem within South Africa that cannot be addressed in the short term (at least from the demand-side).
- Concerns of fraud negate the convenience of cashless transactions
While some people in the low-income segment do not utilise mobile and internet banking simply due to lack of familiarity, the fear of fraud involving ATMs and mobile / internet banking was cited as the number one reason for preferring to transact in cash. This population cohort also expressed a preference for transacting face-to-face because in the event of any issues they feel there is better chance for recourse versus using digital technology.
- A sense of community with trusted advisors is valued
There is significant usage (perhaps more than 40% of South African households3) of trust-based models such as Stokvels. A Stokvel is a savings or investment society in which members regularly contribute an agreed amount which is then divided among themselves (e.g., monthly/at the end of the year) according to the method agreed by the members. For many South Africans, stokvels are more than a mechanism to save money—they provide a safety net for emergencies and offer an aspect of social interaction for the purpose of entertainment or advice. Especially for the lower-income population, community-based organizations such as Stokvels still provide the flexibility, advice and support structure that is perceived as lacking in the banking industry.
- Procedural barriers hinder the accessibility of financial services
The financial services industry poses substantial barriers for individuals to access products such as loans. Banks require documentation that can be problematic to produce, such as payslips and bank statements, and procedural inefficiencies can result in lengthy approval times. Given that loans to the low-income segment are often needed on the same day, such as for commuting to work, and many people in this segment do not have access to documents such as payslips, in a pinch many South Africans turn to informal credit providers (such as a “Mashonisa2“) or friends / family.
This situation is in large part a legacy of Apartheid, even though the institutionalized system of racial segregation formally ended over two decades ago. The Group Areas Act under the Apartheid regime systematically segregated the population, with poor African/Black people being forced to locate to urban living areas built on the periphery of towns and cities. Many still live in these areas, but on a daily basis they have to travel significant distances to their jobs, which are concentrated in central city locations. When borrowing money to get to work, flexibility and near immediate response times are the key factors in determining the channel selected; while formal financial institutions have made progress in this area, regulatory requirements impede their ability to compete.
- A significant amount of business is conducted informally
According to the last survey conducted by Statistics South Africa in 2013, more than 1.5 million people were running small, informal businesses in the country. These informal businesses do not easily satisfy the requirements of the formal financial sector. Banks require proper registration in order to open business banking accounts and obtain loans, but registration fees are often prohibitively expensive for small business owners, limiting the use of such services by small businesses.
The way forward for South Africa
Bringing more people into the financial system has the ability to enhance GDP growth, reduce poverty and create new market opportunities for the private sector. Achieving financial inclusion is therefore a critical milestone on the path towards realising the promise of the Rainbow Nation. However, the issues noted demonstrate that a more innovative approach to financial inclusion is required in the South African context. While regulation by the government can act as a catalyst, financial institutions will need to work together with the public and private sectors. At the same time, stakeholders need to understand the preferences and unmet needs of consumers, as well as the barriers they perceive in accessing financial services. Importantly, digital technology is not a silver bullet solution on its own, with multiple levers needing to be pulled to achieve this goal.