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					                                                                                         NEDBANK RETAIL

                          Nedbank and the Mzansi Initiative in South Africa
                                                           Access Conference – Cartagena 2009


                                                                              Presented by: Bryan McLachlan



                       The following information is strictly confidential, is to remain in-house at Nedbank Group, is for in-house purposes only, and may not be disseminated to outsiders.
 Attendees and staff members are reminded that they are legally bound by all constraints imposed upon them in regard to privacy of Bank information whether in terms of their contracts of
employment including the declaration of secrecy, and/or any and all codes and policies relating to conduct, including those restrictive as to share dealings, and in particular insider trading.




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Contents

 Background to the South African Market


 Banking industry rationale for Mzansi


 Background to Nedbank


 The Mzansi journey for Nedbank


 The impact of Mzansi on the South African banking market


 Future focus areas for Mzansi


 Considerations for banks


 Considerations for regulators



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South Africa is a beautiful country…




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The hosts for the 2010 FIFA World Cup…




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And the wealthiest country in Africa.




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Unfortunately, like much of Latin America…




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There is a wide distribution of wealth…




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And not everyone lives in the same conditions…




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The early 1990’s was a time of immense change and
transformation in South Africa
 Apartheid ended as a system, and apartheid laws were repealed.


 Every adult was able to vote for the first time.


 Nelson Mandela became South Africa’s first democratically elected, and black, President.


 Nelson Mandela and F W de Klerk were awarded the Nobel Peace Prize for guiding South
  Africa through a peaceful transition.


 A new, and very progressive, constitution was written.


 South Africa is a very diverse country in terms of race, culture and religion – South Africans
  say a “Rainbow Nation” was born.




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 However a decade later, in 2003, greater support for the transformation
 of the country was required from the banking sector:

 AMPS 2003
     o Banked                          38%
                                                    • NOTE: Difference in unbanked percentage is
     o Unbanked                        62%
                                                      driven by difference in definition of adults
                                                      (16+ or 18+), and definition of banked and
 Finscope 2003                                       unbanked. Finscope considers the
     o Currently Banked                51%            ‘previously banked’ as unbanked.
     o Unbanked                        49%




 International benchmarks 2003 (banked percentage):
     o USA                90%
     o Brazil             35% (household basis)
     o Kenya              5.9%




D. Porteous; ‘The landscape of access to financial services in South Africa’ SARB: Labour Markets & Social Frontiers April 2003

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And the legacy of apartheid was still apparent with the
demographic profile of the unbanked predominantly black…

               Female                    57                          43


                 Male              43                          57




                Black                         72                           28


            Coloured                    53                          47


               Indian              43                          57


                White        12                         88


                        0%        20%          40%       60%         80%        100%
                                   Unbanked          Banked

Source: FinScope 2003
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The relationship between social issues and being unbanked:
In the last 12 months, how                     Percentage that said ‘Never’
often has your family ……?             Never Banked                  Previously Banked

 Gone Without Enough Food To Eat         42%                            38%


 Felt Unsafe From Crime In Own Home      41%                           35%


 Gone Without Medicine/Treatment         42%                            39%


 Gone Without Cash Income               32%                           27%


 Gone Without Clean Water To Drink            63%                             70%


 Gone Without Shelter                               89%                             91%


 Gone Without Electricity In Home         45%                           41%


 Gone Without Fuel To Heat Home            52%                              52%


 Source: FinScope 2003
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Leaders of the 4 largest banks decided to proactively transform the
industry and pre-empt possible regulation.

 4 largest banks in South Africa have +- 90% market share.


 Worked with Government to devise the Financial Services Charter:
   o Charters have their origin in the Constitution and their objective is to achieve social and economic
     equity by redressing inequities that exist in the country
   o The development of the Charter was of a collaborative nature and was voluntarily developed by the
     financial sector in order to have effective transformation occuring.


 The Charter covers six areas:
   o Equity Ownership,

   o Human Resources,

   o Access to Financial Services,

   o Procurement,

   o Corporate Social Investment (CSI), &

   o Empowerment Financing.




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Access was defined by distribution and development of an
appropriate transactional and savings product:
 80 % of the population should be within:
   o 20 km of first order services (open accounts, queries, transactions).
   o 10 km of transactional services where they can access cash (ATM, Cash-back at POS)


 Suitable product be developed: > 60% of the South African adult population to be banked by
  2008:




 Post Bank, a parastatal owned by the Post Office, joined the Access initiative by offering the
  Mzansi account.


 It was calculated that 2.2 million new active accounts would need to be sold and each bank
  was given a target in proportion to their market share.
   o Nedbank’s target, at 18% was 391,000




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Key features of
 Access to all banks’ ATM’s for the same price (no surcharge for other banks’ ATMs)
 Must pay interest to encourage savings
 Simple pricing and terminology
 National brand to be used by all banks, and logo to appear on all cards (banks contributed
  equally to advertising expenses to launch the product
   o R12,000,000 (+- US$ 1,600,000) or +- US$ 400,000 each.
 A defined basket of transactions (2 cash deposits, 2 ATM withdrawals, 1 electronic transfer, 1
  balance enquiry) to cost less than 1 % of the average monthly income of South Africans.
   o At launch average monthly income was R1,500 (+- US$ 200) therefore cost to be less than R15
   o No monthly maintenance fees allowed
 To prevent keep costs low and minimise cannibalisation from other products:
   o No monthly statements
   o Transactions were limited to 6 per month. Thereafter a fee of R10 per transaction was payable.
   o No debit orders (standing instructions) were allowed on the account. This was subsequently amended
     in 2006.
 “Know Your Customer” and “Money Laundering Controls” were impractical in remote rural
  areas or in informal settlements.
   o Regulators created an exemption on condition no transaction on the account exceeds R5,000
     (+- US$ 666) and total transactions cannot exceed R20,000 (+- US$ 2,666) in a month. Accounts need
     to be automatically frozen if the thresholds are exceeded.
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Nedbank in 2003:

 Traditionally in the affluent market only


 +- 18% market share by value but didn’t have sufficient volume to sustain the infrastructure


 Had a multi-brand strategy with a small brand (People’s Bank) operating in the mass market
  and a joint venture with the parent company (Old Mutual Bank)


 Almost failed in 2003
   o Bailed out by parent company (Old Mutual PLC) through a R 5 billion rights issue (+- US$ 666,666,666)


 Branches and ATM’s were concentrated in affluent areas:
                                     Affluent            Mass              % Mass
               Branches                585                 15               2.6%
                                                    (3 Nedbank, 12
                                                    Peoples Bank)

               ATMs                    1186                71                6%
                                                    (32 Nedbank, 39
                                                    Peoples Bank)


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Mzansi launched in October 2004. By December 2004
Nedbank was on 7% market share…
 Only sold 24,000 accounts, despite the high profile launch (industry sales: 313,000)


 Strategic decision taken to target the mass market
   o Build volume to leverage underutilised infrastructure
   o Gain credibility with government and parastatals in order to attract business
   o Gain credibility with black South Africans and become relevant to all South Africans


 The strategic decision to refocus included:
   o Move to a single brand strategy and re-brand all outlets as Nedbank, to give presence in the mass
     market and reduce costs
   o Set internal target of 850,000 Mzansi accounts by 2008 (more than double the official target)
   o Keep the aspirational positioning of the brand but extend it to all markets




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Distribution needed urgent attention:

 80% of all new outlets and ATM’s opened in mass market areas


 A team was created to engage with local communities and community leaders to get buy-in
  before any new outlets or ATM’s were introduced to an area
   o NGO’s played a significant role
   o Nedbank gained immense credibility from this approach


 More than 15 social upliftment programmes were initiated in the communities

 A large investment was made in customer education
   o Key focus areas in Curriculum
      – Banking & Financial Literarcy
      – Budgeting & Cash Management
      – Preservation & Life Planning Education: Death, retirement, funeral, wills
      – Business plan set up for micro entrepreneurs
      – NCA requirements & credit education
      – Alleviation of fear & ignorance - empowerment through access & security

Mediums for consumer education include radio & print as well as community workshops, face to
  face lectures and videos



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Innovation of physical outlets:
 Innovative new outlets:
   o “Bank in a Box”: prefabricated branch
       ● Can be moved if the location proves unsuccessful
       ● Less than 50% of the cost of a traditional branch




   o Nedbank in Retailers
       ● In-store branches opened in supermarkets serving this market (currently 50, with plans to roll out a further 50)




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A new mobile sales team was introduced:

 Employees drawn from local communities
 Now +- 100 teams
 Primary tool is a “Boot Kit” which consists of account opening forms, marketing material, desk
  and gazebo:




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The Nedbank Mzansi product was updated

 Cannibalisation was understood and the risk did not materialise


 Pricing was tweaked to be best in market


 High transaction penalty fee eliminated (Nedbank remains the only bank not to charge this
  fee)


 Debit orders (standing instructions) introduced


 Access to internet and mobile banking introduced
   o Only 0.08% of Mzansi customers bank online, however the just having it available is a selling point as
     the Nedbank product is perceived to be superior


 Nedbank maintained the service positioning from in this market
   o Shorter queues
   o Mass affluent service levels, staff training etc
   o “Ask Once” (if we fail we will donate R50 to charity)


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And smashed the internal target of 850,000 accounts

                    Nedbank Total Accounts
1,400,000



1,200,000



1,000,000



 800,000



 600,000



 400,000
                                             Nedbank Total Accounts


 200,000



       0




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The results of these initiatives is that sales escalated:

                     Nedbank - Sales per month
40,000



35,000



30,000



25,000



20,000



15,000
                                                 Nedbank - Sales per month


10,000

                                                 Poly. (Nedbank - Sales per month)
 5,000



    0




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Monthly market share has grown considerably from 7%:

                 Nedbank Monthly Market Share
45.0%


40.0%


35.0%


30.0%


25.0%


20.0%

                                            Nedbank Monthly Market Share
15.0%


10.0%
                                            Poly. (Nedbank Monthly Market Share )

5.0%


0.0%




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Nedbank achieved its industry target of 18% of the book…

                  Nedbank Book Market Share
25.0%




20.0%




15.0%



                                              Nedbank Book Market Share
                                              Poly. (Nedbank Book Market Share)
10.0%




 5.0%




 0.0%




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Mzansi has been successful for the industry too:




            100

                            29.8                   30.1
             80                                                          37.5

                             7.5                    9.6
             60
                                                                         11.5

             40
                            62.7                   60.3
                                                                          51
             20


              0
                        2008 (n=3900)          2007 (n=3900)        2006 (n=3894)

                            Currently banked    Previously banked   Never banked




Source: FinScope 2009
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A new measure which has recently been developed (FSM: Financial
Standards Measure) shows significant simultaneous improvement:




         2008
           12.8          16.1           15.9            15.9              15.7             11.7         7.9    3.9



          2007
            12.9           19            12.8           14.3              17.7             12.5         7.4     3.2



          2006
             16.9               21.5            14.4             14.5            14.7             9.3       6.2 2.6


                        FSM 1   FSM 2   FSM 3   FSM 4    FSM 5    FSM 6     FSM 7       FSM 8




Source: FinScope 2009
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Is Mzansi a success in every respect:

 Mzansi is not yet profitable:
   o Competitor Standard Bank claims to have spent +- R200,000,000 p.a. (+- US$ 26,666,666)
   o However:
       ● In the early years acquisition costs make up a large proportion of costs
       ● (> 90% in year 1, < 30% in year 5)
       ● POS (card) and electronic transactions are growing very quickly


 Dormancy (inactive accounts) is a big problem:
                      8,000,000

                      7,000,000

                      6,000,000                                Total Industry

                      5,000,000

                      4,000,000

                      3,000,000
                                                                         Inactive accounts
                      2,000,000

                      1,000,000

                             0
                                  1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43




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Reasons for inactive accounts

 Over selling accounts


 Abandoned accounts to avoid credit payments


 Don’t need an account but want to “belong”
   o Want an answer to the question: “where do you bank?”


 Only use the account to save


 Only work part time or occasionally


 Recently unemployed


Potential solutions include pre-paid cards, customer education, employee training




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There are still opportunities for improvement in the banking
industry in South Africa…
                          19,487,315
                                                                  Too poor                         Market
                                                               Often go without      253,592    redistribution
                                                                 enough food                         zone
                        Currently banked
                                                               Physical access
     27,496,578                                                 Bank attribute –    1,497,741
                                                                 too far away
                                              6,522,890
                                                                 Awareness
     Total market                                               Never heard of      3,245,680
                                            Does not have          Mzansi
                                            access to the
                                               product             No trust                         Market
                          8,009,263                                                              development
                                                                Reason no bank       116,268
                                                                     a/c                             zone

                           Currently                             Can’t afford
                           unbanked                             Earn to little to   4,086,734
                                                                 afford Mzansi

                                                                    No ID
                                                               Reason no bank        186,952
                                                                    a/c
                                             1,486,373
                                                               Does not want         114,519
                                           Has access to the    the product                         Market
                                           product but does                                       enablement
                                              not use it                                             zone
                                                               Potential users      1,371,854


Source: FinScope 2009
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What has Nedbank gained from this work:

 R 200,000,000 needs to be seen in the context of headline earnings of R 5 billion
 As acquisition costs reduce as a percentage, Mzansi is expected to break even on a monthly
  basis in 2009
 Gained knowledge and credibility in a market which Nedbank did not previously service
 Nedbank has gained 1,400,000 new customers who are sharing the cost of infrastructure
 Approximately 10% of these customers (140,000) now behaving as mainstream banked
  customers (with accompanying revenue opportunities)
 Nedbank has gained credibility with Government and has won a number of important tenders
 Nedbank has gained market share of affluent black clients
 Nedbank has gained credibility with other stakeholders such as the media, regulators,
  investors
 There have been considerable learning’s which have now been applied to other areas:
   o Nedbank is rolling out in-retailer outlets to supermarkets serving the mass affluent market
   o Mobile sales teams now selling mainstream products such as current accounts, personal loans,
     insurance, savings
   o Applying knowledge of cannibalisation to new funding products and new transaction products
   o Able to do lower risk lending of personal loans to customers with Nedbank Mzansi accounts
   o Some pilots in the community may lead to greater opportunities

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Considerations for Banks:

 This is an expensive initiative, and consumes significant resources, so requires the drive and
  will of executive management to succeed.


 The business case needs to be considered over 10 to 20 years, rather than over traditional
  timeframes.


 This is an opportunity to grown the market organically. In South Africa the banked market
  grew by approximately 20% by number.


 It is sometimes in the interests of all stakeholders for banks to pro-actively support the agenda
  of the state.




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Considerations for NGO’s and Regulators:

 There are significant social benefits to have the population banked as financial transaction
  costs are lowered.
 Fraud and corruption is reduced, if social grants are paid directly into a bank account.
 “Know Your Customer” and “Money Laundering Controls” are expensive and sometimes
  impractical in remote rural areas or in informal settlements.
   o In South Africa regulators created and exemption on condition no transaction on the account exceeds
     R5,000 (+- US$ 666) and total transactions cannot exceed R20,000 (+- US$ 2,666) in a month.
     Accounts need to be automatically frozen if the thresholds are exceeded.
 In South Africa, Competition Law has become much stricter since 2003 (as in many other
  countries).
   o The collaboration required to bring Mzansi to market successfully would not have been possible today
     in South Africa. An exemption in terms of Competition Law would have needed to have been granted
     for this initiative.
 Regulation is costly and can have unintended consequences. Other sanctions are available,
  including:
   o Procurement policies of Government, Parastatals, Utilities and other state supported organisations.
   o Negotiation
   o Lobbying by the state, consumer organisations, NGO’s, media etc.



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