Is Sanlam too late to the bank party?

On paper – and in slide decks – perhaps the strategy seems sensible. Use a partnership with GoTyme Bank, given a common shareholder (Patrice Motsepe), to establish a retail credit joint venture as well as transactional banking services and offer these to the existing 10 million-plus Sanlam clients in South Africa.

But after a “soft launch” to staff and intermediaries from November, Sanlam’s banking offering will only launch sometime in the “first quarter” of 2027. By April, Pepkor’s bank, Plus B, will also be live.

This will see Sanlam’s banking offering launch nearly eight years after Discovery Bank (never mind the roughly two years later than rival Old Mutual). That’s an awfully long time.

The problem is that the incumbents haven’t stopped growing, nor will they surrender market share without a fight.

Together, across the 10 banks operating in the retail space in South Africa, they hold 86 million clients. That’s a third larger than our population!

Obviously, there’s a lot of duplication in that number. Many people will have an account at two (or three) different banks. But, crucially, there’s also a fair amount of dormancy in those figures. One bank’s definition of a customer is not the same as another’s.

Sanlam wants to sell banking services to its existing clients, but these people already have primary bank accounts elsewhere.

Given its scale, it’s not a stretch to imagine that the largest portion of them bank with Capitec.

The challenge of standing out

How is Sanlam’s transactional banking offering going to be materially different from those of existing players?

CEO Paul Hanratty says the structurally lower operating costs from GoTyme means it will be able to offer higher interest rates on savings. But this in itself is not a reason to switch banks – just ask African Bank or GoTyme.

Sure, one may attract some savings accounts, but that’s not the strategy.

And while it plans a notable credit push (loans and credit cards), this, too, is easy to implement but not particularly sticky from a transactional banking relationship.

Its rewards programme, Sanlam Reality (which could be described as a very narrow version of Vitality), will stitch this all together.

Until now, the group has offered limited detail of capex and opex budgets or customer or breakeven targets for the banking effort.

Still, it is building out a branch footprint in its Retail Mass business (how very 2010) and will leverage its distribution capabilities to sell transactional banking services to its existing customer base. By the end of June, it had 156 outlets and will have 200 by the end of the year.

Banking comes at a cost

This investment saw its ‘corporate expenses and other’ increase to R374 million in the first six months, “due to higher business enablement costs in setting up the group’s banking proposition, technology and modernisation initiatives in South Africa”.

The nascent ‘credit, banking and rewards’ segment reported a loss of R179 million in the six months (versus total operating profit excluding investment variances of R6.7 billion).

At least Sanlam appears to only be spending hundreds of millions on the banking effort, versus the billions spent by both Old Mutual and Discovery to enter the space.

The upside – and the risk

The upside is that if it manages to attract, say, one million transactional banking customers in the medium term at low cost, it could add incremental profits to its already sizeable South African operation.

Having this relationship would also, in theory, make those customers ‘stickier’ and less likely to buy insurance or investment products elsewhere.

The danger, of course, is that Sanlam launches a not-quite-attractive-enough proposition that isn’t adequately differentiated from GoTyme, Capitec or other retail banking offers in the market.

This could see it end up being an also-ran, with a subscale base that is eventually sold or would down.

This movie has been seen before. Pick n Pay (in a partnership with Nedbank called Go Banking), Bidvest, Grindrod and Sasfin all attempted to enter the retail banking space and eventually sold, abandoned or wound down these efforts.

This article was republished from Moneyweb. Read the original here.