01-05-2025
SMME Focus: How SA banks are rethinking SMME finance in a cash-first economy
Cash is still king in South Africa's informal economy, and banks are not pretending otherwise. Lenders are starting to rewrite the rules of engagement when it comes to the country's spaza shops and township traders.
South Africa's small, medium and micro enterprises (SMMEs) are punching well above their weight. They contribute to around 34% of GDP and employ roughly 60% of the labour force, according to the Banking Association of South Africa.
Regardless of their economic muscle, SMMEs – especially those in townships and the informal sector – remain financial outsiders. The formal banking system often misses the mark in a country where cash is still the currency of trust.
'In the battle between cards and mobile money, who is winning? Cash. I think cash is still winning,' said Wiza Jalakasi, director of African expansion at payments partner, EBANX.
The R5-trillion sector running on rands and cents
The MSME (micro, small, medium enterprises) sector has an estimated turnover of R5,29-trillion, with 72% of SMMEs operating informally and remaining largely cash driven, according to FinScope's MSME 2024 survey.
Townships and rural SMMEs often exist outside the formal banking system, leaving them vulnerable to theft, limited growth and a lack of credit history.
'Physical cash being handed to a merchant and being translated into a digital currency or an instant deposit into a transaction account – that makes businesses work,' said Chris Wood, Absa's executive of product. '[Banks] have got to be sitting there at the crossroads.'
South Africa's banks are showing up to that intersection. But rather than forcing SMMEs to go digital, they're starting by meeting SMMEs where they are.
Lending on a swipe
At Capitec's annual financial results presentation this week, the company's CEO, Gerrie Fourie, said the bank sees huge potential in the informal market. 'There's about 3 million spaza shops out there, 70% of them in the informal market. How do we capture that market and actually unlock the potential in South Africa?'
Capitec's solution analyses a business's daily takings and tailors credit accordingly. 'We say you need to look at the cash flows. They haven't got assets,' Fourie said. 'So you need to lend against the cash flow. And that's the model we've built.'
Capitec's dynamic loan model deducts payments as a fixed percentage of a merchant's inflows – whether from cash, card, or EFT. '[The customer] repays his loan as their business is performing,' he said.
In a year, the bank's small business base has more than doubled from 28,000 to 63,000. It has also issued more than R1.2-billion in scored loans to small businesses.
The card machine cartel
A major barrier to digital inclusion is the hardware itself.
Traditional card machine rental models, costing around R500 a month, are out of reach for micro enterprises. Fourie noted that Capitec has shifted towards a model where businesses can buy a device from R1,499.
'I think the rental model is ridiculous,' Fourie told Daily Maverick. 'The average rent is just below R500. If you buy your machine it's R2,000. So in four months, you've repaid (the cost of) your machine.'
Competitors such as Yoco offer similar hardware from as little as R750. Although, it isn't just upfront costs that need to be considered. Transaction commission fees typically range between 2% and 3.5% per sale, depending on the provider, which adds up quickly for high turnover, low margin businesses.
Tap, type, swipe
For banks such as Absa, getting merchants online means giving them options. 'We've got to make sure that where our merchants are, they are able to accept more,' Wood said.
'It could be QR codes, it could be pay by link. And that includes cash,' Wood said. 'That convergence of physical cash and what would always typically have been a merchant card machine, is getting closer and closer.'
The real banking role is systemic: getting cash safely back into the banking system. 'We want to make cash safe and make sure our customers are getting that cash into their transactional accounts sooner,' Wood said.
The SMME arms race
Across the sector, banks are rushing to build trust and relevance with SMMEs.
Standard Bank has launched a township entrepreneur initiative, focused on financial literacy and tailored products. Nedbank, named South Africa's Best SME Bank in 2024, now supports more than half a million businesses through digital tools and a free business development platform.
Meanwhile, FirstRand Bank secured a $150-million (about R2.8-billion) loan from the International Finance Corporation (IFC), earmarked for SMME lending, particularly for women-owned businesses.
FNB announced on 24 April that it is strengthening its lending muscle with more than R4-billion in SMME-lending capacity through two funding streams: a R1.8-billion risk-sharing facility, backed by the International Finance Corporation (IFC) and the EU; and a R2.5-billion social bond issued by FirstRand Bank. The funds will target women-owned businesses and rural sectors such as agriculture and healthcare.
What this means for you as a small business owner
Banks are starting to speak the language of small businesses.
By offering services such as cheaper card machines, loans based on a business's daily takings, and converting cash into credit history, the tide is turning towards financial tools that work in practice and not just on paper.
Teaming up to bridge the gap
To close the IFC's estimated $30-billion (R550-billion) SMME financing gap, banks are teaming up with fintech players.
A notable alliance is Mastercard's partnership with Johannesburg-based Sava, which provides small businesses with digital bank accounts and expense-tracking tools. This hybrid model could help informal businesses become creditworthy.
'Consumers are getting more and more comfortable with the way we're doing digital payments,' said Meagan Rabe, Visa's senior director for sub-Saharan Africa fintech. 'In South Africa specifically, 70% of consumers are wanting to be digital.'
That shift is already playing out in numbers – at Capitec, at least. 'When we started 20 years ago, 80% of our transactions were cash and 20% was electronic. Now we're 13% cash and 87% card,' Fourie said.
The Reserve Bank, he added, is also laying the groundwork for a more digital economy, taking cues from countries such as India and Brazil. DM
