TFG FINANCIAL SERVICES DIVISION

TFG Financial Services is the custodian of the group’s customer database. In this capacity it looks for opportunities to retain and grow that base whilst providing a range of products and services that strengthen the group’s relationships with its customers. These products and services are generally of a financial services nature and include credit, insurance, publishing and cellular products. The division operates four large call centres employing a total of 1 100 agents.

The division is made up of four specific business units:
  • Retail Technology;
  • Credit Services;
  • Publishing and Insurance; and
  • Group Marketing, Communication and Customer Relationship Management (CRM).


Retail Technology unit

This unit focuses on making contemporary mobile devices, accessories and related connectivity available to the group’s customers. This includes all forms of mobile technology such as cellphones, tablets and navigation products as well as accessories and network connections. The group has a relationship with both MTN and Vodacom, which provide the bulk of the products and connections.

In the previous year the group offered mobile technology to its customers through 1 040 of the group’s stores. This was increased in the past year to 1 160.

Credit Services unit

This unit manages the group's in-store credit card programmes, which consist of 14 different card formats. Its function 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.



Publishing and Insurance unit

This unit oversees the group's interests in the Club, a facility which offers customers of the group a range of benefits including automatic insurance, medical help lines, 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 this unit. These products include policies related to card loss, cellphone loss, personal protection and jewellery loss.

Group Marketing, Communication and CRM unit

This unit is responsible for all communication with all of the group’s customers. This involves increasing the awareness of the group’s 14 brands with its customers and promoting shopping across these brands. Group-level marketing campaigns and customer acquisition drives also form part of this unit’s responsibility.

Following the successful launch of the group’s mission, values and corporate identity (CI) by this unit, it retains responsibility for the ongoing execution of the CI throughout the group and to external parties.

The above-mentioned units represent the group in a number of forums which include the Consumer Providers Association (CPA), The National Debt Mediation Association (NDMA) and the Direct Marketing Association (DMA).

All units are pleased to report that there were no incidents of non-compliance with regulations and voluntary codes controlled by these associations during the year under review.

REVIEW OF THE YEAR

Despite continued uncertainty in financial markets, it is pleasing to report that over the year as a whole there was positive improvement in the quality of the debtors’ book, as well as a significant increase in the revenue generated from this book.

Whilst the impact of the 2010 FIFA World CupTM football tournament on sales was eagerly awaited, it was uncertain how this event would affect the payment behaviour of customers. A number of additional communication processes were put into place and it is pleasing to report that there was no disruption to payments during this period.

If anything, buoyed by the additional cash coming into the country, payment efficiencies improved and growth in the percentage of cash sales for the period outstripped that of credit sales.

Further improvement in the control of the debt review process under the National Credit Act (NCA) has seen payments from this source stabilise and the number of new matters has reduced. At year-end the total value of business under debt review amounted to R95,8 million.

During the early part of the year many of the recovery agents whom the division uses for processing its charged-off debt reported poor performances. This caused the division to review some of its strategies and to look at ways to improve the yield from this source. Sales of slow-paying debt were discontinued and the debts were moved into agencies that had shown an ability to effectively collect this debt. This strategy, coupled with a focus on the division’s own debt collection agency, PSA, has worked well and recovery performance improved toward the end of the year.

There were two interest rate cuts during the year, bringing the annual weighted average interest rate under the National Credit Act (NCA) down to 23,4% from last year’s 26,0%. Because of the gearing of the NCA rate to the repo rate, a reduction of this nature has a significant impact on interest revenues. Fortunately, the book growth of 20,6% ameliorated some of the margin loss.

One of the key objectives assigned to the Credit Services unit for the year was to grow the active account base by 10%. The strategy used to carry this out involved a combination of writing new business, the reactivation of accounts, a reduction in charge-offs, and the prevention of attrition in the base. Month by month this was carefully monitored and strategies were adjusted to achieve the goal. By year-end this effort was rewarded by a record 10,5% growth in the active account base. New accounts totalling 590 000 were opened during the course of the year.

A review of the group’s new account evaluation processes was also carried out. Certain operational changes were introduced to improve customers’ experience when opening a new account. In addition, over the past period, the quality of the information that is received from the credit bureaus has improved. These bureaus produce a score for each customer on their database. These scores now incorporate microloan information from the national loans register maintained under the NCA.

Tests were conducted over several months to ascertain the impact of these new scores, coupled with the Credit Services unit’s own profit scores, on new account decisions. It was determined that there were profitable segments that were being turned down, and certain other segments that the group should be rejecting. The revised scores were then introduced into the group’s day-to-day operations. The acceptance rate has risen, leading to a significant improvement in new account profit for marginal additional risk.

RETAIL TECHNOLOGY UNIT

The process of consolidating all the group’s cellular trading activities into one centrally-controlled unit in the form of the Retail Technology division has produced good results. The centralisation of the planning activity, the rationalisation of orders, and the more appropriate range selection for each trading division has led to fewer stock-outs and to improved stock turn ratios.

During the year the group sold more than 1 000 000 handsets and increased annual sales by 26,5%. The Sports division commenced selling cellular products, bringing the total stores in the group involved in cellular trading to 1 160.

CREDIT SERVICES UNIT INTEREST INCOME

The group’s credit offering gives customers the option of paying for their purchases over 6 to 18 months. On the 6-month product, customers who pay the required monthly instalment are charged no interest. All other payment options attract interest. Currently 40,9% of customers make use of the 6-month product. In the previous year the figure was 47,8%. A total of 74,0% (2010: 70,7%) of customers are paying interest on balances of 84,6% (2010: 81,1%) of the value of the total book.

During the year there were two interest rate reductions. The gearing impact of these reductions according to the NCA formula reduced the weighted average annual interest rate by 2,6%.

Despite this rate reduction, interest income grew by 10,8% primarily as a result of the book itself growing by 20,6%. This book growth took place on the back of strong credit sales, a large volume of new accounts opened, and a marginal increase in the number of accounts selecting the longer-term payment products.

Profitability      
  2011 % 2010
  Rm change Rm
Interest income 705,2 10,8 636,4
Other income 285,5 32,2 215,9
  990,7 16,2 852,3
       
Net bad debt (401,7) 11,9 (359,1)
Credit costs (248,1) 4,8 (236,7)
Profit before tax 340,9 32,9 256,5

OTHER INCOME

Other income, which consists of Insurance, Club and One2One products and services offered to customers of the group, grew in aggregate by 32,2%.

INSURANCE

During the year a "Men’s Only" insurance product was introduced to the customer base. This product offers cover specifically for dread diseases that afflict men. It also provides further cover for accidental and natural death. The “Men’s Only” offer is further enhanced by an outsourced legal helpline that allows customers to get legal answers to questions of concern. The product, which is sold primarily through telemarketing, has been well received by the market.

Net income from insurance activities grew by 25,6%.

PUBLISHING

The group offers a number of publications to its customer base through the Club concept. These publications, which are of a lifestyle nature, include titles such as Club, Sport, Soccer, Kidz, ClubX and Livingspace. Accordingly they cater for a wide variety of readers. Some of the magazines host their own Facebook pages which give Club members a platform to interact with one another as well as to give the division feedback on content.

Net income from publishing grew by 36,0%.

ONE2ONE

The success of the One2One product continued into this year. It is essentially an airtime contract over 24 months that is charged to customers’ TFG account. The offer is exclusive to MTN and is an attractive proposition for many customers. Currently, from as little as R15 per month customers can receive airtime to the value of R50. Airtime is automatically topped up monthly.

The product is sold through telemarketing. During the year the number of accounts billed for One2One grew by 35,9%.

NET BAD DEBT AND PROVISIONS

The net bad debt situation improved in the year. Although it is clear that many consumers remain under pressure from excessive debt incurred in the past few years, the infusion of cash from the 2010 FIFA World CupTM tournament and above-inflation wage increases have no doubt assisted customers to improve their credit positions. It seems that a recovery is in progress, but it will be a steady process over an extended period of time. Net bad debt grew by 11,9%, much reduced from the previous year’s 37,3% growth. As a consequence of these improvements the debt ratio is more favourable, with net bad debt to closing debtors reducing to 9,2% from the previous year’s 9,9%. Debtors in arrears reduced to 20,7% from 22,1%.

There was some stabilisation in the number of accounts going under debt review and the cash flow from these debtors also improved.

Post charge-off recoveries was another area that came under pressure. The trend has continued into the early part of the next year. However, toward the latter part of the year yields started to pick up and this recent improvement is encouraging.

The increased incidence of fraudulent activity on credit applications remains a disturbing trend for the consumer credit industry. This fraud is often perpetrated by syndicates. During the year 69 syndicates were closed down with several arrests, this largely as a result of concentrated effort in the forensics unit.

The group continues to provide for doubtful debts on a recognised accounting basis that takes cognisance of actual payment performance. The provision ratio reduced to 8,7% (2010: 8,8%) and now totals R365,8 million.

CREDIT COSTS

Credit costs increased by 4,8% during the year despite a substantial investment in the customer relationship management programme. Credit cost containment was assisted by the recoupment of collection fees on arrear debt.

PROFIT

The division's profit for the year increased by 32,9% (2010: 16,4%).

GROUP MARKETING, COMMUNICATION AND CRM

The three-year CRM strategy devised in 2008 focused on three core objectives − customer acquisition, customer growth, and customer retention. The campaigns implemented to meet these objectives have exceeded expectations and have contributed to the group’s sales growth.

Salient statistics    
  2011 2010
Number of active accounts ('000s) 2 278 2 062
Credit sales as a percentage of total retail sales 61,5 62,6
Net debtors' book (Rm) 3 823,0 3 169,3
Arrear debtors as a percentage of debtors' book 20,7 22,1
Net bad debt write-off* as a percentage of credit transactions 4,7 4,8
Net bad debt write-off* as a percentage of debtors' book 9,2 9,9
Doubtful debts provision as a percentage of debtors' book 8,7 8,8
Percentage able to purchase 82,0 81,7
* Including VAT, excluding movement in provision    


CUSTOMER ACQUISITION

The target of acquiring 300 000 new customers in the year through invitational mailing was attained. This was significantly more than the 166 000 attained in the previous year. This growth was achieved through the use of a combination of marketing channels. The investment in new customers will continue to benefit the group in the future.

New accounts drives in the stores also contributed significantly to the growth of the account base. Their success benefited from a focused approach across all the retail brands, a consistent in-store message and targeted magazine advertising.

CUSTOMER GROWTH

Gift-giving events were used as triggers to promote cross-shopping into a wider range of the group’s retail brands. The ability to cross-shop on a single account across 14 retail chains remains one of the group’s biggest differentiators in the retail market.

Overall the initiatives resulted in an average incremental lift in spend for these campaigns of 15,3% and an average return on investment of 1 062%.

CUSTOMER RETENTION

The number of dormant customers dropped from 12,5% of the book to 11,0%. This was achieved through campaigns targeting dormant customers at specific points in their cycle.

The implementation of SAS Analytics, a leading software package, will further enhance the division’s ability to determine the optimal point at which to incentivise dormant customers and hence reduce attrition.

An integrated voucher tracking system was implemented which has enabled accurate tracking and return on investment calculations for all offer-driven campaigns.

The group once again received Assegai Awards at the Annual Direct Marketing ceremony in recognition of excellence in its direct marketing campaigns.

COMMUNICATION

The group’s change of corporate identity to “TFG”, accompanied by the work associated with the group’s mission and value statement, was undertaken by this division.

The division’s "iamme" student campaign continues to gain attention on student campuses and at selected graduation fairs nationwide. The campaign’s objective is to position TFG as an employer of choice.

Gift cards, which went live in November 2009, have seen very positive take-up by customers. Gift card sales for the financial year amounted to R74 million.

PROSPECTS AND STRATEGY

The focus of the division will continue to be on expanding the number of customers with whom the group does business. The current economic climate, coupled with new legislation, presents numerous challenges in acquiring new customers.

Cash customers, who account for 38,5% of the group’s retail business, are a group that will receive particular attention this year. The division intends to provide these customers with a means of identifying themselves whenever they purchase. In so doing it will be possible to better understand these customers’ spending patterns and merchandise preferences, and it will create the opportunity to promote cross-shopping. In addition, it will ensure that the division maintains regular communication with this important group of customers.

The promotional benefits that are made available to cash customers will also be gradually rolled out to the credit customer base.

It can be expected that there will be continued gradual improvement in customers’ ability to service their debt. Ordinarily this would translate into ratio improvements in bad debt. However, given the orientation of the group’s scoring process to profit as opposed to pure risk and the more expansive customer acquisition process that has been embarked upon, the division is comfortable to favour sustained bottom-line improvement in a trade-off with improved bad debt levels.

During the next year the division will expand the group’s credit offering to its stores in Botswana and Lesotho, and also look at how payment alternatives can be offered to stores and customers in Zambia, which are currently trading on a purely cash sales basis.

The division will introduce a new insurance product and a new Club format early in the year and explore opportunities to expand the reach of the Club by developing third-party relationships that will provide access to more customers whilst rendering service to these customers and third parties alike.

Cellular and mobile technologies now include a variety of internet-connected devices and this is seen as a growth opportunity. Until now the group’s offering has been confined largely to cellular handsets sold through its chains of stores. Going forward, the opportunity exists to expand the product range as well as the sales channels used to provide connected hardware and services. During the year the division will experiment with some of these options to determine what best suits the needs of the customer base whilst also tying in with the group’s lifestyle offering.