Focus note: Why Retailers?
Prepared for FinMark Trust
March 2015
Focus note: Why Retailers? 2015
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FOCUS NOTE: WHY RETAILERS?
Retailers in South Africa play a critical role in the provision of financial services. Their extensive physical footprint,
trusted brands, administrative infrastructure and customer-facing staff are key assets that can be leveraged at low
marginal cost to provide financial products and services. As credit providers, retailers enable borrowers to purchase
merchandise that would otherwise be unaffordable. They also facilitate access to insurance, often on more
competitive terms than similar products made available through traditional channels. In addition, they process a high
proportion of money transfers that link geographically dispersed financial households.
FinMark Trust, in collaboration with Cenfri, commissioned two studies to explore this concept. These studies
examined the business case for retailers to offer financial services and the user case for consumers to take up these
services. The target market for the analysis was lower income individuals defined as those in Living Standard
Measures one through seven1.
BUSINESS CASE: WHY DO RETAILERS OFFER FINANCIAL SERVICES?
Figure 1: Retailers by dominant payment mechanism and purchase frequency
1 The SAARF LSM (Living Standards Measure) divides the population into 10 LSM groups (10 being the highest to 1 the lowest), based on living
standards using criteria such as degree of urbanisation and ownership of cars and major appliances.
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The research identified four retailer types; namely, Fast Moving Consumer Goods (FMCG) retailers, cash-based
clothing retailers, credit-based clothing retailers, and furniture and appliance retailers.2 The format of the core retail
business has an impact on the financial services offered by these retailers. By and large, FMCG retailers focus
predominantly on offering high volume transactional services including money transfers, till point cash withdrawals
and third party payments. Clothing and furniture and appliance retailers focus on credit and insurance products. The
figure below indicates the clear clustering of financial services offered around dominant payment mechanism (cash
versus credit) and purchase frequency.
Retailers clearly depend on efficient financial mechanisms to support sales activities. They need to process payments
at till point and so require an interface into the banking system. In the case of credit retailers, they rely to a large
degree on financial services to facilitate retail sales by making purchases more affordable for consumers. Beyond
simply facilitating existing sales, retailers can add to profits through the sale of financial services and leverage
financial services to influence customer behaviour, by attracting more customers into the store and by shaping their
behaviour or directing purchases. A third motivation stems from the retailer’s ability to leverage existing assets and
infrastructure in order to enhance profitability. At the core, the primary motivation for retailers to offer financial
services is to increase revenue and bottom line profits.
The three main categories of drivers for increased profits are discussed in more detail below:
1. Increased foot fall
Retailers offer financial services that are in demand within their target markets in order to draw a greater number of
customers into the retail environment more frequently. This includes both attracting new customers into the store
and increasing the number of interactions with existing customers.
Example: Shoprite Money Market. Shoprite offers a range of financial services through in-store Money Market3
counters, including money transfers, bill payments and insurance. To quote from its 2007 Annual Report; “Money
Market forms part of the Group’s non-core value-added strategy aimed at increasing consumer traffic in its stores.
The main focus of the services offered is adding value to consumers’ shopping experience by providing convenience
and saving the consumer time, so turning outlets into destination stores”(Shoprite, 2007).
Box 1: When becoming a destination store back fires
PEP Stores4 launched its cash back service in 2008 and a money transfer service in early 2011, servicing clients from till
points. These services proved to be exceptionally popular, so much so that demand for financial services negatively
impacted on the retail environment, causing long delays at till point and resulting in stores running out of cash. After
extensive basket and store level analysis both services were re-designed to curb the high demand to sustainable
levels. Purchase thresholds were introduced for the cash back services and access to money transfer services was
limited to PEP Club5 members only.
2 An interactive market map of financial services offered through retailers in South Africa is available in the Retailers’ Financial Services database on
XtracT found here: http://xtract.eighty20.co.za/
3 The only financial service offered at till point is a cash back (cash withdrawal) service 4 PEP is a cash-based clothing retailer that offers high frequency transaction services which are more typically offered by FMCG retailers. 5 Any PEP customer can join their loyalty programme, the PEP Club. Club members earn points that they can use to enter various competitions.
PEP Club members with a PEP sold sim card earn double points
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2. Driving more profitable customer behaviour
Financial services can be used to drive more profitable customer behaviour either by encouraging customers to
increase basket size or to incorporate higher margin products into the basket. This is best illustrated through
providing access to attractive financial services conditional on customers meeting certain criteria. Examples include
meeting spend thresholds, becoming a credit customer or belonging to a club or loyalty programme.
Example: PEP Club. PEP has implemented these strategies most visibly. Shoppers who spend a minimum of R50
($5.00) in store can withdraw cash at the point of sale and only PEP Club members can send money through PEP’s
money transfer service. Membership of the PEP Club is open to all customers but Club members are encouraged to
take up a PEP sold sim card by offering double points to customers who have a sim card purchased at a PEP store.
This provides a further benefit as PEP earns commission on all airtime purchases associated with sim cards purchased
at PEP (in-line with agreements with respective Mobile Network Operators).
Example: Pick n Pay Mobile Money. More recently Pick n Pay, in its partnership with MTN, launched a mobile bank
account called Mobile Money. The offering allows customers to withdraw and deposit cash, send money, purchase
pre-paid electricity and airtime, pay for goods and services at selected pay points, receive money by way of electronic
funds transfer and link debit orders. A recent amendment to product pricing has seen Pick n Pay offer free Mobile
Money transactions to customers who purchase and RICA6 an MTN sim card at Pick n Pay.
3. Leveraging existing assets and infrastructure
Retailers have invested in physical store networks and payments infrastructure in order to operate their core retail
businesses. In addition, they often have strong and trusted brands and some have existing lines of communication to
their customers through club newsletters and magazines. Credit retailers in particular have rich client data that can be
mined to inform merchandising decisions, financial product design and to generate sales leads. All these assets can be
leveraged to provide financial services that offer good value to customers and generate high profits for the retailer.
Example: Edcon’s insurance offering. Edgars and Jet stores of the Edcon group7 have utilised client data and credit
infrastructure to offer a wide range of insurance products including funeral insurance, motor and household insurance,
legal expenses insurance and even dental accident insurance. Its insurance products are offered to account holders
only and entry level premiums are relatively low. According to Edcon’s 2012 annual financial statements, the retailer’s
insurance division has 5.6 million active policies, in 2014 the retailer made R739 million in profits from their insurance
policies (Edcon, 2012 & 2014). Products are actively marketed in-store to clients who come in to pay accounts,
through the Edgars and Jet Club magazines which have very wide readership (the Edgars Club magazine has a
readership of 1.4 million and the Jet Club magazine has a readership of 4.5 million8) and through its outbound call
centres which generate leads off the existing client base.
USER CASE: WHY DO CUSTOMERS TAKE UP FINANCIAL SERVICES OFFERED
BY RETAILERS?
The business case for retailers to offer financial services hinges on a sufficiently large segment of customers taking up
6 The Regulation of Interception of Communications and Provision of Communication-Related Information Act (RICA) makes it compulsory for
everyone in South Africa to register their cell phone number 7 Edcon is a credit-based clothing retailer. Its two largest retail brands are Edgars and Jet 8 Source: AMPS 2014. According to AMPS, a reader is defined as anybody that has read or paged through any copy of a publication during the past
6 months – regardless of whether it is their copy or not. It includes any separate parts, sections or supplements that are included with the
publication
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retailer offerings despite their ability to access these services elsewhere. This begs the question, what motivates the
consumer market to access financial services through a retailer?
In order to understand the nature of demand by consumers, it is important to first understand the factors that drive
demand by consumers. The consumers’ experiences, or more accurately, their expectations regarding these
experiences, can shape the conscious selection of a particular product or provider. Classic economic theory presents
the underlying assumption hypothesis that consumers consider all available alternatives and make rational choices to
select products that best meet their needs. In reality, decision-making is often fraught with irrationality. As
highlighted by behavioural economists there are psychological, social, cognitive and emotional factors that influence
choices. These can be loosely categorised into three broad categories (Congdon, Kling and Mullainathan, 2011) as
summarised by Error! Reference source not found. below:
Figure 1: Three broad categories of behavioural biases
Source: Congdon and Mullainathan, 2011
Broadly speaking there are a number of factors that motivate customers to take up financial products offered by
retailers9:
Accessibility: Retailers are more accessible both in physical and functional terms than pure financial services
companies (FSP). Within pure FSPs distribution is one part of the value chain and often seen as a cost to be
minimised. Channel strategies by and large focus on driving the customer towards digital channels and out of
branches. The contrast for retailers is that distribution is at the heart of the business model and, as part of this, they
actively seek opportunities to bring customers in store. Additionally, there is a functional intersection for customers
between their activities within the retailer and the financial services accessed. This can extend to a convenience factor
of interacting with unrelated financial services along an already established regular relationship touch point with the
retailer.
9 The research on customers explored the nature of this demand through focus groups that focused on credit, savings and insurance products ,
along with a survey of just under 1 000 shoppers to understand decision-making around money transfer services. Focus groups were held in
Johannesburg, Cape Town and Empangeni (KZN).
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Flexibility: While FSPs in general prefer to collect premiums and instalments by debit order, retailers allow customers
to pay in cash in store. Many customers value the flexibility and control that in-store account payment affords them.
In addition, there is a perception of greater flexibility of grace periods if payments are missed, along with additional
repayment benefits such as receiving a receipt or a trip to the retailer to explore new merchandise.
Facilitates control: The close link between the financial services and the retail transaction enables retailers to design
and deliver purpose-specific services that assist consumers with self-control by containing their access to finance to
the arena of the retailer.
Convenience: Customers can access a portfolio of financial products with ease due to retailers bundling financial
services with other offerings or leveraging existing data and collections mechanisms to sell and service products.
Many of the products are of a short term nature, which adds to the appeal of a convenient access point for a short-
term good.
Status quo: For certain financial services, such as clothing accounts and money transfer services, retailer offerings
have exceptionally high rates of adoption. This serves to reinforce their status as the default provider.
Qualifying criteria: Credit products offered by retailers are perceived to be easier to qualify for than those offered by
FSPs. In the case of insurance and money transfers, retailer’s products are often perceived to be more affordable than
services offered by traditional FSPs.
Of course each specific financial service has its own characteristics, and its own advantages and disadvantages
relative to competing products that shape the user case. These can be explored across the key decision touch points
that underpin the consumer’s experience of a product or service, summarised in Figure 3 below.
Figure 3: Consumer decision framework
Source: Authors’ own
This framework is applied across credit, savings, insurance and money transfers.
CREDIT AND SAVINGS
South Africa has a very well developed consumer credit environment in which retailers play a significant role.
Consumers have a variety of options of financial mechanisms and providers to finance their retail purchases. Figure 4
below illustrates why a consumer would choose to make use of a savings or credit product from a retailer in line with
the framework detailed above.
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Figure 4: Summary of findings – credit and savings
INSURANCE
The user case for two types of insurance products sold by retailers was investigated: insurance sold to credit account
holders that is linked to the account (‘linked insurance’) and standalone insurance sold off-the-shelf.
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In the case of linked insurance, the
timing of the sale of the insurance
product has a significant effect on the
user case. When the insurance is sold
during the credit application process the
consumer’s primary focus is to qualify
for the account. The perception from the
qualitative research was that signing up
for a linked insurance product would improve the probability of qualifying for the account. In contrast, various factors
influence the decision to purchase insurance when it is sold as a standalone product, as shown in figure 5 below.
Figure 5: Summary of findings – insurance
MONEY TRANSFERS
According to FinScope 2013 a total of 3.5 million adults in South Africa send money to dependents outside of their
households and 3.1 million adults receive money from someone outside of their household. Three channels dominate
for both senders and receivers: informal methods using relatives or friends, supermarkets, and bank or ATM deposits
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or transfers. A number of FMCG retailers offer money transfer services including Shoprite, Checkers and uSave (part
of the Shoprite group), SPAR, and Pick n Pay and Boxer (part of the Pick n Pay group). In addition PEP, a cash-based
clothing retailer, also offers a money transfer service to its PEP Club members.
The analysis of money transfers was conducted using a survey of customers waiting to access the service at
Shoprite10, the market leader in the provision of this service11. Most of those surveyed use the Shoprite money
transfer service regularly: 43% of respondent use the service monthly and a further 39% use the service more often
than monthly. One third of respondents said they use the service to send money only, 30% use the service to receive
money only and the remaining 37% use the service to both send and receive money. Figure 6 summarises key
components of the user case.
Figure 6: Summary of findings – money transfers
CONCLUSION
The success of retailers in offering financial services reflects a strong alignment of supply and demand side factors.
Retailers are well placed to offer services profitably using models that align well with consumer needs. The close link
between the financial services and the retail transaction enables retailers to design and deliver purpose-specific
10 The project team conducted a survey of people queuing at the Money Market counter waiting to send or receive money. The survey explored why
consumers preferred to use a retailer rather than other alternatives. In total 985 surveys were completed. The majority of surveys were done around
the greater Johannesburg area with some surveys done in Pretoria, Pietermaritzburg, East London and Umtata 11 Shoprite was the first retailer to offer money transfers. It launched the service in 2006 and since then more than 1o million people have registered
on the system. In 2010 around R10 billion was sent using the service (Ramsamy, 2014). Shoprite offers the transfer service through their Money
Market counters in store.
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services offered at the right time that are convenient to take up. These and a number of other factors that support the
relative strength of retailers over FSP’s across key touch points are summarised in figure 7 below.
Figure 7: Supply and demand side factors that influence provision and take up of financial services
The objective of this research was to unpack the business case and the user case for financial services offered through
retailers. These cases have been presented, but their systematic relevance remains unknown. A useful next step for
research would be to assess the impact of retailers on access to financial services. But beyond that, it is critical to
assess the degree to which retailers contribute towards meaningful financial inclusion, and how financial incentives as
well as the regulatory environment shape this. Further it is useful to explore the implications of this study for
traditional financial providers. While the question posed was “Why Retailers?” FSPs should perhaps be asking
themselves “Why not us?”. The answer as documented in this research is quite simply that in many cases retailers do a
better job of meeting the financial needs of consumers than do banks or insurers. This may well signal that financial
institutions should review their propositions and align them more closely with consumer need.
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BIBLIOGRAPHY
Congdon WJ, Kling JR, Mullainathan S. 2011. Policy and Choice Public Finance through the Lens of Behavioral
Economics. Washington, DC: Brookings Institution Press
Edcon. 2012, 2014. Annual Report 2012 and 2014. Edcon Holdings Proprietary Limited, South Africa. Available at:
http://www.edcon.co.za/pdf/annual_reports/annual_report_2012.pdf and
http://www.edcon.co.za/pdf/annual_reports/annual_report_2014.pdf
Ramsamy, P. (2014). Remittances from South Africa to SADC. Available at: http://bit.ly/1vHtZJQ
Shoprite. 2007. Annual report 2007. Shoprite Holdings Limited, South Africa. Available at:
http://www.shopriteholdings.co.za/InvestorCentre/Documents/AR2007_Financial_statements.pdf