Running a $5 Monthly Bank Account Probably Isn’t Profitable for Large Banks

It seems that keeping a bank account with a monthly fee of R5 isn’t conducive to profitability for most large full-service banks.

Nedbank is planning to increase the monthly “management fee” for its basic MiGoals account from R5 to R7 starting in January, marking the last bank to abandon the traditional R5 pricing for these types of accounts.

Read: Nedbank aims for expansion in Africa with a R12bn war chest

Even Capitec Bank, which has 23 million banking customers, can no longer sustain such low fees. The monthly fee for its GlobalOne account increased from R7 to R7.50 in March 2024 and is projected to rise again next year. This additional 50c per customer per month amounts to almost R140 million annually.

Notably, Nedbank serves only 1.7 million customers in its entry-level segment, and while many may choose alternative pricing structures, an increase of R2 per month per customer can still have a substantial effect on revenue. If just one million customers are included, it equates to an extra R25 million in fee income for the upcoming year.

Interestingly, monthly fees for these accounts have generally settled around the R6.50 to R7.50 range.

Due to its size, Capitec largely dictates the pricing, while other banks tend to follow suit, which is why no bank has set prices above the R7.50 level of the GlobalOne account.

Is this a price-sensitive segment?

While one might assume this segment is highly price-sensitive, the middle market could be even more affected by pricing. Generally, lower-income customers do not primarily base their choices on price differences since the variations in costs are minimal.

The distinction between paying R5 and R6 monthly for an account is relatively trivial (compared to middle market accounts where the price difference could be around R70 for a Capitec account plus transaction fees versus R100 to R110 from larger banks).

Read: Capitec faces a R56m financial penalty from Sarb

Lower-income customers prioritize value and convenience over mere pricing when selecting banking services. This is why Capitec has been focusing on developing a rewards system through its Live Better program during its expansion phase.

These customers are prepared to pay a bit more if they perceive they are receiving good value and can avoid excessive transaction fees.

* Effective from 1 October 2023 and 1 October 2024

** Effective from 1 March 2023 and 1 March 2024

Nedbank’s choice to increase the monthly fee while simultaneously lowering the debit order fee from R3.50 to R2 is noteworthy. The bank is aware of the frequency of debit orders within this customer group and views this as a smart strategy, as debit orders are becoming increasingly widespread, even among lower-income customers.

For a customer with a single debit order, the savings from this change nearly offset the increase in the monthly account fee.

The two leading digital banks in the context of monthly account fees are TymeBank and Bank Zero, both of which do not impose a monthly fee.

TymeBank reached over 10 million customers in October, achieving this significant milestone in less than six years after its inception. Its operational costs differ greatly from those of larger banks, and it has successfully attracted deposits with the highest interest rates in South Africa, enabling it to secure investment at favorable rates.

This capital will be utilized for the imminent launch of its highly anticipated credit offering (even though it has introduced interest-free advance products that are not standard credit).

Bank Zero has smaller operational costs and a customer base compared to TymeBank. While it has developed a unique niche offering that provides considerable value, it unfortunately remains relatively unknown.

Read/listen:
TymeBank reaches 10m customer milestone
Reasons behind Sarb’s push for digital banking
Bank Zero opens its doors [Aug 2021]

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