“In dealing with a man who thinks you are a fool, it is good sometimes to remind him that you know what he knows but have chosen to appear foolish for the sake of peace.” Ibo Proverb
Imagine walking into a luxury car showroom today, looking at the various models on display, test driving one or two, and then end up walking out of the showroom with a mortgage application duly filled and submitted for your dream home instead. Then imagine walking into your supermarket to pick up some grocery items for your house, and then end up walking out of the supermarket with a personal loan tucked into your wallet. BMW Finance in South Africa, the financial services arm of the luxury German car manufacturer, is currently offering home loans at lower costs and with better service than any of South Africa’s big four lenders – Nedbank, ABSA, FNB and Standard Bank – according to Finweek magazine’s May 2012 edition. An investigation by the magazine found that BMW Finance provided better service, a more competitive interest rate and lower administrative costs than any of South Africa’s big four banks.
British supermarket giant Tesco entered into a joint venture with Royal Bank of Scotland in 1997 named Tesco Personal Finance. It was renamed Tesco Bank when the supermarket bought out the 50% RBS stake for a reported £950 million in 2008. What is the key synergy proposition for Tesco? Tesco is able to use its large customer base to cross sell financial services products. The bank has more than 6 million customer accounts across all products with double-digit growth in savings, loans and credit cards. Tesco said it was now the seventh largest credit card issuer in Britain.
What do BMW and Tesco have in common? They are NOT traditional financial institutions. They do not have the strictures that come with the near paralyzing management attitude of “that’s the way things are done around here.” In Tesco’s case (which has also been replicated by the UK food giant Sainsbury’s and the high street retailer Marks and Spencer) they have recognized that they have an enviable primary business requirement: customer footfall. They then strategically take a business decision to deepen the share of wallet of that customer footfall because for as long as that customer is shopping inside their retail outlets, the retailer has another enviable business requirement: a captive marketing audience. Leveraging on the retail outlets as a distribution network, the supermarkets have been able to grow their customer bases primarily through cheaper in store advertising as well as customer loyalty linkages through bonus points. Tesco, for instance, allows customers to accumulate Tesco Clubcard points when they purchase finance products. This strategy is highly effective because it can be combined with in store offers which results in customers spending higher amounts of money, often on non-food items in order to increase sales across all product lines thus causing sustainable yet competitive growth.
In BMW Finance’s case, it didn’t require a rocket scientist to understand their customer demographic. The customer that would walk into a BMW showroom to purchase a luxury automobile using financing would most likely be able to afford a mortgage on the same cash flows (read paycheck) that were being used to seek car financing. The credit application and review process was an already existing internal operation and the only procedural changes required would be to incorporate encumbrance of property and a credible valuation process of the same. Two extremely disparate industries (automobile and supermarket) with one common finding: It doesn’t take a genius to provide loans at a lower cost of production and with better service than the traditional banking industry. Neither does it take a genius to realize the fluidity of the 21st century consumer looking for instant gratification and appreciation for being perceived as a relationship rather than a transaction.
The BMWs and Tescos in our Kenyan space are in the form of the mobile telephone operators. They are the likely future of banking. They provide a virtual space within which to deposit and transfer money and in the case of recent innovation, to even borrow money. As customer needs evolve it is only a matter of time before the evolution becomes one of offering a return on the virtual deposit. That return, which some might call interest, does not necessarily have to be paid in cash, it can be paid in additional air time which for all intents and purposes is treated as currency in this part of the world. It can be a “reward” for keeping your virtual cash intact for certain predetermined periods of time. Your intact cash can then be used to lend to other mobile customers. Of course the traditional bankers will take umbrage. Which regulator in their right mind will allow this? Two things need to be kept within their tunnel vision: First, innovation always runs way ahead of regulation (and bankers hide behind the same regulation where it suits them). Second, the bigger the banks grow, the further away they distance themselves from the very customers that led to that growth in the form of poor service and complete lack of customer value propositions. The regulator’s core mandate is twofold; to protect customer deposits while ensuring that there is financial sector deepening with more access to financial services to the wider citizenry. Regulation therefore will be more focused on how to ring-fence deposit taking risks rather than how to prevent a lower cost access to funds from taking root in an emerging and innovative market like ours.
The traditional financial industry is under a slow but steady siege from the least likely of non-traditional competitors. Competitors that have chosen to appear foolish for the sake of peace, as they won’t be regarded as a threat otherwise. The banking industry has to innovate, and innovate quickly, as the Ibo have a lovely proverb that concludes: “A disease that has never been seen before cannot be cured with every-day herbs.”
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Twitter:@carolmusyoka