How Capitec Became South Africa’s Biggest Bank

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The consumer banking industry is notoriously difficult to enter, not least because most customers rarely switch banks. In some countries, people change spouses more often than they change banks.

The banking industry in South Africa was no exception; for decades the industry was dominated by “the Big Four” (Standard, FNB, Nedbank, and Absa). However, in 2000 a new player entered the industry, called Capitec, which started establishing branches rapidly. By 2007 it broke through the barrier of 1 million active customers; 10 years later it had more than 10 million clients and about 800 branches. It has now become the largest bank in the country.

Importantly, profits kept pace. After breaking even in 2002, net profits continued to rise, to 3.8 billion rand in 2017 (about $260 million), while the company’s share price appreciated by a whopping 61,800% (from 117 to 72,500 rand). In 2016 The Lafferty Group ranked Capitec as “The Best Bank in the World,” a feat it repeated in 2017. Its customers seem to agree: Surveys indicate that Capitec has had the most-satisfied customers of all banks in the country — for the past five years running.

Capitec gets many things right in terms of its strategy, including its market positioning, internal operations, and organizational culture. Yet three things stand out that enable it to grow and prosper.

Resisting revenue temptations

Founder and chairman Riaan Stassen said to me: “Our strength has always been our focus.” Indeed, Capitec is more focused, in terms of what it does and does not do, than most companies and certainly most banks. It serves individuals only, not companies or trusts. It offers them a single account: Everybody gets a gold card with exactly the same conditions, prices, and services. A customer can do three things with this account: saving, loans, and transactions — and nothing else. The bank serves these customers through a network of highly efficient physical branches. It has always held on to this model and never wavered.

Companies, and certainly new entrants looking for growth, often find it difficult to resist jumping onto various new sources of revenue. That’s understandable, because if you are looking for growth, any piece of additional revenue seems welcome. Moreover, in advance, you can never be entirely sure that your original market choices will play out and will generate sufficient income by themselves. Hence, when a new potential stream of revenue presents itself, the company’s management feels it cannot afford to just leave it.

The result of this is, however, that a company ends up doing a variety of things that each might make sense on an individual basis but in combination create costly complexity — not adding up to something that is bigger than the sum of the parts. Or, as the late Steve Jobs said, ”Micro-cosmically it might make sense, but macro-cosmically it doesn’t add up.” In order to grow, a company needs a coherent set of choices.

Put differently, a company needs focus. Stanford professor Robert Burgelman called it a “vector strategy”: All the parts of an organization and all the combined efforts of its people need to be working in the same direction. Adding tangentially related sources of revenue gradually wanes strategic focus.

Capitec resisted the temptations of additional sources of revenue that might appear attractive on an individual basis. For many years, it did not offer anything else other than its single account: no insurance, no currency exchange, no small businesses. Recently, however, it has added credit cards to its offering and has begun to offer funeral insurance. This, however, is only after it has become firmly established in the South African market — and that is a point in itself.

Evolving purposefully

Although Capitec has always been remarkably focused, in terms of client segments, its product portfolio, and distribution network, its strategy has changed significantly over the years — as it had planned.

Capitec first entered the industry in rural areas. These areas were underserved by the traditional banks. That is because most people living there are quite poor and the banks figured they could not make much money on them. There were, however, plenty of microlending businesses in those areas, offering unsecured payday loans. Capitec started buying them up and converting them into bank branches. The big banks ignored Capitec: After all, this new entrant focused on the bottom of the market only, something they weren’t interested in anyway.

However, after Capitec had established itself in the rural areas, it started entering the larger cities, such as Cape Town, Durban, and Pretoria. It set up branches near “taxi-ranks”: stations for mini-buses, used by people who generally cannot afford a car. Still, the big banks dismissed Capitec’s travails: These might be customers who already had a bank account, but they still represented the low end of the market, where margins and profits were thin. The big banks happily left them to switch to Capitec.

Yet Capitec’s management was thinking ahead. After it had established itself in the cities, and gained a well-known brand name and reputation, it started setting up branches in high-end shopping malls. The incumbent banks were rattled, but by now it was too late to stop the new kid on the block. Capitec’s foothold was now firm, and it continued growing.

Capitec’s strategy is reminiscent of Harvard Business School professor Clayton Christensen’s model of disruptive innovation: It did not enter the industry taking its competitors head-on, by offering superior products or services. Instead, it focused on the bottom of the market and gradually yet decisively worked itself upward. Now that it is firmly established, it can afford to gradually change its model.

Many entrants into an industry try to offer something new and superior to potential customers, hoping to do even better than the existing players, often targeting the customer segment with the highest margins. But sometimes an entrant’s chances of success are better by focusing its offering on something that is worse than what’s already available in the market, at least on some dimensions.

Yet successful corporate strategists then look ahead and realize that once they have grown, their strategy will likely need to evolve. This does not just mean adding things to their company’s portfolio and value proposition; it also requires ceasing some of the old parts of the original strategy. In Capitec’s case, for example, not a single one of its branches that were converted from microlending shops are still in operation today. Capitec’s management realized the company had moved on and that those branches needed closing. A focused strategy is important, but allowing (or even planning for) that focus to shift in the future is equally relevant.

Breaking outdated habits

Capitec’s founders had learned something, though, from their early forays into the industry, including from the cash loan shops: Companies in the industry seemed to share some puzzling practices. For example, in contrast to the loan shops, all banks in South Africa closed at 3:30 PM. As Michiel le Roux, cofounder and former company chairman, said to me: “I think that is a leftover from the days that money was physical; bank employees needed an hour or two at the end of the day to count the money and balance the books.” Even though most money is electronic, and balancing the books happens in the blink of an eye, banks continue to close at 3:30 PM.

Capitec, by contrast, decided to keep open its branches till 6 PM, or even 8 PM, and on Sundays to accommodate the needs of working customers.

Similarly, across the industry, banks charge a fee on transactions that was a percentage of the sum transferred (which was probably a leftover from the days that money was transferred by check, rather than online, to account for the costs of potential loss or theft). Capitec, instead, charged a fixed fee, regardless of the amount being transferred. Customers loved it, but incumbents found it surprisingly difficult to imitate the practice: Their percentage-based fees were interlinked with various other aspects of their model, such as the budget of their departments, managers’ headcounts, and the bonus system of the executives. It enabled Capitec to remain unique in its offering for an unexpectedly long time.

But it wasn’t only particular practices and systems that Capitec organized differently than traditional banks; it was the whole attitude of the company and its employees, particularly toward customers. In traditional banks, customers had to line up; branches and bank employees could be bureaucratic and intimidating; the inner workings of the banks sometimes were smothering and opaque.

Capitec’s founders had noticed that the cash loan shops often seemed to treat customers much better. Similarly, they decided that Capitec would treat people as what they were: customers. They would be asked to sit down rather than line up if they had to wait; they would look at the computer screen together with the bank employee serving them, rather than face a window or a desk; and they would be made to feel like visiting a retail shop, rather than a banking office. To facilitate this cultural change, Capitec decided to not recruit people from other banks but hire former retailers.

By focusing its new business on removing the industry’s outdated practices, Capitec brought a new model into the industry. Gerrie Fourie, its current CEO, called it “innovating around frustrations.” Companies in well-established industries are often remarkably alike: They do more or less the same thing, and often have all been doing it like that for many years. Sometimes industry insiders just shrug their shoulders when asked why it has to be done that way, proclaiming, “That’s how we’ve always done it.” Sometimes they might even refer the industry’s “best practices.”

But best practices can turn bad, as a result of changing market conditions, customer demands, or progressing technology. Then, innovating by ceasing them can become a source of growth and competitive advantage — just as Capitec has done.

Will Capitec’s success last forever? Probably not: Few things in life do, and business is certainly no exception. The incumbent banks have (finally) started to catch up; moreover, after 18 years Capitec is now an incumbent too, and new, innovative entrants may one day disrupt its model as well. What’s more, the company still relies heavily on unsecured loans, a business that is notoriously risky and hard to value.

But, so far, Capitec’s growth strategy has revealed some lessons for any company that is trying to grow in a crowded, competitive market. It is a story of focused evolution, based on bravely shedding the outdated practices of the industry’s dominant incumbents.

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