Official data paints a gloomy picture of South Africans’ ability to save. It’s not surprising that we rank last in a comparison of the savings rates among G20 countries; the latest household savings rate was -0.5% in the last quarter of 2018 (according to Trading Economics). Our gross national savings rate at 14% of GDP in December 2018 (CEIC data) represents an all-time low and is in stark contrast to some of our BRIC peers (Russia: 37.4% in December 2018, India: 30.5% in 2018 and particularly China: 45.7% in 2018).
Grant Locke is Head of OUTVest, a digital savings and investment platform that was built to make professional grade investment planning and management easy. It offers investors access to low-cost, intelligent investment funds and qualified financial advisors. He believes credit extension has played a significant role in crowding out household savings and points to the rapid rise in debt as a proportion of disposable income: from 40% in 1969 to over 80% in 2008 (around 72% at the end of 2018, data from the South African Reserve Bank). “This a relatively crude conclusion as there are many, many interrelated factors, but we have seen this happen in other countries with a highly developed financial services sector, such as the US and the UK. Conversely, China has a very high savings rate and a relatively low penetration of financial services products” he says.
This debt culture has made conspicuous consumption possible; according to Old Mutual research, the proportion of household income taken up by consumption/living expenses has risen from 57% in 2011 to 67% in 2018. Meanwhile, 15% of respondents cite higher levels of debt as the reason they are saving less. Encouragingly though, there are signs that households are getting starting to get on top of their debt and focusing more on the importance of debt management.
But it’s not only about debt; there’s also the widespread lack of financial education and inability to access capital markets that prevents people from growing their money.
Lack of financial education
“I learned the hard way that earning a salary is actually a great conduit to getting into heaps of debt and not necessarily using it to build wealth”, says Gary Kayle of Worth, South Africa’s leading independent financial education company. “Financial vulnerability is the biggest cause of over-indebtedness and culture of no savings in South Africa. Financial education is the way to overcome this hurdle.”
Given our dysfunctional education system, it’s little wonder that people don’t understand the benefits of savings and investment, or how to go about doing either. Too many choices and complex products just add to the confusion.
“Financial markets and products are difficult to understand in general and without the necessary guidance and education around what they are and how they perform, they are hard to navigate,” says Warren Kopelowitz. He is CEO of MyTreasury, an independent, free rate comparison website that helps savers find the most suitable savings account for their needs, to ensure they’re getting the best interest rate on their savings.
Barriers to access
Furthermore, South Africa suffers from low levels of financial inclusion, with factors like high fees, cumbersome regulation and a distrust of the formal banking system inhibiting the use of bank accounts.
Thomas Brennan, CEO of Franc, a digital investment platform that offers investors an affordable way to access the money market and exchange-traded funds, points out that stokvels are a popular savings mechanism. According to Nedbank research, more than 11 million people collectively save R44 billion in stokvels annually. However, the majority don’t invest in capital markets. Nedbank’s analysis also shows that those stokvels with savings at formal banks generally use low- to no-interest earning accounts. “People save but don’t invest, primarily because of a lack of access to capital markets”, says Brennan.
Not taking advantage of interest-bearing accounts is also true of individual savers, according to Kopelowitz. “While 16 million South Africans have savings accounts, the fact is that they are emptier than they should be”, he says. “According to the latest South African Reserve Bank statistics, about 40% of this money sits in accounts that offer very low interest rates, if any interest at all”.
Evidence suggests that South Africans do want to invest though. Brennan says: “The surveys undertaken by Franc and the initial uptake of our product show that people across the income spectrum want to invest (South Africa is top in the world in terms of Google trends for "how to invest") but don't know how or where to invest”.
What needs to be done?
Tackle the debt culture: Locke’s suggestions include a charter between credit providers aimed at reducing household debt as a proportion of disposable income, imposing harder limits when it comes to affordability assessments and forcing providers to help consumers find the cheapest source of credit available to them.
Promote financial education: “Helping consumers understand and analyse financial information will help them make better financial decisions”, says Locke. Kopelowitz agrees that introducing people to basic financial concepts is critical. “People need accessibility to basic, general financial education covering topics such as how to manage your money and what saving money every month means etc”, he says. Hayley Parry, Worth’s Chief Education Officer, adds that many people have a complicated relationship with money over and above a fear or inability to manage their monthly salary. “Financial education is critical to helping people understand that their salary is a wealth building tool”, she says.
Improve accessibility and simplicity:
Making the process of saving and investing easier and more convenient is also key. “Allowing consumers to access all their financial information in one place will also help them make better financial decisions”, says Locke. “And of course, make investing easier to use to solve personal financial objectives will go a long way too”.
Kopelowitz strikes a similar tone: “We need greater market transparency and accessibility,” he says. “People want convenience; an easy way to invest their hard-earned money without having to go into a bank branch and wait in a queue”. Interestingly, 15% of MyTreasury.co.za users are over 55 years old which shows that even some of the older generation find it more convenient to search online for the best interest rate than visit a bank branch.
What is being done?
Franc, Worth, OUTvest and MyTreasury.co.za are four examples of businesses that aim to improve the South African savings and investment landscape through a combination of financial education and removing common barriers to access.
Franc’s approach centres on the latter in particular. “We’ve simplified investing down to just two funds: a money market fund that returns better interest rates than a bank savings account and a domestic equity tracker fund”, says Brennan. “We also use social pressure to stimulate investment behaviour, so users are encouraged to create and share investment goals. Most importantly, we've removed financial barriers to access, so we don’t require minimum investment amounts or impose withdrawal restrictions”.
OUTvest is also about making investing easier. “Simply put, we can help people plan to achieve their financial objectives using state of the art investment technology, without them having to know everything about investment,” says Locke. “Anyone can build and manage their tailored investment plan in minutes online or using our app. We are low cost, but also don’t apply penalties or hide charges”. He argues that there are more people that need financial advice than there are providers, and that OUTvest’s direct to consumer investment proposition can help alleviate this mismatch with its accessible, affordable, and easy-to-understand means of financial planning and execution.
MyTreasury aims to simplify the savings world by analysing over 600 interest rates across South African banks to help savers identify the savings accounts that offer the highest interest rates for their individual needs. This offering is soon to be extended to the credit card market, to give people the tools to compare credit card offerings. “We want to make the savings market transparent and accessible to the masses,” says Kopelowitz.
Then there’s Worth. Parry says: “Employers increasingly understand how critical financial wellness is when it comes to employees’ overall health and wellness and we’re pioneering solutions to address this need. The financial education we offer to corporate employees clearly shows return-on-investment through a changing employee financial risk score”.
Worth’s goal is to ensure a million South Africans have a R5,000 emergency fund or financial buffer in place by teaching people how to improve their financial behaviour. “Before doing our courses, we know that 70% of our learners don’t have access to a R5,000 emergency fund. After doing a 6-hour course (over a period of 60 days) we know that 60% of these participants have already turned that around,” says Parry.
Words of wisdom
All four businesses are enjoying success in the South African market and other entrepreneurs looking to enter the savings/investment field have much to gain from learning from their experiences and may be grateful for their insightful advice.
For all four businesses, the hardest part about their journey so far has been trying to overcome certain market perceptions.
For MyTreasury it’s been about changing industry players’ perception of their product. “Some institutions see our business as a threat and a disruptor in the market rather than the future and a partner to work with”, says Kopelowitz. “Those who see us as a partner and genuinely want to work together are enjoying the fruits of our partnership”.
However, he is keen that other entrepreneurs enter the fray. His advice to those looking to launch a savings and/or investment product in South Africa?
“Start. We need it,” he says. “The more savings products and tools we have, the more it will benefit a greater number of people and educate the masses in becoming financially smarter and understanding how important it is to save”.
In Worth’s experience, confronting preconceived ideas about the appeal of financial education has been particularly challenging. “For a long time, selling financial education was terribly unsexy; a grudge purchase in fact,” says Parry. “Now, edtech and fintech are sexy in the start-up world and there is a growing realisation that financial wellness is a key component to overall wellness as it directly affects health, relationships, productivity and stress”.
Parry recommends that those looking to penetrate the savings/investment market in South Africa begin with finding a solution that they know will make a difference to them or those familiar to them.
“Everyone deals with money on a daily basis”, she says. “Look for the products or services you know would help you and the people around you and start there, because that’ll give you the opportunity to develop something with passion. Testing your idea on anyone and everyone you know will quickly help you identify where and how to refine your idea”.
She adds: “Once you have a viable idea or business opportunity, getting yourself a mentor or onto an accelerator or incubator programme is the ideal way to stress-test your offering and leverage off the experience of others who have walked this road before you”.
OUTvest’s perception hurdle has been trying to change the notion that it is a simple savings product. “While trying to reach the broadest market, we believe we have wrongly positioned the business as a pure savings product, rather than an investment product”, says Locke. “We are working on changing this with the introduction of new products and different messaging”. This will take time, but as he points out, you need to be prepared that your product/service won’t take off overnight and you’ll make mistakes along the way. “You need patience because everything takes more effort and takes longer than you think,” he says. “You need to make sure you quickly work out where you went wrong, because unless you are very lucky, the first thing you will be is very wrong”.
For Franc, the perception problem has been about overcoming the view that the financial sector is not to be trusted, although this is a less significant issue than the capability of regulatory bodies. “Incapacity of regulatory bodies is our biggest challenge” says Brennan. “We submitted our Financial Advisory & Intermediary Services (FAIS) application in November 2018 to become South Africa’s first and only robo investment advisor in the market. The Financial Sector Conduct Authority (FSCA) apparently has a backlog of 6 months and they are yet to review our application.” His advice to other entrepreneurs considering launching a savings and/or investment product in South Africa is to apply for regulatory licenses as soon as possible.
He adds: “A lesser challenge, which we're happy to overcome, is distrust of financial institutions. Many South Africans have been exploited by financial service providers in the past (from informal loan sharks to predatory lending by retailers and banks alike). Trying to be 'franc' in this market is going to be hard going”.
Hope on the horizon
There is clearly much scope for improving the savings and investment environment in South Africa; a firmer grip on household debt, the removal of access barriers and the promotion of financial education will go a long way to doing so. With committed entrepreneurs like the ones we spoke to developing innovative solutions to address these issues, there’s a real chance we could see some meaningful and much-needed change to savings and investment behaviour in the near future.