Driving Financial Inclusion

GG Alcock, who coined the term Kasinomics to describe the township economy, is one of the few voices giving insights into the economics that underpin the informal market in South Africa. The lack of research on the township economy estimated to employ 17% of South Africa’s population and contribute more than R300 billion to the country’s GDP is in itself an indication that an opportunity looms large.

However, South Africa’s informal market is a space that is well understood by South African fintech, Lesaka Technologies, a champion of financial inclusion, steadily building a leading position in these fast growing, previously underserved markets.

Lesaka Technologies, listed on the NASDAQ and JSE with a market cap of [R4 billion], is currently one of the largest technology focused companies in South Africa. The Group uses proprietary banking and payment technologies to distribute low-cost financial and value-added services to small businesses, primarily in the informal sector, as well as to consumers, the majority of whom are grant beneficiaries and have largely been excluded from financial services.

Previously known as Net1, a change in ownership resulted in the appointment of a new board and the building of a management team with strong credentials and international experience to clean up the business and refocus its offering to play a leading role in financial inclusion in South Africa.

Modelled on successful emerging market fintechs, such as PagSeguro and Fawry, its turnaround involved closing its grant distribution business, redesigning its offering and repurposing its staff to focus on solutions to champion financial inclusion in previously underserved markets. In 2022 it acquired the Connect Group, one of the leading providers of fintech solutions in South Africa, with the transformative acquisition igniting the rebranding to Lesaka Technologies.

Lesaka has leveraged disruptive technologies to establish infrastructure, products and services to build a unique dual sided ecosystem which meets the needs of merchants and consumers operating in informal markets.

More than 72 000 informal retail merchants currently use the Group’s cash management solutions, bill payment technologies, value-added services, business funding and card acquiring solutions which essentially allow individual merchants to become a stand-alone financial hub, where their value-add products and services directly drive customer growth. On the consumer side Lesaka provides unsecured credit, transactional banking and microinsurance to 1.3 million customers through its EasyPay Everywhere brand.

According to the World Bank and IFC, of the estimated 2.1 million MSME’s across South Africa’s informal markets less than 8% have access to formal credit, and of 1.4 million informal merchants only 4% have access to digital payments. From a consumer perspective, out of 26 million people in the 1-6 LSM category only 20% have access to regulated savings and credit, and 90% of the 12 million grant recipients rely on immediate cash withdrawals.

“We aim to help merchants in the informal and township economy compete and grow their businesses. On the consumer side we work hard to add value to their lives and to help them improve their lives, so we focus exclusively on the grant recipient space. All our attention is devoted to understanding their needs and creating relevant and affordable products and distribution networks for them” says Lincoln Mali, Lesaka SA CEO. Mali joined Lesaka in 2021 after spending 25 years in the financial services industry, most recently as the head of Group Card and Payments at Standard Bank.

“Joining Lesaka was an opportunity to take a loss-making organisation with a troubled past and turn it around into a commercially successful force for good that would give grant beneficiaries choice, respect and dignity as unique individual customers.

“Competition to serve grant beneficiaries will change the grant payment space for the better and enable individual customers to choose their bank based on factors that matters to them such as service, products, price, or convenience,” says Mali.

Driving the shift from cash to card

Like many developing economies, South Africa’s economy is still largely cash driven, accounting for 60% of all transactions. That figure is even higher in the informal sector where around 90% of transactions are cash-based. The majority of grant beneficiaries withdraw their entire grant in one go from an ATM, reports Mali.

“Although we talk about the fact that 80% of people have a bank account in South Africa, the reality is that most of the 12 million grant beneficiaries are withdrawing their grant out in one transaction. That can’t be regarded as financial inclusion as grant beneficiaries still don’t enjoy access to the financial system for their payment, transactional, credit, savings, and insurance needs. We are well positioned to use technology to offer the broadest range of financial services to these customers.” he says.

Shifting grant beneficiaries away from cash, explains Mali, requires financial literacy, the development of trust and educating consumers on the benefits of cards. Although the business is starting to see cards having more traction – this is off a very low base – he does not expect cards to replace cash any time soon but he sees the long term potential as hugely exciting with the transition providing a durable long term catalyst for Lesaka’s growth potential.

A fintech leader

The acquisition of the Connect Group has been a game changer for Lesaka’s merchant business.

Connect Group CEO Steven Heilbron has extensive experience of the financial services industry after spending 19 years working for Investec where he was global head of private banking and joint CEO of Investec Bank plc. In 2013 he led a private consortium which acquired a cash solutions business, which was rebranded as the Connect Group.

In addition to driving organic growth in the Connect Group, Heilbron also oversaw the successful acquisition of Kazang in 2020, a business which had 35,000 spaza shops and informal trader customers. The acquisition of Kazang was both targeted and strategic. It provided enormous opportunity for growth in that it facilitated a unique access, coupled with a last mile delivery capability focused on the increasingly targeted and fast expanding informal merchant market. This provided an exclusive highway through which the business could deliver multiple product and service opportunities.

A unique ecosystem

Heilbron is adamant that South Africa’s future prosperity lies with small businesses. “Our focus at Lesaka is to resolve the pain points that formal and informal merchants experience by using financial technology as an enabler.”

The company provides merchants with a POS device which is linked to a digital wallet from which they can pay suppliers, sell many products such as airtime, electricity, gaming and municipal bill payments, take customer payments via card swipes or tap and pay, providing instant settlement to the wallet. Merchants are also able to access funding and an electronic smart vault via the device.

Through the Connect and Kazang brands, Lesaka provides formal and informal merchants, including larger and smaller spaza shops, with access to physical smart vaults which process and digitise up to R10 billion of cash a month. Kazang Pay, a spin-off of Kazang, which launched in late 2021 with just 300 clients, currently has over 42000 clients.

“We’re providing a complete ecosystem which merchants are quickly becoming dependant on,” says Heilbron.

Key to the success has been an obsession with innovation, disruption, and execution, and a willingness to explore potential opportunities and then quickly scale those initiatives that work. The business is obsessed with fintech, not for its own sake, but for its ability to enable financial inclusion in the informal market”, says Heilbron.

Turnaround paying off

Lesaka’s turnaround strategies and new business model seems to be paying off. Its results released recently reflect an Operating Income (before PPA amortisation) of R134 million for its third quarter, compared to an Operating Loss of R147 million in the same period last year. Similarly, its Adjusted EBITDA has swung from a R113 million loss in Q3 2022 to R137 million profit in Q3 2023.

For the full year ending 30 June 2023, Lesaka’s guidance for revenue is approximately R9 billion and Group adjusted EBITDA of approximately R500 million.

“Despite the very challenging economic environment, we are excited by the Merchant Division’s outperformance, and another quarter of continued improvement and profitability in the Consumer Division. With our innovative technologies, leading distribution network and relevant product set, Lesaka is well positioned to take advantage of the opportunities arising from the transformation of South Africa’s informal economy” said Mali on the third quarter results.