An initial overview of the impact of Covid-19 on South Africa's financial sector

1. Impact of Covid-19 on SA's Financial Sector
DFI CoP 15 April 2020

2. About Us
71point4 is a Cape Town-based strategic research consultancy specialising in consumer-focused, data-driven research.
We help clients drive change in transformational sectors that contribute to economic development in South Africa and
the continent as a whole and improve the well-being of consumers.
We work across a wide array of data types
and sources from ‘big data’ including
administrative and transactional data sets to
small, thick data from in-depth interviews
and focus groups.
Using a combination of research
techniques and data analysis tools, we
bring all the findings together to answer
our client’s questions and deliver the
most useful insights.
We take the extra step to help our
clients’ strategically incorporate the
insights into their organisation and
set an agenda for future data
gathering and monitoring
interventions.
1 |

3. 2 |
SURVEY DATA ANALYSIS & DESIGN
» Analysis of existing survey data
» Primary research survey design &
implementation (face-to-face, mobile,
online)
QUALITATIVE RESEARCH
» Focus groups
» In-depth interviews
» Mystery shopping
» Action research
BIG DATA ANALYTICS
» Credit bureau data
» Deeds and other asset registry
data
» Transactional datasets
DATA AGENDA DEVELOPMENT
» Developing measurement
frameworks
» Identifying and liberating data to
populate frameworks
OUR SERVICES
We are not bound to one research approach but rather start each
project by focusing on the underlying question. From there, we
determine the best approach to answer it.
SECTORS OF INTEREST
Our work focuses on sectors that hold the potential to
fundamentally impact on consumers lives. We have deep research
experience in the following sectors:
o HOUSING & HOUSING FINANCE
» Focus on affordable housing, including rental
» Performance of housing markets & submarkets
» Origination and performance of mortgage loans in
affordable market segments
» Transaction Support Centre in Khayelitsha
o CREDIT MARKETS & INDEBTEDNESS
» Credit market trends and performance using record level
credit bureau data & National credit regulator data
» Informal lending
o FINANCIAL SECTOR DEVELOPMENT & FINANCIAL
INCLUSION
» Spanning all products from insurance, transaction
banking, savings and credit products and across all
channels (traditional, digital, mobile)
o ECONOMIC INCLUSION
» Urbanisation, transforming cities and city-led growth
» Youth employment
» Informality

4. 3 |
We work across sectors with clients in both the public and private sectors

5. AGENDA
IMPACT OF COVID-19 ON SA’S FINANCIAL SECTOR
4 |

6. 5 |
Credit
Insurance
Payments

7. As at Quarter 4 2019 total outstanding consumer credit in South Africa amounted to
R1.96 trillion, half of which was mortgage debt
GROSS DEBTORS BOOK: 2019 Q4 (R billions)
CREDIT
FACILITIESMORTGAGES
UNSECURED
CREDIT
SECURED
CREDIT
SHORT-TERM
CREDIT
Source: NCR Consumer credit report. Developmental credit is provided by lenders registered as developmental credit providers and includes educational loans; small business loans;
loans for the acquisition, rehabilitation, building or expansion of low income housing
DEVELOPMENTAL
CREDIT
R
2
2
7
b
n
R 979 bn R 446 bn R 261 bn
R 220 bn R 2.4 bnR 56 bn
NO OF ACCOUNTS 5.28 M1.70 M 3.50 M 27.02 M 0.80 M1.22 M
6 |

8. GROSS DEBTORS BOOK: 2019 Q4 (R billions)
CREDIT
FACILITIESMORTGAGES
UNSECURED
CREDIT
SECURED
CREDIT
SHORT-TERM
CREDIT
Source: NCR Consumer credit report. Developmental credit is provided by lenders registered as developmental credit providers and includes educational loans; small business loans; loans
for the acquisition, rehabilitation, building or expansion of low income housing
DEVELOPMENTAL
CREDIT
% 90 days or
more in arrears
4% 14% 14% 19% 5% 19%
4%
18%
4%
9%
6% 25%
91 DAYS +
R 979 bn R 446 bn
R 261 bn
R 220 bn R 2.4 bnR 56 bn
NO OF ACCOUNTS
7 |
5.28 M1.70 M 3.50 M 27.02 M 0.80 M1.22 M
As at Quarter 4 2019 total outstanding consumer credit in South Africa amounted to
R1.96 trillion, half of which was mortgage debt

9. In the fourth quarter of 2019 there were 25.2 million credit active consumers (around
64% of the adult population)
CREDIT ACTIVE CONSUMERS: 2019 Q4
25.2
MILLION
Total population 18+:
39.1 million
64% credit active
Source: NCR, Stats SA LFS, 2019 Q48 |

10. According to NCR data, around 10.7 million credit active consumers have impaired records and a
further 2.1 million have at least one account that is one or two months in arrears. This was pre-
lockdown!
11.5 M
46%
2.1 M
8%
6.3 M
25%
3.3 M
13%
1.2 M
5%
CURRENT
1 - 2 MONTHS ARREARS
3+ MONTHS ARREARS
ADVERSE LISTINGS
JUDGEMENTS AND ADMIN ORDERS
Source: NCR, Stats SA LFS 2008 Q1, 2019 Q49 |
CREDIT ACTIVE CONSUMERS: 2019 Q4
Impaired records

11. Data from TransUnion further highlights that credit consumers were facing financial strain pre-
lockdown. Vehicle and home loan delinquencies increased between 2018 and 2019 and the 30%
year on year increase in personal bank loans suggests constrained liquidity
10 | Source: TransUnion Covid-19 Playbook webinar presentation

12. Perhaps the only good news is the credit purchases for non-productive assets, like
clothing, appear to have declined between 2018 and 2019. However, this too points to
low consumer confidence and disposable income
11 | Source: TransUnion Covid-19 Playbook webinar presentation

13. <R7,500 R7,500 - R15,000 R15,000 +
In 2019, 7.8 million accounts were opened for borrowers with an income of under R7,500 per month. Most of
the accounts (66%) were credit facilities, largely made up of store cards. Any defaults on these accounts in the
lockdown period will impact consumers' credit scores and reduce their prospects of obtaining asset-building
finance, such as a home loan, in the future
1.1 M
15%
(160,000)
41%
(1.54 million)
26%
(996,000)
33%
(1.22 million)
18%
(1.86 million)
98%
(156,000)
49%
(1.54 million)
27%
(845,000)
25%
(779,000)
57%
(609,000)
28%
(299,000)
10.1 M
3.2 M
3.8 M
60,000
Total originated in 2019Number of accounts originated per income group
(2019)
51%
(5.18 million)
31%
(3.13 million)CREDIT FACILITIES
MORTGAGES
UNSECURED
CREDIT
SECURED CREDIT
SHORT-TERM CREDIT
Source: NCR Consumer Credit Report
79%
(48,000)
21%
(12,000)
160,000
DEVELOPMENTAL CREDIT

14. Most lenders have responded to the crisis with payment holiday options. However, these
are limited to customers who were in good standing pre-lockdown, excluding arguably
the most at-risk group, those already in financial distress
Footnote13 |
BANKS RESPONSE TO COVID-19
The plan incorporates a three-month payment relief and allows customers in need
of short-term financial relief to reduce their monthly instalments. Customers in
good standing (with up-to-date accounts), and who have been financially
impacted by the pandemic will have the opportunity to opt-in for payment relief,
aimed at assisting with cash flow needs. This means the plan will give customers
the opportunity to either continue paying if they are in a position to, to pay
reduced instalments by agreement with the bank or to defer payments for a period
of three months.
Our interventions will be executed in phases, with the first
assisting those clients who demonstrate sound banking
behaviour, such as having honoured their repayments to the
bank on a consistent basis prior to COVID-19.
We've tracked the major announcements by the banks on our website, see:
https://www.71point4.com/a-nation-working-together-part-1/

15. Canada
• Many of the biggest banks are
offering mortgage payment
deferrals for up to 6 months.
There is however no clarity if
deferrals will be interest free
USA (California)
• Governor of California
issued an executive order
that authorizes local
governments to halt
evictions for renters and
homeowners, slows
foreclosures, and
protects against utility
shutoffs for Californians
affected by COVID-19
Nigeria
• The Central Bank of Nigeria, CBN,
Monday cut interest rates on all
applicable CBN intervention facilities
from 9 to 5 percent per annum for 1
year effective March 1, 2020 and also
granted a further moratorium of one
year on all principal repayments
Italy
• Decree suspending
mortgage payments
in certain areas for
households that
adhere to certain
criteria
Spain
• Moratorium on
mortgage repayments
for families whose
incomes have been hit
by the crisis
Republic of Ireland
• Five main banks have agreed to
suspend mortgages and business
loan repayments for 3 months.
Application for this break will not
adversely affect customers credit
score
United Kingdom
• 3 month payment holiday
on mortgages for qualifying
customers. Unpaid interest
will be recovered on later
date, but credit scores will
not be affected
China
• Targeted measures by a dozen
banks such as forbearance for
eligible households. The
extension of repayment period as
well as interest rate cut of 0.5%
for them
Singapore
• HSBC offering forbearance
with 6 to 12 month deferment
of mortgage principal
payments but seems only
applicable to customers with
good credit rating
Malaysia
• President Anwar called for
forbearance from lenders for
mortgage payment arrears by
low income households
• Several Banks offered financial
relief that includes restructuring
and rescheduling of financing
for up to 6 months to its
customers who are impacted by
the ongoing Covid-19 outbreak
Hong Kong
• Up to 12 months principal
deferments by many
lenders
See: https://www.71point4.com/maybe-a-holiday-is-just-the-medicine-we-need/

16. The Reserve Bank has been quick to react by reducing the repo rate on two occasions
and by lowering the bank requirements on liquidity reserves
Source: https://tradingeconomics.com/south-africa/interest-rate15 |
South Africa's repo rate: 5 year view
The SARB slashed the repo rate by 100 basis
points on the 19th of March and by a further
100 basis points on the 14th of April
On the 27th of March the SARB also
announced that from the beginning of
April lenders would not be penalised for
breaching the Bank’s Liquidity
Coverage Ratio (LCR) and holding 20%
less than legally required in cash, or
easy-to-sell assets. This will
theoretically give lenders a temporary
pass to dip into their cash buffers to
support clients hurt by the disruption

17. If there is a silver lining to this lockdown, it is that more consumers are now aware of
credit life insurance – what it is and how to access it
16 |
• Credit life is often an automatic requirement for short-terms loans
• Customers are often unaware that they are paying for this, this is likely to change
with the recent focus on the product for consumers affected by the lockdown
• Some banks, for example African Bank and Capitec, will provide credit insurance
cover to customers who have a reduction in income due to the lockdown
• Other banks, namely the big four, require customers to lose a full month's
income before claiming credit insurance
• Credit insurance often doesn't cover self-employed individuals
Source: https://city-press.news24.com/Personal-Finance/how-credit-insurance-can-cover-your-debt-20200406
https://www.gov.za/sites/default/files/gcis_document/201702/40606gon103.pdf
Final credit life insurance regulations, 2017
• Credit life insurance in South Africa has a tainted history with credit
providers often charging excessive credit life fees, poor sales practices, low
claim ratios, and mis-selling cover (e.g. disability cover for disabled
persons)
• The amendment of the National Credit Act Regulations for credit life
insurance aimed to mitigate these practices by introducing caps on credit
life premiums, among other regulations

18. 17 |
Credit
Insurance
Payments

19. Several short-term insurers have announced automatic premium reductions during the
lockdown period
Note: *Customers must have Vitality Drive and working telematics device in car
Source: https://www.timeslive.co.za/news/consumer-live/2020-04-03-were-driving-less-so-car-insurance-should-go-down-right-it-depends-who-youre-with/
Finmark Trust FinScope SA 2018 Fact Street
18 |
• Uptake of insurance products in South Africa is high
but primarily driven by funeral cover
• According to FinScope, 61% of adults in SA have
access to at least one insurance product
• 56% of adults have funeral cover; 23% have non-
funeral cover
• All insurers are facing the same business risks with
the fall in stock markets but they're facing different
consumer risks
• Funeral cover and medical insurers may see a spike
in claims
• Short-term insurers may see increase in customers
canceling or downgrading policies
• Insurance premiums are likely to be one of the first
payments reduced for consumers facing strain as a
result of Covid-19 lockdown
• Some vehicle insurance providers are responding to
this with automatic premium reductions
Impact of Covid-19 on insurance sector
15% discount on premium in May
15% discount on premium in April
25% discount for those doing
<500km in April; 15% discount for
those doing >500km*
25% refund on premiums paid at
the end of lockdown

20. While customers seem pleased with the short-term premium reductions, 'new’ insurtech
providers like Naked Insurance appear to be getting a lot of attention online due to their
more flexible offerings. Will Covid-19 push more insurers to innovate digitally?
19 |
Impact of Covid-19 on insurance sector
• Launched in April 2018
• South Africa's first "end-to-end artificial intelligence (AI)-driven insurance
platform"
• Fully digital customer sign-up and claims process. Claim assessments still
done by humans but company says their AI algorithms are learning from
the human assessors
• In addition to their fully digital offering, CoverPause was a unique selling
point of their pre-Covid-19 lockdown
• Very similar, if not the same, as US-based Lemonade Insurance

21. 20 |
Credit
Insurance
Payments

22. A number of countries are incentivising the use of digital payments to reduce cash use
“In order to avoid the risk of transmission through physical
handling of money, we encourage the use of cashless
transactions such as mobile money and credit cards”
- Uhuru Kenyatta, President of Kenya

23. Whereas many services rely on the cash-in cash-out at agents, incentives are being used
to encourage purely digital payments
See: https://nextbillion.net/coronavirus-africa-mobile-money/
• Mobile money services generally
start with an over-the-counter
model where agents provide a cash
in and cash out service
• Many mobile money services
struggle to breakout of this model
to one where customers start to
transact digitally, reducing the need
for cash in and cash out
Rwanda example
• Make it easier for people to transact –
transaction limits relaxed to encourage more
usage
• Improve interoperability – this can reduce
the need for users to convert into cash. In
Rwanda the fees for all bank to wallet and
wallet to bank transactions have been
reduced to zero
• Encourage digital merchant payments –
Traders are being encouraged to accept
contactless payments by reducing all fees to
zero
Moving to truly digital payments

24. Within eight days of the lockdown announcement the Shoprite Group announced a new cashless
and contactless payment option for their customers. Will this nudge customers away from cash?
Source: https://www.shopriteholdings.co.za/articles/Newsroom/2020/shoprite-the-first-retailer-to-offer-contactless-qr-payments.html
https://www.shopriteholdings.co.za/content/dam/MediaPortal/LatestIntegrateReport/IR2019/Shoprite_IR_2019_Full.pdf
23 |
• Shoprite and Checkers have quickly innovated in response to Covid-19 offering cashless and contactless payment options
• They claim to be the first South Africa retailer to offer QR code payment at till points
• Customers can scan the QR code using either Masterpass, SnapScan, Zapper, FNB Pay or Nedbank Pay
• Currently available in 29 stores with a plan to roll out to all stores in next two months
• At the same time the retailer announced virtual vouchers which can be sent to someone's phone and redeemed in-store
• The roll out of the QR payment offering and virtual vouchers is in line with the companies strategy of expanding digital offerings to clients as highlighted in their 2019
annual report

25. In summary
24 |
• South Africa's credit sector was already
under strain pre-lockdown, it's likely to get
much worse
• Loan repayment defaults during lockdown
will have long-term impacts on the health
of the credit sector
• Credit retailers are going to be badly hit by
this, their loans are likely to be the first that
people default on and they already have
high arrears. In addition their sales will be
badly affected by the lock down
• Current support interventions by banks will
help but exclude the most at-risk
consumer groups
• Reduction in the repo rate may help buffer
the sector and a small silver lining of this
period is the increased awareness and
usage of credit life insurance
• Should the credit sector be doing more to
protect the financial health of their
customers in the long term (i.e. freeze on
debit-order bounce penalty fee, limiting
negative reporting to credit bureaus)?
• All insurers are facing the same risk in
terms of the decrease in investment
returns due to the drop in stock market
• Short-term insurers likely to be facing
additional risk of consumers cancelling or
downgrading policies
• Risk for consumers is that missed
premiums means policy lapses
• How can insurers support their loyal
customers through this time to ensure
long-term sustainability?
• Will this be a catalyst for people to move to
insurtech services which appear to be
more flexible to customer needs?
• SA's retailers serving lower-income
segments have innovated quickly in
response to Covid-19 lockdown with QR
payment options, will this sufficiently
nudge consumers away from cash?
• Will this be the catalyst that the industry
needs to accelerate the usage of digital
payments (both in and outside of SA)?
Credit Insurance Payments

26. A note on data: Along with transparent publication of health indicators, the Covid-19
response needs more transparent publication of key economic indicators. The financial
sector can assist with this
Source: https://www.dol.gov/ui/data.pdf25 |
• To assist policymakers and industry develop consistent and aligned
policies, the financial sector can release key indicators, such as:
• How many customers, and what segments, are applying for
payment holidays?
• How many debit orders are bouncing at the end of the
month and for which customer segments?
• How many customers have lapsed on insurance premiums?
• The initial data we’re seeing from companies like Yoco is great and
more companies should follow suit
• The US Department of Labour release weekly reports on the number of
unemployment insurance claims
• South Africa’s UIF has implemented a Temporary Employee/Employer Relief Scheme
(TERS) to assist companies in paying employees salaries throughout the lockdown
period
• The UIF’s reporting on unemployment claims has been sparse in the past and is
unlikely to change in the short-run, but this data is critical and should be made
widely available to help industry respond to the Covid-19 pandemic
US Department of Labour Unemployment Insurance Claims
PUBLIC SECTOR DATAPRIVATE SECTOR DATA

27. Past crises have had long lasting (good) impacts on financial services
Source: https://www.economist.com/the-economist-explains/2015/03/02/why-does-kenya-lead-the-world-in-mobile-money;
Mas,I., Morawczynksi, O. (2009). Designing Mobile Money Services. Lessons from M-pesa. Available: https://www.mitpressjournals.org/doi/pdf/10.1162/itgg.2009.4.2.77;
https://www.cnbc.com/2020/03/26/chinas-2002-2003-sars-outbreak-helped-alibaba-become-e-commerce-giant.html
26 |
2007/8 Post-election
violence in Kenya
2009 Between March
2007 and early
2009, 6 million
customers
registered with
M-Pesa
2002 SARS outbreak
in China,
forces much of
the country
into lockdown
2003
Alibaba launch
business-to-
consumer
ecommerce
site, Taobao.
Encourages
many Chinese
consumers to
try online
shopping for
the first time
Jack Ma and his employees who helped build
Taobao from his apartment in 2003

28. What positive implications could SA's financial sector see coming out of Covid-19?
Footnote27 |
Credit Insurance Payments
• A potentially more productive
credit sector – move away from
non-asset building lines of credit
• Renewed focus on better lending
and collection practices
• Increased consumer awareness of
credit life insurance products
• More innovative, flexible products
that are aligned to customer needs
• Improved consumer awareness of
digital payment offerings
• Increased uptake of digital payments
for additional use cases besides
airtime and electricity purchases

29. www.71point4.com | +27 (0)21 286 2585 |
7th Floor, Norton Rose House, 8 Riebeek Street, Cape Town, 8001
THANK YOU
Jessica Robey & Claire Hayworth
jess@71point4.com claire@71point4.com