Controversial fintech company Net1 could be heading for the Constitutional Court over compensation for distributing social grants in the six months ended September, which it says resulted in a R557m loss for its subsidiary Cash Paymaster Services (CPS).
Net1 wants the court to recommend that the National Treasury reimburse the full cost of distributing grants to rural-based recipients. But the expert panel appointed by the court has urged the court to consider the profit that Net1 continues to make from transaction-processing fees earned from social grant beneficiaries.
Losses relating to grant distribution were the major factor behind what one local analyst described as a shocking 98% slump in Net1 profit to $1m in the three months to end-September.
CPS’s five-year contract to distribute social grants to 11-million recipients on behalf of the SA Social Security Agency (Sassa), which was worth R10bn and was mired in legal battles since it was first awarded in 2012, was due to expire at the end of March 2017. The Constitutional Court ruled just weeks before that date that CPS’s contract had to be extended for 12 months because Sassa had not made credible alternative arrangements. Those 12 months were extended for an additional six months to end-September 2018. The court ruled that CPS could not make a profit on the service during those six months and would only be paid for the grants it distributed.
In April the Treasury recommended CPS be paid R51 for each recipient granted cash in rural areas where costs are significantly higher due to the absence of retail and banking infrastructure. This recommendation has been challenged by the expert panel. Net1 finance director Alex Smith said it will keep using the old fee of R14.42 until the court makes a final decision.
During a conference call with analysts on Friday Net1 CEO Herman Kotze described the post-September period as a “new dawn” for the company now that it was relieved of its constitutional obligation to distribute social grants. “We are now able to dedicate our considerable efforts and resources to the provision of financial inclusion services to the unbanked and underbanked in SA and internationally,” said Kotze.
The company’s controversial EasyPayEverywhere (EPE) product dropped 32% of its cardholders between end-July and end-September as Sassa migrated grant recipients to the new SA Post Office card. Sassa also restricted the number of recipients paid at CPS-controlled paypoints to 300,000. Kotze told analysts the court ruling required CPS to deploy its entire infrastructure to ensure there was no disruption in grant payments.
“As a result the number of beneficiaries we serviced at paypoints, which forms the basis of the fee we charge, declined exponentially.”
Kotze said Net1, in partnership with Cell C, was well placed to target the rural market where there are five million potential new EPE customers. The EPE product, which CPS says offers the cheapest lending and insurance in the local market, has been described by activist organisation Black Sash as exploitative.
On Friday, Net1 shares fell more than 46% to R50.54, its biggest one-day loss since April 2018.
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