Debt counsellors and sceptical consumers are outraged at Pick n Pay for what they perceive as a brazen attempt to lure consumers further into debt, following the retailer’s launch of a credit offering last week.
Pick n Pay’s new store card will allow qualifying Smart Shopper customers to purchase Pick n Pay goods on credit. If they settle their account in full within 55 days, no interest is charged.
“The decision by Pick n Pay to sell food on credit in their supermarkets is going to come back and haunt them because there is going to be a massive demand for this product and hugely debt-strapped consumers are going to default on these loans on a scale not seen before,” says Neil Roets, CEO of debt counselling firm Debt Rescue.
If consumers had to resort to buying food on credit then it was unlikely they were fully credit-worthy, as required by the National Credit Act, he added.
More than half of South Africans are three months or more behind in their repayments having collectively notched up some R1.71 trillion in debt, according to the latest National Credit Regulator statistics.
“We are in the midst of an exceptionally difficult economic cycle where the price of everything is skyrocketing with salaries and wages in many cases remaining static. If consumers have reached the point of desperation that they had to buy food on credit that means that they are already at the end of their tether and in my view should not qualify for yet more credit,” he says.
However, Pick n Pay deputy CEO Richard van Rensburg argues that outraged consumers have not understood their intentions.
“People haven’t read into what we are doing. I completely agree that using the proceeds of interest-bearing debt to buy food and groceries is a bad idea.”
Rather than luring more customers into debt, Pick n Pay is targeting middle-income consumers in a bid to “ruffle feathers” and challenge high fees in the banking industry.
“South Africa’s debt burden is huge. The biggest thing that is sucking disposable income out of the economy is the high cost of credit. Hidden costs such as initiation fees, administration fees, mandatory insurance fees and penalty fees exacerbate the cost of credit. We have worked with RCS to design a product that has none of these hidden fees and carries a nominal R10 monthly service fee,” he says.
The target credit customer is drawn from its 7 million Smart Shopper customers; one who typically does not have a credit card, but may have a debit card. They may have a bond already or be saving towards one. Ideally the shopper will deposit money into his or her bond or savings account at the beginning of the month and allow it to accrue interest. At the end of the month, or the rolling 55-day credit cycle, those funds are then used to pay off the grocery account, which has accrued no interest.
“These are not people who earn a Sassa grant or who earn less than R10 000,” Van Rensburg says adamantly. “Although they are being exploited by loan sharks and worse, there is no way we will grant them credit.”
He estimates that if the retailer is able to attract about 150 000 shoppers on to the system it will incentivise lenders to bring down the cost of credit.
“Our target is the credit charges that the industry is charging our customers – interest and other fees.”
Pick n Pay made an upfront decision not to earn income off the interest charged to consumers.
“We are not in a profit-sharing deal with RCS,” he says. “We were clear there could be no conflict of interest here. When it comes to the high cost of credit, we are on the side of the consumer.”
Of course if the consumer does get into trouble, then they will be liable for the interest fees charged by RCS, which fall within the bounds of the National Credit Act.
Where Pick n Pay will gain is if shoppers using credit and debit cards migrate to the new Smart Shopper credit card, which bypasses the National Payment System.
In the past Pick n Pay chairman Gareth Ackerman has been vocal about the high cost of bank charges, which have grown as customers have switched to using plastic. On every credit card transaction about 1.4% of the transaction amount is paid to the banks, while on debit cards the cost is lower, at 0.55%. This is higher than European benchmarks, which are about 0.3%.
Pick n Pay has negotiated lower charges with RCS.
“In the closed loop system with RCS we will pay roughly half of what we pay the banks,” says Van Rensburg. Despite this being lower than the banks, it substantially contributes to RCS being able to offer the free credit, he says. In addition, the low R10/month fee was possible because Pick n Pay could technically integrate with Smart Shopper, thus avoiding a card issuing expense. Statements are issued on the Smart Shopper app, again reducing costs.
However, for the banks to really notice a dip in this revenue stream Pick n Pay will have to attract about 500 000 customers to its card.
It is early days yet. Pick n Pay has received 7 000 applications so far, and has approved 1 000 of them.