Capitec R120-million secret weapon that took on FNB and Standard Bank — and won

Being able to build its IT infrastructure from scratch gave Capitec a significant advantage over South Africa’s incumbent banking giants, Absa, FNB, Nedbank, and Standard Bank.

In his new book, Capitec: Stalking Giants, author TJ Strydom underscores how the upstart bank’s lack of legacy technology baggage allowed it to take on the big players — and win.

Capitec co-founder Riaan Stassen once told Moneyweb that they had built the entire bank for R300 million. Of that, around R120 million went into hardware and software.

“Many of the big banks can spend in the region of R3 billion over a three-year period on the same thing, and our system handles similar volumes to theirs,” Stassen said in 2010.

In his book, Strydom wrote that the long-established banks were probably spending even more than that on IT.

Standard Bank’s results showed that it allocated R2.7 billion in South Africa for IT infrastructure that year, and Absa and Nedbank R2.1 billion each.

FNB did not report its IT costs, but its parent, FirstRand, said it spent R1 billion on IT in 2010.

These costs were also growing every year. By 2015, Standard Bank’s IT spending was R5 billion, growing to R5.4 billion three years later.

Although easier said than done, building Capitec’s systems themselves from the ground up had given the company two major advantages: lower cost and greater simplicity.

In a separate interview a year later, Stassen said, “Most banks inherit their systems, which have been changed and added to over generations.”

His co-founder, Michiel le Roux, also once said that banking was ultimately about IT.

Stassen and Le Roux founded Capitec in March 2001, and it has grown to be the largest consumer bank in South Africa in terms of customer numbers.

Earlier this month, Capitec reported that it has 23 million clients — more than two of its closest competitors combined.

Standard Bank is second, with around 11 million customers in South Africa.

Having simpler systems that cost much less to operate allowed Capitec to offer customers much better prices and still be profitable.

Unfortunately, you can’t hold on to this advantage forever.

Henk Lourens, one of Capitec’s old guard, put it succinctly in an interview with Strydom: “If you start building a new system today, your legacy issues will start tomorrow.”

Strydom was Capitec’s operations boss until 2007. He currently serves as executive of strategic initiatives.

As Capitec grew, its IT costs have ballooned — although they remain much lower than those of its competitors.

Strydom noted that Capitec’s IT-related personnel costs rose from R319 million in August 2019 to R953 million in 2023. Other IT costs increased by about R500 million over the same period.

Cloud computing costs were a negligible expense item in 2019, but in 2023, it was R163 million.

Capitec had embarked on a major cloud migration drive in 2022, on which it has spent billions.

The migration featured products from companies such as Salesforce, Microsoft, and SAP, with the bank’s data platform and systems migrated to Amazon Web Services.

During Capitec’s half-year results in 2023, CEO Gerrie Fourie said the company needs to ensure it doesn’t have any legacy systems, and by 2024, all Capitec’s data had been migrated to the cloud.

This strategic shift came as new digital banks came online to continue the tradition of smaller players hoping to disrupt the space with attractive prices and aggressive interest rates.

Much like Capitec, they can offer better rates because they are more cost-efficient.

TymeBank and Bank Zero are the two most prominent examples of this. However, even an old hand in the financial sector like Old Mutual is set to launch a new bank soon that will take direct aim at Capitec’s demographic.