Tendai Musikavanhu - Chief Executive of Umbono Capital in South Africa

MONEYWEB: Welcome back and with me in the studio now is Tendai Musikavanhu, the CEO of Umbono Capital, and Totsi Mamele-Khambule, the MD of Postbank. She is also the acting chief operating officer of the South African Post Office. Welcome. You've got a new product out at the moment. It's something that's very interesting, particularly from bringing people into the savings net. If we look at exactly what it is - let's start with you, Tendai. What exactly does the product do and how does it work?
TENDAI MUSIKAVANHU: It's a product that's designed to be affordable and to give people access to the capital markets. So, for R62 a month every South African can now have access through the huge number of Post Office branches, and basically be participants in the capital markets.
Moneyweb: Why R62?
TENDAI MUSIKAVANHU: R62 is what we have found through our research and various pilots is an affordable amount of money. Whether you are saving for your children for university or whether you are saving for yourself or even for more cultural things, like lobola and other aspects, it's an affordable amount of money.
Moneyweb: How long does it last? What sort of time period do we have - especially, I notice, that there were six payment holidays that were unavailable Is it a 20-year term? How exactly does it work?
TENDAI MUSIKAVANHU: It's a 10-year term and, by giving people a focus on things like saving for their kids from when they are a young age - and this is what Postbank, our partner, does so well. It's getting people into that whole habit of saving. So this is a 10-year product. It does have a lot of flexibility in it, and initially it will be rolled out through 100 branches. Those will be rolled out, you know, according to performance to a total of 1200 branches, potentially touching over 3 million people's lives.
Moneyweb: What about things like lapse rates, surrender values, all of those sorts of things? Do any of those come into the picture at all, or why you need a payment holiday is, I think, the first question.
TENDAI MUSIKAVANHU: Ja, that's probably the most pertinent question. How do we reduce the lapse rate and therefore make the product more sustainable? We have made sure that when people go into the Post Office branch, they actually are buying the product as if it's a merchandised product, off the shelf, which is quite unique.
Moneyweb: That's the first one.
TENDAI MUSIKAVANHU: So, that's the first one. Now that in itself is a good screen and filter. Our statistics have shown us that if people pay the first premium, they are very likely to pay the second, third and fourth, etc. So that weeds out a lot of the non-payers. The second thing is, we have a very interactive relationship with our customer. So we SMS them constantly, we keep them in touch when a payment has lapsed. We make them aware of the cost of the first transaction so that they have enough money in their account. So it quite interactive, almost like taking the hand of the investor along with us.
Moneyweb: So, what happens when they do lapse, if they do miss seven payments, for example?
TENDAI MUSIKAVANHU: Well, yes, they will actually lose the product, but that's well accepted in the culture. The product is a funeral product as well. So it basically has an investment aspect, which is the largest part, but the funeral aspect is culturally accepted, and people are quite comfortable with the fact that if you don't pay a funeral premium, then you are not covered. So that's why we've slipped in the funeral aspect of it so that it is, you know, culturally accepted and obviously likely to be a success.
Moneyweb: Totsi, if we turn to you now - why was the decision taken to structure it like this, as opposed to just basically a long-term savings account?
Totsie Mamele-Khambule: It's important to indicate that with us as Postbank our key responsibility is to make sure we inculcate the culture of savings across the board with all our communities. But the key issue is the affordability, to make sure that the product is affordable and because there are certain things that we can't do with our current exemption, we always look at partners that have got innovative products to enable our customers not only to save in our traditional modes or types of products, which is your book and transacting and investing long term, because we do have products where one can save over three to five years. But, in terms of this, we believe it assists the person, that he has a packaged product. It's not only savings, but you already are covered in terms of your insurance as an individual, and we believe that it is also going to give our customers a further buck for the investment that they actually do. We have looked at other alternatives together with Umbono, because this is not necessarily new. We've repackaged it, based on the experience that we have had in the past four years as to what is it that we need to do best, because we need to make sure that we also drive down the cost and make sure that the cost itself to the Post Office is less but also make sure that the product is doing what it is meant to do for the customer.
Moneyweb: What is it meant to do for the customer?
Totsie Mamele-Khambule: It's meant to make sure that the customer does save. But, for us, more than that, it is also to cover a person, the individual, for insurance, which we can't do currently on our own as the Post Office, as the Postbank, because we are not in that type of underwriting and doing sophisticated things like that. So for us it does cover both, which means currently we have individual products, but now this will provide the customer with a package of products that the customer can actually access. And the exciting thing is the fact that the customers that we are enabling are those customers that have not been enabled to be part of the market in the past, and now they can be part of the stock market without necessarily having to pay huge amounts of money. And for us this what we find exciting.
Moneyweb: Tendai, why do it this way? Why not just allow them to invest in unit trusts in and of themselves at R63 a month in monthly instalments? I mean, why structure it like this, why package it up with insurance? It seems to be getting complicated, which in some respects is something which you would want to move away from, particularly for this sort of type of market.
TENDAI MUSIKAVANHU: Ja, we've found that the way current unit trusts are packaged is very expensive. So, what've had to do is be quite innovative and get, effectively, the insurance and the unit trusts to cross-subsidise each other. And therefore, instead of having to pay x plus x, which is 2x, you are only paying 1x, or 1-point-something x. So that obviously reduces the cost to the customer. The other thing is, people like Rob Rosconi you may know turned the insurance industry upside down by research into costs to customers - and for us that is a key thing. About making it affordable, as Totsi was saying. He's gone on record as saying that this product, he doesn't know how we make money. And the reality is that we don't really make money until we hit at least 120 000 to probably 150 000 people saving. That's when it begins to be profitable for us. And we think those are the products of the future. Instead of having products that rip off the poor, purely because they are poor and the argument is therefore they are a lower risk, we have designed this product so that we are the ones, as entrepreneurs, at risk.
Moneyweb: What's in it for you, then?
TENDAI MUSIKAVANHU: Well, sense of good feeling. Our core purpose at Umbono is to improve the standard of living of all by innovating, empowering, serving excellently and ethically. So, there's a feel good factor and it does really meet, you know, our core values and core purpose. Secondly, we will make money as long as we get to the high volumes. So, if we get 150 000 customers and above, it will be quite lucrative and there is a nice annuity stream, so business-wise it makes sense.
Moneyweb: What if you don't get the 150 000, though? Will it be something that you might decide down the line not to carry on with?
TENDAI MUSIKAVANHU: We obviously have an obligation as a Financial Services Board-registered financial adviser and provider to continue to look after customers, no matter how many you get. And that, I suppose, is the risk as well.
Moneyweb: Totsi, if we come back to you - from a savings point of view, you clearly have something that government is working on in terms of trying to get people onto the savings net. There is a lot of talk about grey money, and vast amounts of money in things like stokvels and burial societies. Are you aiming with this product to get money from those into this new product, or do you see it as a competing product for things like stokvels and burial societies, or something they can invest in?
Totsie Mamele-Khambule: For us actually we see it as a supplementary product, because when you look at it, customers tend to have a silo product that they have a package and end up having to pay huge costs because of the number of things that they need to do. And for me it's an opportunity for the four million customers that we have at Postbank, for them to actually get another product which may not necessarily be underwritten by the Post Office or  Postbank, but that we look at partners that can add the value in terms of skills that we may not necessarily have currently, but to partner with those people that are actually excited and look for opportunities for adding value to our communities that we serve, and serving those people that for many, many years have not been served. But we are going to be able to serve not only individuals but groups in terms of some of the products that we have for our stokvels and our burial societies. And I think it is going to add immense value to a wide range of our customers.
Moneyweb: How does this relate to what government has been trying to propose in terms of a national savings plan? Is it adjunct to that, or have there been any considerations around that?
Totsie Mamele-Khambule: I think it's in addition to. It's not necessarily separate, but it's part of making sure that we put focus - because, as you know, as South Africans we are very bad savers. But ordinary people, people at the lower end of the market have been saving for many, many years, but that saving has been sitting outside the net of what you may call banking, and this is one of the way of making sure that we can ensure that our customers get more than what they can if the money only circulates outside the banking system .
Moneyweb: So you're saving, but you're not saving in a banks, effectively.
Totsie Mamele-Khambule: No, what's exciting is that the Post Office is not your traditional bank, if you may call it that. Our core responsibility is to make sure that we enable people to accumulate capital, and that's ordinary people - and it's work that we have done for many, many years since 1845. And that is what is exciting - to say we need to also move with the times and make sure that we provide innovative products for our customers, and not only enable them to put money in the book where, yes, they may access that money. They will also be able to do that, but they can do much, much more by being part of the Post Office and Postbank.
Moneyweb: Totsi Mamele-Khambule, thank you very much. She is the MD of Post Bank and also with us Tendai Musikavanhu in the studio. He is the CEO of Umbono Capital. That's all from Power Lunch in association with Moneyweb.