African Bank, a specialist consumer finance
player in South Africa, has taken an unusual step to boost its
credit card issuance: by buying out a furniture retailer. CEO Leon
Kirkinis told William Cain what the deal means for its
rapidly growing credit card business.
South Africa’s African Bank has made credit card
growth and innovation a central part of its strategy following its
takeover of furniture retailer Ellerines. A consumer lender
specialising in unsecured credit, the bank took over the furniture
chain in a ZAR9.16 billion ($1.19 billion) deal in January.
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Domestic banks Absa and Standard Bank both have
joint ventures with retailers to run their financial services
divisions, but African Bank’s deal was different because it took on
the retail business as well.
CEO Leon Kirkinis told CI the main reason behind
the move was that financial services made around 70 percent of
Ellerines’ profit and was subsidising the furniture selling side of
the business. As a result, a buy-out of the financial services side
only would mean paying “more than you could justify”, and would
result in a joint venture between bank and retailer which Kirkinis
says “have never worked in South Africa”.
Credit cards a key component
Credit cards are to play a key part in the development of the new
business. Kirkinis said the bank is well on track to double its
credit card outstandings to ZAR1 billion by the end of 2008 –
continuing its focus on customers that have never previously been
issued with cards.
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By GlobalDataAlthough the bank faces a tough task to break
into the upper echelon of South African card issuing – the top four
banks control 97 percent of the credit card market – its target
would give it around a 1 percent share of the market with its
issuance growing rapidly.
Kirkinis said: “Our strategy is to deliver cards
to customers that have never had access before. For 85 percent of
our credit card customers, it is the first time they are getting a
credit card. As a result, your credit card offer has to be somewhat
different.”
African Bank’s credit card offering is at the
more innovative end of the scale, with fixed-rate, fixed-instalment
products which operate more like an instalment loan-credit card
hybrid, rather than classic revolving cards. The bank operates a
real-time verification system for transactions through an online
system which allows the bank to evaluate every deal, allowing it to
cut down on fraudulent transactions. It has also been one of the
earliest issuers of instant credit cards in-branch in South Africa.
Once customers have filled in the paperwork at African Bank’s 550
outlets, the credit card can be issued there and then.
The bank, assets around ZAR26.7 billion, recently
published its first set of results including the Ellerines
business, and the initial reaction has been mixed. The bank has
been one of the global banking industry’s most profitable banks as
measured by return on assets (ROA). Its pre-acquisition 2007 profit
of ZAR2.1 billion on assets of ZAR11.8 billion gave an ROA of 17.8
percent, but that figure could halve in its 2008 results.
Deal timing under question
Critics have questioned the timing of the deal with the South
African economy weakening, while others have concerns about whether
it is possible for a bank to effectively run a retail furniture
chain. Some have said the deal was not earnings-accretive and also
point to an increase in the bank’s non-performing loans (NPL),
which rose 16 percent in the bank’s interim results – although NPLs
as a percentage of gross advances fell slightly.
On the timing of the deal, Kirkinis said: “It is
precisely when times are tougher that the customer looks for value.
You can sit and debate strategies in the boardroom and sound like a
genius, but the reality is the strategy only matters if it delivers
value to the customer.”
Senior banking
executives in South Africa have paid close attention to the deal to
see whether there is value in the sum of its parts. The areas which
will make or break the link-up are likely to be in the way the bank
adapts to the different approach to collections and credit granting
in the Ellerines business.
Kirkinis said the bank’s risk management and
customer segmentation would be one of the main ways the bank could
add value. African Bank would introduce a more differentiated
underwriting process, bringing in up to 50 different risk groups to
try to eliminate cross-subsidising between risk categories.
Collections would also be centralised where
possible, making payments more convenient. At present, Ellerines
customers pay their instalments in cash at stores because it was
seen as a way of making customers buy more products. But Kirkinis
said he sees that idea as “an urban myth” and would want 85-90
percent of Ellerines customers to have the instalments paid direct
from their bank accounts.
Kirkinis also plans to use the 1,270 Ellerines
stores as outlets for African Bank’s products, which would give it
the largest proprietary distribution network of any of the South
African banks, with 1,820 branches.
