If you were standing on the precipice of the future as the millennium turned, would you ever have guessed that banking would be one of the most controversial, innovative, profitable and unexpectedly absorbing sectors out there? Everybody, at that point, I presume, would have guessed tech (remember Y2K?) and not much else – and they would have been right in a sense.

But banking! What a wild ride it has been over the past quarter of a century. From the highs of the Bitcoin boom to the lows of the international financial crisis, banks have become perhaps the most unexpected sector in our era of innovation, triumph, creative destruction and just plain old destruction. 

We have learnt about black swans, overconfidence and strange financial instruments. We have learnt about “too big to fail” and the devil’s pact between governments and banks. But banks have become intimate parts of our everyday lives. In 1990, perhaps 30% of South Africans had a bank account; now every adult South African has at least one bank account. (This explains, in part, why I get so impatient about SA’s political class constantly wringing their hands about SA’s banking participation rate; they are just parroting the battles of yesteryear without the slightest notion of what is happening under their own noses.)

Banks are also the unacknowledged powerhouse behind tech and perhaps the most lucrative client of the tech industry. Tech has powered banks, but banks have largely paid the bills. The huge profits and growth chalked up by cloud computing like AWS, Azure and their ilk is not about your emails; it’s mostly about banks. 

The old joke about banks is that people like bankers, but soon they lose interest (sorry). The stereotype of the banker is someone upright, well-dressed, very conservative and instinctively cautious. How profoundly has that changed in such a short time? Catching sight of a tie now in a bank is a rarity. Bank architecture has changed along the same lines - gone are blockhouses, signifying solidity and strength. Banks are now designed like the “service centres” that they are.

Last week, two moderately notable things happened in South African banking. First, Capitec announced its interim results, tabling a 36% jump in profits. It’s a flattering number with the comparable number artificially suppressed a bit. But still, for the umpteenth time, Capitec has astounded the market; it’s now SA’s largest bank by clients, and its market cap is 50% higher than Absa and Nedbank combined. All other banks in SA are trading on supercheap price:earnings ratios of around or below 10 times earnings; Capitec is trading at 2.5 times that. The cobbled-together microlender that once was has come of age with a vengeance - and investors want a piece of it and no other banks. 

It’s almost as though the entire market is holding its breath and asking: “When will this bank stop growing?” The answer, if the forward estimates are to be believed, is not any time soon.

So, if you think that Capitec has cornered the lower end of the market and all the other banks are furiously competing in the higher end of the market, then it would come as a surprise to you - as it was to me - that TymeBank has just reached 10 million customers, also announced last week. It did that in less than six years. Tyme has reached half the client number of Capitec in a third of the time, without hurting Capitec in the least. What on earth is going on here?

I chatted to TymeBank’s CEO, Karl Westvig, recently to try to get a sense of this. The answer is complex, but I think it comes down to the fact that tech has made banking work for people with relatively modest amounts of money in their pockets. In some ways, Tyme is simply Capitec with rocket boosters. One of Capitec’s famous innovations was to remove banks from malls and put them near taxi ranks. Tyme has dispensed with banks entirely; it offers only kiosks. It has dispensed with physical money too: no physical money changes hands; it is all digital. By smashing costs, it can offer better savings rates than established banks struggle to provide.

The result is that Tyme’s cost growth over the past five years is probably up 10% to 20%. But revenues are 20 times, says Westvig. The bank is now breakeven, and “positive jaws” are just going to become bigger and bigger as the bank gains customers, which it is doing at the rate 170,000 a month. Incredible.

Tyme is actually by no means the only bank in the world with this model: Nubank in Brazil has more or less the same business plan and, amazingly, its growth rate has been more or less the same. The diverse set of TymeBank owners is now seeking out new markets at a furious pace: the Philippines is the most advanced, but then it has its sights set on Vietnam and after that Indonesia. That will be three new markets in two years with a combined population of a little less than half a billion people. 

What’s the risk here? The same as any germane to banking: overconfidence, client desertions, technical faults, economic decline and reputational damage - to mention but a few. Not a picnic, running a bank. But it’s noticeable that both Tyme and Capitec are flourishing precisely when the economy is struggling - perhaps because the economy is struggling. 

The ability of both banks to accurately send hundreds of millions of instructions, instantaneously without fault is what lies at the root of the democratisation of banking. The end of this story has now yet been told, but what a sight to behold.

Good investing,

Tim Cohen