As its economy has strengthened,
South Africa’s consumer finance sector has taken off, and its
increasingly prosperous population is taking up the credit on
offer. But, concerned about the potential debt burden, the
government is acting to check credit provision. Sarah Williams

Following decades of limited access to credit facilities, millions
of South Africans, especially those in the emerging black middle
class, have become attractive to lenders, and South Africa has
become the fastest-growing credit card market on the continent.
However, growing levels of indebtedness have led to concern from
the authorities, and, as a result, the government has taken a
number of steps to keep the credit market in check.

The authorities are walking a fine line: on the one hand they are
keen to open up modern financial services to an increasingly
prosperous population, while at the same time they seek to avoid
the country building up a pyramid of bad debt.

The country’s considerable unbanked population, which is estimated
at 16 million people, presents a growth challenge. There have been
various initiatives aimed at bringing the unbanked into the
financial system, notably Mzansi, South Africa’s low-cost national
bank account launched in 2004 by South Africa’s ‘big four’ retail
banks (Absa, First National Bank (FNB), Nedbank and Standard Bank)
plus Postbank. Mzansi – a basic, standardised, debit card-based
transactional and savings account – is aimed at extending banking
to low-income earners and those living beyond the reach of
mainstream banking services. However, there are questions about
Mzansi’s future, as it is reportedly unprofitable for the

Another fairly recent initiative is Wizzit; launched in 2005, it
aims to solve the problem of bank access for the unbanked through
mobile banking. Wizzit CEO Brian Richardson forecasts it will break
even in 2007.


Debit cards and ATMs

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By GlobalData

The South African Reserve Bank (SARB, the central bank) estimated
in late 2006 that there were roughly three times as many debit
cards as credit cards, which implies a figure of around 18 million
debit cards in the country. There has been very rapid growth in
debit card use in South Africa in recent years, the main driver
being growth in the proportion of the population that is

Undoubtedly, the launch of Mzansi has been a key factor in
increasing the proportion of the banked population and, by
extension, the number of South Africans who have a debit card. Of
the branded Mzansi debit cards in circulation, approximately 60
percent are Visa cards.

Debit card usage has also been bolstered by the replacement of ATM
cards with debit cards as well as a growing preference for cards as
a method of payment, at the expense of more traditional methods
such as cash and cheques. As Figure 1 shows, the volume of debit
card payments rose by 125 percent CAGR between 2002 and 2006, while
payment value grew at an equally impressive 141 percent. Anecdotal
evidence suggests that debit cards are tending to displace cash at
the higher end of the transaction spectrum, but cash still
dominates low-value transactions. This is unsurprising given the
large numbers of very small retailers, individual stalls and
markets that make up a significant proportion of the country’s
retail sector.

Along with the rapid increase in debit card use (albeit from a very
low base) comes a concerted effort to develop the ATM network. In
June 2007, FNB and Absa announced they plan to invest ZAR550
million ($80.2 million) in new ATMs over the next three years as
the big four banks scramble to increase their share of the market.
FNB plans to invest ZAR150 million in 750 new ATMs by June 2008,
which would bring its total number of ATMs to 3,900. FNB is also
launching mobile banks to increase its penetration in
under-serviced areas such as rural locations, and to date has
deployed ten of these mobile banks on a pilot basis. For its part,
South Africa’s biggest retail bank, Absa, plans to spend ZAR400
million over the next three years on 1,000 off-premises ATMs, which
would raise its total ATM deployment to 8,000.

Venete Klein, an executive director for Absa, said the ATM market
in South Africa is at an “infant” stage and projected that “the
growth opportunities are immense. The population we reach will have
access to a range of future services that go beyond the traditional
transactions associated with ATMs.” ATMs are being introduced to
retailers and in petrol forecourts under flexible franchise models,
turning off-premises ATMs into an annuity income stream for the

Nedbank has also recently said it plans to increase its ATM network
by 50 percent over the next three years.


Credit cards

As of September 2006, there were an estimated 6 million credit
cards in circulation. Many of these are gold cards – a March 2007
estimate from
Money put their number at around 2 million. The growth
in the credit market has been very rapid. As Figure 2 shows, credit
card debt had reached ZAR53.1 billion by August 2007, representing
a CAGR of 29.6 percent between 2001 and 2007. Over the past three
years, growth has been even more rapid at more than 40 percent per

A quirk of the South African market is that many issuers charge
cardholders both an annual or monthly fee (typically around ZAR150
per year) plus an annual loyalty, rewards or air miles fee.
According to Virgin Money, the approximately 6 million South
Africans who hold credit cards issued by Absa, Discovery, Standard
Bank, NedBank and FNB pay average fees of ZAR250 a year.

However, there are indications that this is slowly changing. In the
months following Virgin Money’s launch (see below), FNB announced
that it was dropping the ZAR150 annual loyalty fee on its credit
card offering.

Credit card debt comprises only around 5.5 percent of total bank
credit to households, but cards have grown at a much faster rate
than other consumer credit products such as mortgage lending.
Official figures show that South Africa’s household debt rose to a
record 76 percent of disposable income in the first quarter of
2007, up from 73.7 percent in the first quarter of 2006. Service
costs for this debt are now 9.5 percent of disposable income – the
highest level since 1999. Unsurprisingly, this growing level of
indebtedness has led to concern from authorities.

Government action

As a result, the government has taken a number of steps to keep the
credit market in check. First, it created a new regulatory entity
in June 2006, the National Credit Regulator, and appointed Gabriel
Davel as its first CEO. Second, in June 2007 the government
introduced the National Credit Act (NCA), which is designed to
place curbs on credit. The legislation aims to make it
significantly more difficult for banks, retailers and other
providers of credit to sign up new borrowers, and it has been
successful in this. Interestingly, the new law does not limit
offers of credit, but it does put the onus on providers to disclose
all the information about the total cost of credit and the interest

There was evidence in the months leading up to June 2007 that card
issuers were aggressively trying to attract new customers ahead of
the legislation coming into force. Lenders resorted to mailing
credit cards to prospective clients and offering them pre-approved
loans in text messages and high-pressure phone calls. As Davel
explained at the time, reckless lending has been “rife” and his
office believed some lenders have not even been looking at
consumers’ credit records before granting them loans.

Davel also noted that the news was not all bad. He commented that
one of the core components of the NCA is competition and that, from
that perspective, the number of new offers coming onto the market
is positive. Davel recently noted that research by the regulator
shows a decline in the number of disbursements from microlenders.
This is positive, as expensive credit from microlenders is being
replaced by cheaper credit card credit, either from banks or their
joint venture partners. While microlenders charge up to 90 percent
a year in interest, credit card rates are closer to 20 percent. In
the past, a lot of the client base for microlenders were those who
had to get their finance outside of the banking sector.

Credit and affordability issues

In the past few months there has been debate regarding the extent
to which consumer debt in South Africa is a problem or simply the
natural outcome of an increasingly prosperous country. While SARB
figures show that overdue payments on credit cards and home loans
are rising sharply, many observers point to the fact that this is
in part simply a reflection of the rapid growth in overall lending
that has taken place over the past few years.

For example, SARB figures show that credit card payments in arrears
by more than three months jumped 57 percent in May 2007, compared
with the same month the previous year, reaching ZAR2.78 billion.
Some analysts say that this steep jump in overdue debt should be
seen in the context of rapid growth in private sector credit, which
has been climbing at an annual pace of more than 20 percent since
January 2006, when interest rates were still at record lows.

The proportion of long-term credit card arrears as a proportion of
overall credit card debt rose from 5 percent in May 2006 to 5.45
percent in May 2007. This is a more worrying trend because, as
Standard Bank economist Elna Moolman has pointed out, people tend
to first default on short-term, non-secured debt, and if the trend
continues South Africa could see a spillover into non-performing
home loans. From June 2006 to June 2007, SARB raised interest rates
by a cumulative 2.5 percentage points in response to mounting
inflation pressures, fuelled mainly by higher food and fuel costs
but aggravated by robust consumer spending and borrowing. (Prior to
this, it slashed interest rates by a cumulative 6.5 percentage
points between 2003 and 2005, taking the country’s lending rates to
historic lows and contributing to the growth in the demand for
credit cards.)

However, Moolman also believes that healthy growth in employment
and income, spurred by the expanding economy, should prevent debt
distress from spreading.


Fuel purchases

Another characteristic of the South African market is that credit
cards cannot be used to pay for fuel at filling stations. Rather,
petrol or fuel cards are often used. However, unlike credit cards
for which the bank charges a fee to the merchant, with fuel cards
it is the cardholders who pay for the cost of the transaction –
typically around 5 percent. Because the fuel industry in South
Africa is regulated (there is a margin that oil companies and
service station owners are allowed to make), any merchant handling
fees would inflate the pump price, as merchants would pass on
increased costs to customers in order to maintain margins. In turn,
this would mean that consumers paying for their fuel with cash
would be effectively cross-subsidising those using credit cards.
The Department of Minerals and Energy has made it clear that this
would not be considered acceptable.


Competitive environment

The credit card market in South Africa remains dominated by the
largest banks (see Figure 3), with Standard Bank taking the lion’s
share of the market. According to data published in September 2007
by Efficient Research, part of the investment management company
Efficient Group, FNB is experiencing difficulties in the credit
market; it was the only bank to lose market share over the 12
months to July, continuing a trend that began in April 2006.
According to Efficient Research, FNB’s products are not attractive
enough. With the implementation of the NCA, banks are finding it
difficult to attract new customers, making client retention ever
more important.

The impact of Virgin Money

Virgin Money launched its offering into this credit card market,
dominated by a handful of banks, in late June 2006. Within six
weeks, the company had issued 50,000 credit cards and 20,000 car
cards, used to pay for petrol and road tolls. Virgin Money is a
joint venture between Virgin Group and Absa, the country’s largest
retail lender. By July 2007, Virgin Money claimed that it had
approved 180,000 cards, 65 percent of which were applied for
online, according to the company.

Why has Virgin Money received so much attention? The company claims
to offer the only credit card in South Africa to combine no annual
fees, no loyalty fees and an interest rate of 0 percent for the
first three months for purchases. At the time of launch, John
Maxwell, managing director at Virgin Money South Africa, said the
new card aimed to provide absolute transparency in fees. He noted:
“The average South African credit card has up to 25 different
charges – Virgin Money has eight.”

Virgin seems to have approached the South Africa market with the
same marketing messages that it has used in many countries in
different sectors, for example, highlighting the higher costs of
its rivals. Statements by Virgin Money make consistent reference to
the shake-up its entry to South Africa has meant for the rest of
the market. Virgin Group chairman Richard Branson said: “Our entry
into the South African credit card market has given the established
banks a well-deserved wake-up call, bringing about real competition
and a permanent shift towards lower pricing for consumers.”

The arrival of Virgin caused a stir among the incumbents, which
were determined not to lose customers to a new rival. Since Virgin
Money launched, FNB has unveiled new cards with Kulula, a low-cost
national airline, and with South African Airways. Other new
products have come from financial service provider Metropolitan,
telecommunications companies Vodacom and MTN, and retailers Edcon
and Clicks. They are typically linked to loyalty programmes and the
benefits of the new cards are more generous than those of standard
cards offered by conventional banks, although many are partnered
with one of the large banks. The pace of new entrants to the market
has slowed in 2007 as the NCA makes it harder for credit card
issuers to give credit.


Standard Bank

Standard Bank is the largest bank in South Africa by assets and, as
of September 2006, had the largest share of credit cards in force
in South Africa, at 36 percent. Standard Bank issues a wide range
of both Visa- and MasterCard-branded credit cards, affinity cards
and loyalty cards. It began adding chip and PIN cards in June 2007.
Standard Bank backs the MTN, Edcon and Bluebean cards. On a debt
outstanding basis, Standard Bank’s market share was 35 percent as
of July 2007.


Absa is South Africa’s second-largest bank by assets and was
acquired by Barclays in 2005. According to a statement by Barclays
in July 2007, since the second half of 2005, Absa’s card operation
has achieved a 2 percent rise in market share to 25 percent and new
card acquisition is up 61 percent. In May 2007, Barclays announced
that it had reintroduced Barclaycard-branded credit cards to South
Africa, through Absa. The new cards will be aimed at the affluent
end of the South African market.

Barclaycard CEO Antony Jenkins commented: “The new Barclaycards
will enhance Absa’s existing card range and increase customer
choice. Absa has a multi-branded strategy, appealing to different
market segments, and Barclaycard forms part of this.”

First National Bank

FNB is owned by FirstRand Banking Group. Jan Kleynhans, CEO of FNB
Credit Card, has indicated that FNB grew its credit card lending
more slowly in 2006, focusing on the middle to upper end of the
market rather than writing high-risk business.

“When the National Credit Act comes in there will be more
opportunities to write business at the lower end of the market
because the margins will be wider,” Kleynhans told Business Day
newspaper in late 2006.

Kleynhans says FNB has also been monitoring the credit limits of
customers carefully and has tightened some of its lending criteria.
FNB CEO Michael Jordaan has acknowledged that the company has not
been performing well in the credit card market and has promised to
fix the problem.

In addition to its bank card portfolio, FNB manages a range of
private-label programmes, including cards for clothing retailer
Spitz, food chain Spar and homewares retail group
Hyperama/Shop-rite. The bank also issues the Sportsmans Warehouse
card, which gives customers access to the largest sports clothing
and equipment warehouse in South Africa. Via WesBank Auto (a
subsidiary of FirstRand Bank), FNB issues an added-value garage
card, called the Petro Plus card, which helps people to control
their vehicle expenses.


Nedbank is the main banking division of the Nedbank Group, owned by
international financial services group Old Mutual.

In September 2006, South African Airways’ (SAA) Voyager frequent
flyer programme, together with its banking partner Nedbank,
launched the SAA Voyager credit card in South Africa. The card
presents the SAA Voyager brand in partnership with Nedbank,
American Express and Visa. There are three types of card packages:
Voyager Premium, Voyager Gold and Voyager Classic. Each card
package has unique features and benefits, including one mile earned
for every ZAR6 spent on the American Express card, and double miles
on eligible spend for the first three months.