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Focus note: Why Retailers?
Prepared for FinMark Trust
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.
Focus note: Why Retailers? 2015
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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 retailers 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 Groups 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
Focus note: Why Retailers? 2015
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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 PEPs
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: Edcons 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 Edcons 2012 annual financial statements, the retailers
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
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