How do you swim to safety when your life vest has malfunctioned, the current is against you and sharks are circling?
That’s the challenge facing Postbank as the 148-year-old savings institution attempts to become the country’s newest fully fledged bank.
It’s all part of the ANC’s determination that South Africa have a state-owned lender. Which is why, late last month, President Cyril Ramaphosa signed the South African Postbank Ltd Amendment Act into law, legally separating the savings institution from the beleaguered Post Office and paving the way for its registration in terms of the Banks Act.
If the bank is the ANC’s dream, the reality is somewhat nightmarish. The struggling Postbank is ill-equipped for what lies ahead — in terms of its governance structures, systems and technology shortfalls, as well as its reliance on the rapidly failing and technically bankrupt Post Office. That’s before you even consider the capital demands of a sustainable bank.
It seems the milestone the government is clinging to is the mere fact that Ramaphosa signed the act. When asked about the amount and source of capital to ensure a liquid and solvent bank, the department of communications & digital technologies tells the FM was: “It is important to note that Postbank is not a new bank altogether; it has been in existence for years offering limited services as a division of [the Post Office].”
Yet these services — taking deposits, issuing transactional cards and allowing for electronic fund transfers on some accounts — hardly make the Postbank a bank.
It doesn’t exactly instil much hope for success.
“The ANC is determined to carry this through at all and any cost,” says DA MP Tsholofelo Bodlani, a member of the portfolio committee on communications & digital technologies. “My question is, what due diligence was done?”
It’s an apposite query, particularly in light of the odds that seem stacked against the bank.
As Anchor Capital CEO Peter Armitage tells the FM: “It is very seldom that you see a start-up business on the back foot launching a new initiative that tends to be successful.”
When it comes to governance, Postbank is a shambles. On September 12, all but one of its directors resigned, claiming in a WhatsApp that communications & digital technologies minister Mondli Gungubele had become “increasingly hostile and oppressive”.
The resignations followed two KPMG forensic reports pointing out governance lapses at the bank. The bone of contention between Gungubele and the board relates to a R140m software contract with payment-switching provider FFS and, later, Electronic Connect. The contract was signed even though Postbank was supposed to build the software in-house.
Gungubele dismissed the board’s claims, saying after the directors’ resignations that “maybe lending is not where their area of strength is”. He has promised to appoint a new board before mid-November.
Not helping perceptions of the bank’s capacity is that the board’s departure came days after thousands of beneficiaries failed to receive their government grants from Postbank branches.
These “digital glitches”, as Gungubele called them, affected mainly old-age and disability grant payees. Postbank’s excuse was its migration to a new IT system.
But it’s not the first time social grant recipients have been left hanging. Grant payments were also delayed in December and January — the first reportedly because of criminal attacks on Postbank’s network, the second due to another glitch.
There’s a security issue that goes back further. In December 2021, the Reserve Bank issued a variation notice to Postbank, severely curtailing its participation in the national payment system. To be part of the system financial services companies must comply with strict standards.
The Bank had taken issue with Postbank’s handling of South African Social Security Agency (Sassa) grant payments. “Serious irregularities were detected on [the then Post Office’s] Postbank-branded Sassa cards,” said the variation notice.
The Bank gave the Post Office and Postbank 18 months to reissue almost 12-million bank cards with enhanced security features. Postbank missed the deadline, prompting Bank governor Lesetja Kganyago to stop it issuing new products to new clients without prior approval. (It has since been given until December to improve its security systems.)
The department’s response on the issue is curt: “Postbank has embarked on the IT modernisation project and a refresh of the IT environment in order to ensure it [is] fully [compliant with Reserve Bank] requirements.”
Still, it can’t have helped matters that a report last March by investigative outfit amaBhungane showed that in October 2021, before the variation notice was issued, Postbank had fallen victim to computer hackers who stole about R90m of Sassa grant money. The breach was kept secret for months.
It calls Postbank’s digital capabilities into question.
In Bodlani’s view, there is simply “no clear technical capability by Postbank to pay grants”.
Operationally, there’s the Post Office millstone. It’s supposed to provide the bricks-and-mortar service points for Postbank, but its own viability is in question.
Former Postbank chair Thabile Wonci acknowledged the concern in the most recent annual report, saying the bank “needs to review its overreliance on [the Post Office] given the challenges that [the Post Office is] currently faced with”.
The Post Office has shed staff and branches since Covid. Now in business rescue, it is fighting for survival. In part, that’s a result of its failure to adapt to an ever-growing digital economy which relies more on micro-couriers than postage stamps. Gross inefficiency when compared with private operators hasn’t helped.
Other players have taken up the slack when it comes to banking service outlets. Grocers such as Shoprite, Pick n Pay and Spar already offer some form of service to consumers who wish to transact through low-cost banks such as TymeBank. For example, there are TymeBank self-service kiosks in Pick n Pay and Boxer stores, and in certain TFG outlets. Most lenders also allow clients to withdraw cash at supermarket tills.
Especially problematic is that the government doesn’t seem to have figured out how to tackle competitors yet. The department, for its part, simply points to Postbank’s legacy and current client base, adding: “The amended legislation enables it to increase its scope and market reach as a fully-fledged commercial bank owned by the state.”
But, should business rescue practitioners shrink the Post Office further, it will be to the advantage of competitors such as Capitec, which is still adding bricks-and-mortar branches and which services the same market Postbank will target.
In short, if Postbank wants to be a serious contender, and if it wants to reach the lower-LSM consumer in far-flung regions of the country, it will need to roll out branches in areas the Post Office no longer serves.
Starting a bank requires a stiff capital injection if it is to loan funds to consumers — a driving force for banks’ profitability.
“A retail banking strategy tends to be advances- or borrowing-led, attracting clients through unsecured loans while [they’re] paying up for deposits,” says Patrick Mathidi, head of equity and balanced funds at Aluwani Capital Partners.
That’s a problem when you consider how rising food and fuel prices, higher interest rates and a stagnant economy and job market are wreaking havoc with the consumer — low-income earners in particular. It’s seen most banks reduce unsecured lending as their loan books sour.
“Given the tough economic environment, the risk appetite for nonperforming loans will need to be high to attract and grow the advances [loan] book, which ultimately means lower returns,” says Mathidi.
Armitage believes the problem runs deeper. “Forget the politics and the government, I don’t think you’ll find investors in the corporate space to fund a brand-new bank,” he says. “Discovery has done it with some of the best businesspeople in the country, and they’re still loss-making after seven years. And they’ve got an existing base to work from.”
At its year-end results presentation, Discovery CEO Adrian Gore said the bank is signing up about 1,000 clients a day for a total of more than 700,000. Still, the group’s banking unit made an operating loss of R767m for the year to end-June, from R990m a year earlier. Building the necessary momentum and capital has meant Discovery shareholders lost out on dividends for almost four years.
Mathidi, for his part, struggles to see the logic behind a state-owned bank. “On the face of it, it is hard to see a strategic rationale for [Postbank], other than perhaps political. Banking can be an expensive and long-tenure journey before the requisite financial returns can be recognised.”
In Bodlani’s view, it’s the fiscus that will ultimately have to cough up — and that’s something the National Treasury can ill afford. As it is, it’s in tense talks with the government to cut spending ahead of an election year.
Taken together, Bodlani says, “the odds are against Postbank flourishing in South Africa”.
Postbank hadn’t responded to the FM’s questions at the time of going to print.