FG FINANCIAL SERVICES
FG Financial Services manages the group’s in-store credit card programme, which consists of 14 different card formats. This includes managing the acquisition of new accounts, customer services, debt collection and recoveries, as well as all associated support services such as forensics and risk analysis.
This division also oversees the group’s interests in the Club, a facility which offers customers of the group a range of benefits including automatic insurance, medical helplines, promotional discounts, monthly draws and bursaries to the value of R2 million annually. A further range of insurance products offered to customers of the group is also managed by the division. These products include policies related to card loss, cellphone loss, personal protection and jewellery loss.
Certain group responsibilities relating to the procurement and management of cellphones, as well as the direct sales of airtime, are also managed by this division.
The Customer Relationship Management (CRM) department has developed significantly. It too reports into this division.
The division oversees the group’s membership of the Direct Marketing Association, to ensure it is fully compliant with their code of conduct. A process of ensuring full compliance with the Consumer Protection Act is in progress, to ensure compliance by the effective date. Compliance with the requirements of the National Credit Act is also ensured.
The division is pleased to report that there were no incidents of non-compliance with regulations and voluntary codes concerning marketing communications, including advertising, promotion and sponsorship by type of outcomes, during the year in review.
REVIEW OF THE YEAR
The global economic conditions that faced the division during the previous year continued to have an impact in the 2010 year. Although interest rates fell in the previous year and continued to decline, many consumers found themselves without jobs or working fewer days at their places of employment.
Faced with these economic realities customers battled to meet their commitments. Hence defaults increased, as did the incidence of customers resorting to debt counsellors for relief. The value of debt counselling matters lodged with the division grew from R30,2 million at the end of the previous year to R76,8 million at the end of the 2010 year. It was disappointing that roughly a third of these account holders were customers of the group whose accounts were in a current status when they went into debt review.
Payments from consumers under debt review have been held up at various points in the process. The National Credit Regulator has recently put fresh impetus behind initiatives to ensure that payments flow consistently to creditors and the level of payments coming through from this source since January 2010 has been encouraging.
The number of accounts deteriorating into write-off started to level out toward the end of 2009 and there have been encouraging signs in the first three months of 2010. It is, however, likely that the recovery will be gradual and that no significant improvement in write-offs will be seen until later in the year.
The CRM department achieved successes in a number of areas in the past year. Invitational mailing volumes rose to the extent that, despite an increase in amounts written off and widespread reluctance on the part of consumers to open new accounts, growth of 4,4% was achieved in the total number of active accounts.
A start was made on the process of consolidating the group’s interests in cellular technologies, the internet and direct marketing. They are being combined into a single unit named the Retail Technology division. It is headed by Brad Fly, a seasoned retailer in the group. The step of centralising planning and procurement, as well as the inclusion of Vodacom in the range of cellular service providers, has already led to positive sales growth. Once the consolidation process is complete this division will focus on expanding the use of the internet to encourage retail sales.
| 2010 | % | 2009 | |
| Rm | change | Rm | |
| Interest income | 636,4 | 21,0 | 526,1 |
| Other income | 215,9 | 31,1 | 164,7 |
| 852,3 | 23,4 | 690,8 | |
| Net bad debt | (359,1) | 37,3 | (261,5) |
| Credit costs | (236,7) | 13,3 | (209,0) |
| Profit before tax | 256,5 | 16,4 | 220,3 |
The net result of these initiatives has been positive growth in the number of active customers on the book, growth of 16,4% in the division’s profit, and a healthy debtors’ book.
INCOME INTEREST
Interest income is derived from two credit sources. The first is a repayment plan extending over six months which only attracts interest if customers default on payments and the second is an extended plan of 12 or 18 months which attracts interest on a daily balance. At the year-end 52,2% of customers used 12- or 18-month plans and 70,7% of accounts were attracting interest.
The entire book is governed by the National Credit Act (NCA). The maximum interest rate that can be applied to the book is that prescribed by the formula under the NCA. During the year under review the repo rate dropped by 300 basis points. Because the interest rate charged by the group was below the maximum NCA rate, reductions in the NCA rate did not oblige the group to reduce its rate until the two had reached parity. The weighted rate for the year was 26,0%.
Net book growth for the year was 15,4%. This growth, underpinned by expansion in the extended credit book, led interest income to increase by 21,0%.
OTHER INCOME
Insurance
During the course of the year insurance products named “Legal” and “Women’s Only” were launched. They bring the group’s total insurance offering to seven products. Charges for the products are evaluated against those prevailing elsewhere in the industry and it is clear that the group’s products are extremely competitive. They have been well received by the customer base. Net income from insurance activities grew by 34,0%.
Club
Customers continue to prize the group’s Club offerings and recent ABC statistics attribute 950 000 subscribers to the main Club magazine, making it the third-largest retail magazine in the country. ClubX, a magazine aimed at the teenage market, was launched during the year. The take-up was significant, placing the magazine at the top of teen magazine circulation ratings. Total net revenues from all Club offerings rose by 24,4% over the year. This remains a growth area for the business and the expansion of The Club into related areas will be pursued in the next year.
One2One
One2One is a discounted airtime offer sold through telemarketing. It provides the convenience of an airtime contract linked to a group card. At present this product is exclusively an MTN offering. Over recent months, as service levels have improved, the product has been sold with more conviction. The convenience of this product has been accepted by customers and the billing base grew by 46,2% in the year.
Pienaar Sithole and Associates (PSA)
To counter a perceived trend by banks to own third-party debt recovery agencies, and hence a concern about the effort that would be applied to the group’s work lodged with these agencies, the division started a business based in Randburg focused on the recovery of written off debt. During the latter part of the year the business was strengthened by the inclusion of a senior executive from the recovery industry. This business currently devotes itself exclusively to the group’s debt recoveries.
NET BAD DEBT
Collections were a challenging area of the business in the past year. Gains were made in the previous year on improving early-stage delinquency levels and returning more customers to the status of buyers, and in the past year focus was renewed on the front end. By conducting credit awareness campaigns and improving its predictive risk capability, the division reduced the overall value of accounts rolling into collections by 4,3%. Nevertheless, those that did end up in collections proved to be more intractable, with the result that the value of accounts removed from collections fell by 1,0%.
Third-party recovery agencies, including the group’s own agency, PSA, also suffered as distressed accounts yielded lower repayments. The debt review process provided by the NCA as a relief mechanism to over-indebted customers also had the effect of delaying or pre-empting debt collection procedures. Payments recovered from payment distribution agencies for accounts under debt review have only recently started to improve.
Fraud
The fraud detection scorecards introduced last year have continued to benefit the group despite the impact of a higher incidence of fraud on the industry. As a result the incidence of fraud during the year remained below the group’s internal threshold.
Provisions
The division continued its use of the Markov model to identify the level of inherent risk in its customer base. This tool has proved reliable in its responses to changes in payment behaviour and in predicting future levels of write-off. Performance in the division is continuously evaluated against the provision predictions of the Markov model. In the past year the model required a R53,6 million charge to the income statement as against R31,7 million in the previous year. The doubtful debt provision now stands at R306,0 million, which represents 8,8% of the closing book compared to 8,5% of the closing book in the previous year.
Net bad debt, having been adversely affected by lower collection and recovery yields, grew by 37,3%. The ratio of net bad debt to credit transactions increased to 4,8% from 4,0% in the previous year while the ratio of total net bad debt written off to book debt increased to 9,9% from 8,7% in the previous year, but it is already showing a downward trend. It had been 9,7% at September 2009.
CUSTOMER RELATIONSHIP MANAGEMENT (CRM)
One of the group’s recent key strategies has been to consolidate the CRM function into a central one serving all the trading divisions in the group. This focused, holistic approach has resulted in growth in new customer acquisitions, as well as further leveraging of the large customer base.
After entering the second year of the original three-year CRM strategy, the group has seen the results of its intensified focus on customer acquisition and retention. Invitational mailings to boost new accounts resulted in an additional 166 000 new accounts opened, despite the difficult economic climate. Benefits arising from these new customers will be seen in the next year.
Recognition for the division’s invitational mailing drive came in the form of its first Assegai Award at the Annual Direct Marketing ceremony. Assegai Awards acknowledge excellence in direct marketing, taking into account both the creative concept and the return on investment achieved.
A customer entrenchment programme was implemented to ensure that new customers enjoy their shopping and continue buying at stores in the group’s 14 retail chains. It remains a key objective of the division to enhance customers’ awareness of the range of lifestyle and fashion merchandise which is opened up to them by having an account with the group. The ability to cross-shop on a single account across 14 retail chains is one of the group’s outstanding advantages over competitors.
In order to improve the gift options available across the different formats within the group, 14 types of gift cards were launched in all stores of the group. There was a positive response to these gift cards in terms of both the amount of media publicity generated and the extent of sales, which exceeded expectations. The gift cards replaced paper vouchers previously sold in the group’s stores and in the five months that have elapsed since the launch in November 2009 have generated more than double the value in turnover generated by the previous paper-based gift certificate programme.
The division was the recipient of two Gold Prism Awards at the annual PRISA gala function in recognition of the gift card initiative and its internal communication. These awards are presented to companies that successfully incorporate strategy, creativity and professionalism into their public relations and communication initiatives.
CREDIT COSTS
Credit costs increased by 13,3% (as against 26,5% in the previous year) primarily as a result of the expanded invitational mailing programme and staffing increases for telemarketing.
PROFIT
The year’s divisional profit increased by 16,4%, with growth of 31,1% in other income playing a major role in the overall increase.
STRATEGY
The division will continue its efforts to grow the active account base. This is a key point in the group’s operations since 62,6% of total merchandise sales are made on credit and account holders have furthermore proved to be highly receptive to the financial products supplied by the group.
Expansion is planned for The Club and in insurance and cellular products. Market research suggests that substantial growth in these areas can be expected, with the group’s credit account offerings as its foundation.
The Retail Technology division has already produced a substantial turnaround in the cellular area of the business and has placed the division in a position to grow the group’s share of the cellular goods market and related services. The internet, direct selling and other avenues will be explored by this division.
| Salient statistics* | ||
| 2010 | 2009 | |
| Number of accounts with debit balances (’000s) | 2 062 | 1 975 |
| Credit sales as a percentage of total retail sales | 62,6 | 61,8 |
| Net debtors’ book (Rm) | 3 169,3 | 2 746,3 |
| Arrear debtors as a percentage of debtors’ book | 22,1 | 24,2 |
| Net bad debt write-off* as a percentage of credit transactions | 4,8 | 4,0 |
| Net bad debt write-off* as a percentage of debtors’ book | 9,9 | 8,7 |
| Doubtful debt provision as a percentage of debtors’ book | 8,8 | 8,5 |
| Percentage able to purchase | 81,7 | 81,5 |
| * Including VAT, excluding movement in provision |
Investing in talent development is an ongoing focus to ensure a supply of talent and skills to meet our business requirements. The division is in the process of rolling out a performance management process, as well as other initiatives to drive towards meeting employment equity targets. A nationwide skills shortage at senior management levels is an ongoing challenge. Details on the group’s human resource activities – including employment equity, skills development, and occupational health and safety – are provided in the Human Resources review.
PROSPECTS
The current economic situation remains negative and while performance of the book has improved, it is expected that the recovery will be slow. Despite this, there are prospects that the bad debt position should continue to improve. In addition the interest rate cycle, even if not currently at the bottom of the curve, should start moving upwards as the widely expected revival of the economy occurs. The NCA formula has a ratcheting or levering effect which should work in the group’s favour in terms of improved interest margins when interest rates increase. On current indications it should be possible to achieve double-digit growth in turnover from financial service products.
