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Going back to the roots

18 February 2004 Staff reporter

A report from Ernst & Young (E&Y) reveals that South African financial services companies are realising the value of tapping into the rural mass market.

A global trend shows that relatively flat growth in the broader financial services industry has forced banks and life assurers to seek alternative growth opportunities.

Mass markets are becoming increasingly attractive, provided the right product mix can be effectively and efficiently distributed.

According to Rakesh Garach, E&Y Financial Services partner, most financial services companies have focused their efforts on the urban markets, simply to achieve economies of scale and have, until now, largely ignored the rural mass market.

This approach seems to be changing rapidly, spurred on by the Financial Services Charter, which requires that product solutions be found for the mass-market, which was largely ignored in the past.

"Success in the one does not necessarily mean success in the other and these companies are now devising strategies to effectively reach both the rural and urban markets.

"At least one major local group is in the planning phase of setting up a rural banking network."

Garach says financial services groups should consider extending their product range into the mass market to enhance profitability.

"It is however, important to ensure that distribution is as efficient as possible, given the relatively small inflows that can be achieved at the individual-client level."

The research identifies distribution networks as one of the key factors currently determining sustained success in the South African financial services industry.

According to Garach, distribution is the key success factor in the emerging market sector. "Even the larger financial services players, particularly in the life assurance sector, are finding it difficult to achieve a viable market offering, unless the economics are sound.

Efficient distribution is often the make or break for the insurance industry." Recent initiatives in the banking industry include working together to service the mass market collectively, thereby sharing costs and making their offerings viable.

He says this is particularly true for those companies focusing on the lower-end of the market, given that there is a need to attract large volumes of small, absolute inflows. He adds that a multi-channel strategy may be appropriate.

"This is an approach adopted by at least one local banking group, which offers a full range of banking and assurance products through alliance partners with various retailers and its own branch network."

He notes that although this provides the means to reach a broader target market at the lowest cost, the downside is that some of the revenue inflows are forfeited to the alliance partner.

"This scenario is often preferable to setting-up costly in-house distribution channels."

Making use of a retailer's network may well provide the means to reaching the semi-rural market. Garach says this type of approach could serve a dual purpose, namely minimizing the distribution network and associated cost infrastructure; and extending one's reach to rural markets.

However, the one attempt in this regard has been aborted, due to insufficient revenue flows. Even so, the economics suggest that this will be the single most viable means of reaching rural customers in future.

He says strategic alliances are becoming important to achieve success in the financial services sector. "This global phenomenon is particularly necessary where no strong distribution channel exists and where companies specialise in becoming product leaders."

"The danger of following this approach is that for those not owning a distribution channel, there is a reliance on building up a series of alliances, failing which, one could be too dependent on a single or small number of companies for product distribution", he warns.

He explains that it is far easier for the product distributors to end alliances and find alternative product sources, than it is for specialist product manufacturers to forge additional alliances and maintain volume.

"Unless a product manufacturer is indeed best in class, it has no differentiating attributes. In an era where product replication is becoming more instantaneous, it does seem that the key to success is to couple product manufacturing with strong independent distribution.

"This is particularly true for companies targeting the lower end of the market, where products are relatively simple," he says.

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