If South Africa’s banks and insurers don’t move quickly, they could miss out on the chance to profit from the large pool of financial assets held by the country’s growing black middle class, whose asset base is expected to grow by 25 percent in the next five years. During this period, the personal-financial-services profits to be gained by serving black households with monthly incomes ranging from 2,000 to 10,000 rand ($200-$1,000) could become as large as those from the highly contested and primarily white market of households with incomes above 15,000 rand. But to capture the potential of this attractive new market, the leading South African financial institutions must rapidly develop the skills needed to serve it.

Of course, South Africa’s history of racial divisions means that the distri-bution of wealth in the country remains uneven (Exhibit 1). But as a recent survey demonstrates, total holdings of financial products (including bank, insurance, and investment products) are a function more of income than of race.¹ Black consumers in the middle- and upper-income segments are as active in the personal-financial-services market as comparable whites, with little difference, for example, between the total holdings of white and black households in either the lower-middle- or the middle-income category (Exhibit 2).

But these similarities mask differences in the mix of products used by blacks and whites and in the places where those products are purchased. All bank customers have the basic bank-issued transaction product—the ATM card—but, as Exhibit 3 shows, blacks hold fewer credit cards and more credit accounts in stores than whites do. In fact, up to 70 percent of the short-term and consumer borrowing of black customers takes place outside the conventional banking system, through stores and cash-loan companies.

Similar conclusions can be drawn from the data for savings and investment products. Both black and white lower-middle- and middle-income consumers hold, on average, 1.8 long-term savings and investment products (fixed deposits, pensions, mutual funds, and savings plans). But about a third of those of black customers are held at informal institutions such as stokvels—savings unions that have a long history in South Africa. By contrast, white customers almost never have savings accounts at informal institutions.

Furthermore, most black consumers don’t get loans from banks; indeed, less than 20 percent of lower-middle-income black customers have ever borrowed from a major one, compared with more than half of all whites whose incomes are similar. This pattern doesn’t reflect a lack of demand: 87 percent of lower-middle-income black consumers express a willingness to take out loans, and 52 percent of these people say that their first choice for a lender would be a major bank.

South African history plays a part in these consumer choices. Blacks are relatively new to the formal financial-services market, and many still fear being refused loans if they apply for them. What is more, major banks have not yet developed the ability to assess the credit risks that are associated with many of these newer entrants into South Africa’s financial-services market.

As a result, much of the competition in personal financial services is coming from players adopting unconventional delivery approaches. Supermarket chains such as PEP and Pick ’n Pay are using their far-flung store networks and the popularity of their brands to offer accessible transaction channels and to sell bank products under their own brands. Lenders, including specialist microlenders² and the household-goods and clothing retailers that issue store credit cards, already have a significant presence in this market. They could use their existing knowledge to provide customers with a wider range of financial products.

Moreover, foreign companies such as Capital One Financial and Citibank already do business in South Africa and could increase their penetration of this market. Capital One in particular could exploit the limited access to credit and the low penetration of credit cards among the black middle class. Nonetheless, the large South African players are still best placed to serve this market; 82 percent of black consumers claim one of the four major banks as their primary financial institution, and when asked to cite the financial institutions they most trust and respect, they, like white respondents, name the Big Four banks (Absa, First National Bank, the Nedcor subsidiary Nedbank, and Standard Bank) and the top two life insurers (Old Mutual and Sanlam).

These companies are exploring ways to capture the opportunity that black consumers represent. Standard Bank’s AutoBank e-offer, which combines its ATM network with basic but comprehensive product-service offerings, and Old Mutual’s work-site-based selling model are two examples. But the majors still have a long way to go.