Mercantile Bank has just launched a Private Bank that holds its very own form of differentiation – offering private banking exclusively to entrepreneurs. In Mercantile’s Chief Executive’s own words, ‘Whether you’re Richard Branson or the hairdresser around the corner here…that’s our target market.’ CE Karl Kumbier joined Alec Hogg in the CNBC Africa studios to unpack the bank’s new innovation. – LF
ALEC HOGG: Welcome back to Power Lunch. Mercantile Bank has launched a Private Bank. It focuses on entrepreneurs. The launched happened this morning and joining us in the studio is the Chief Executive, Karl Kumbier. Karl, I’ve had a bit to do with you guys lately and I must say, I like what I see but it never struck me that Mercantile would be a company that would be moving into the Private Banking field.
KARL KUMBIER: Yes, I think Mercantile is currently in quite a nice position. We have lots of capital. We have a clean lending book. We have a lot of liquidity and we spent a lot of money on a new core banking system a couple of years ago. What we then said was that we want to embark on a growth strategy. As part of the growth strategy, we bought a rental finance business and basically, in the past couple of years we’ve growth their lending book from about R30m-odd to R500m, so that’s going nicely. Then we set up a leverage finance unit for entrepreneurs wanting to buy businesses and structure deals in a different way. I must say, that thing’s taken off really nicely. In the past year, we’ve paid out about R850m worth of new business there. A while ago, when we spoke to you we had designed a new business centre concept for entrepreneurs, totally different to any bank branch you’ve ever seen.
We’re starting to roll those out now, so we’ll have 15 of those around the country. We already have 15, but we’re going to revamp all our existing ones and we’re building a brand-new one in Bedford. Currently, the big issue for us is to get scale, so it’s very difficult for a business to move their business from another bank if they don’t know you and haven’t built up that trust yet. Then we thought to ourselves ‘why don’t we look at doing something where we can hook a customer with a product or service, and offer them great service’. Why wouldn’t they bring their business across at a later stage? The penny dropped for us…Private Banking. We thought ‘okay, a Private Bank is all about individuals, so why don’t we go and build the first Private Bank in the country, which is purely for entrepreneurs’’.
ALEC HOGG: Investec might argue that they’ve gone the same route.
KARL KUMBIER: They bank high nett worth individuals – large corporates and people working for the large corporates – and professionals. I agree that there’s a slight overlap. They have the professional side and they’ve done really well in that space, but they don’t have business banking, as Mercantile does. We’ve banked entrepreneurs for 49 years. We understand entrepreneurs. We understand how they think. We understand the risk and that’s why we’re exclusively for entrepreneurs. For example, if someone from SA Breweries (one of the Directors) wants to bank with us, that’s not our target market.
ALEC HOGG: So you’d say ‘no, thanks’.
KARL KUMBIER: Yes, we’d say ‘no, thanks’. We’re only banking with entrepreneurs. Whether you’re Richard Branson or the hairdresser around the corner here…that’s our target market. At the end of the day, we want your business to move across to us.
ALEC HOGG: What’s so different between entrepreneurs and perhaps, Directors or professional managers?
KARL KUMBIER: Professional managers are being looked after and if you look at the big banks, they’re always happy to look at one side of the balance sheet. They like to take the wealth piece and invest it in their asset management units etcetera, but they’re not that great on lending you money. If you think of entrepreneurs, they obviously want their wealth management piece but they like to go and buy properties etcetera too, so you want to be able to offer them a solution on that side. If they had to go to a big bank and look for a solution to a home loan for example, they’re going to go in there and they’re going say… The bank will push it through the normal home loan channel. They’ll have to have a salary slip. At the end of the day, they don’t earn enough through a salary, to be able to afford a home loan and yet, their business is generating a really good cash flow.
Since we’ve been doing business banking our whole lives, we take a single view of that customer and say ‘you draw this much salary out of the business. You’re also generating X amount of cash in your business and your forecasts are looking really good, going forward. We’ll take both of those into account, and then we’ll lend you money on the back of that’.
ALEC HOGG: How are your clients feeling right now? We’re getting mixed messages. In fact, we have the latest RMB Business Confidence Index coming out today, moving into the positive territory for the first time in ages. We know that in the last few months, many entrepreneurs – particularly in manufacturing – were struggling. How do your guys feel?
KARL KUMBIER: It’s tough out there, very tough. There’s no light at the end of the tunnel yet, so I don’t think it’s going to turn in the near future. Entrepreneurs are resilient. If you look at ourselves, and our entrepreneurs, we have really good relations with all our businesses. If you have that good relationship, then you can sit around the table and work out ‘what do we need to do to assist you, because you might be going through a cash flow issue now or a bad cycle. However, we’ll do whatever we can to help you get through that cycle’. Most of our businesses have been on the books for many years. They’ve gone through a couple of cycles, so if you get to understand how their businesses operate then it’s not much of an issue.  It’s all about the relationship.
ALEC HOGG: But even Mercantile itself – because there will be many who remember – as a listed company, got into difficulties, and got investments from Caixa (the Portuguese operation) and now you’re awash with capital.
KARL KUMBIER: Yes, those issues were probably about 14 years ago. I think the bank went a little bit off the rails with bad lending, so it went through a huge restructure in those days. Then Dave Brown (my predecessor) took over the bank about 14 years ago, and from the moment he took over the bank returned a profitability within a year. We built up a capital base of close to R2bn over the last couple of years, so Caixa has been a very good shareholder in that respect, in that they haven’t asked for special dividends or anything. They’ve allowed us to keep the capital so that we can use it as a foundation from which to grow the bank.
ALEC HOGG: You also have an interesting management team around yourself. You’re ex-Standard Bank.
KARL KUMBIER: Yes and quite a few are ex-Standard Bank. We like to play from all the banks so that we get a bit of a variety. I think that if you look at our Private Bank now as an example, when we decided a year ago to build this Private Bank we thought to ourselves ‘do you go and hire or headhunt someone out of the big banks from a Private Banking point of view’, and the answer was ‘no’. The reason why is we don’t want to copy what they’re doing. If you were going to build something from scratch, you’d rather go and build from within. We actually promoted Tom Stillwell. He was running our Product Segment and Marketing, and we promoted him to that position to say ‘build this thing for us’ and I must say that the end product’s been amazing.
On day one, we said to ourselves ‘banks are very guilty of designing products and services they think you want, as opposed to coming to you and asking what you actually want’. On day one, we therefore set up a meeting with 12 of our customers and we chose male, female, large business, small business, old, and young as well – a really nice mix. We put them in a room and when we sent the email out, we said ‘listen, we’re thinking of designing a Private Bank. Would you help us?’ Every one of them accepted immediately. They arrived and we sat there for probably three or four hours per evening debating what the big issues are – what you want out of a Private Bank. The guys came back and a couple of issues were quite interesting. The first one was paperwork. Entrepreneurs don’t like paperwork. They’re saying ‘I want to come in here and open up accounts, etcetera. Just don’t give me paperwork’.
The second one was turnaround time. Being an entrepreneur, if you see a deal on the table now, you want to make the most of it. They seize opportunities all the time, so they need access to cash flow quite quickly. Then, from a Private Banking point of view, they said loyalty. ‘With many loyalty schemes you’re actually, never able to redeem your loyalty points, so give us something that we can actually use every day’. Many of them travel, so they want lounge access at the airports so those are the four big themes that came through. The way we’ve designed the Private Bank now – it addresses all of those. I’ll give you an example.
ALEC HOGG: Tell us about the lounge access because I’m sure there are a few people, thinking ‘hmm’. Okay, so does that mean Bidvest lounge or slow lounge?
KARL KUMBIER: Bidvest lounge is the premier lounge and if you have our black credit card now, you’ll go in there and you have access to the lounge. At least, when you travel you’re feeling a bit more comfortable because entrepreneurs travel quite a bit. I think what’s quite nice is the seamless account opening process. I was our first private customer. I signed up a few weeks ago and literally, someone sat in front of me with an iPad, and we captured all my details on the iPad. It took ten minutes. I signed on the iPad. I was given my credit card an hour later and it worked. You could draw money out of the ATM, so no paperwork.
ALEC HOGG: Karl, having been a client at Private Banks for many, many years, the key issue though is the person who looks after you. Quite often, one finds that person is promoted and moved around. How are you going to overcome that issue?
KARL KUMBIER: At Mercantile, if you look at the Business Banking side, our staff turnaround rate is very low. We actually gave our stats to our staff the other day. The industry averages about 18 percent. We average seven or eight percent and our relation managers hardly ever turn. They stay with us for a long time, so at least you build that relationship with a customer, you get to know their business, and they get to know their relationship manager. With the relationship managers on the Private Banking side, we’ve hired really, good experienced people, but with Business Banking experience. They have to have Business Banking experience. They get to understand your business. What’s going to happen now is that we’re very good, from Mercantile Bank’s point of view, at lending money to entrepreneurs and we have all the products and services a big bank offers, but we don’t have the wealth piece.
We’ve entered into a joint venture with Citadel and Peregrine. Citadel probably has 30bn-odd assets under management, they have a really, good brand and they’re always up there winning awards, etcetera. They’re our wealth partners, so when we come and sign you up, we’ll ask you ‘would you like someone to come to chat to you about your wealth management’ and then we’ll bring a wealth manager from Citadel, they’ll come and sit with you, and talk to you about your needs.
ALEC HOGG: Well, it just shows how things change. Karl Kumbier is the Chief Executive of Mercantile Bank, which was previously listed on the JSE. It then delisted. Lots of capital and its being correctly applied as you heard in that discussion. Another entrant into the Private Banking field but this time, focusing on entrepreneurs.
