Lesaka doubles down on township expansion

Lesaka Technologies is accelerating its expansion into underserved communities, betting that a growing physical distribution network and deeper product penetration across consumers and merchants will drive its next phase of growth.

The fintech group plans to add 15 new branches and 30 community sites this year as it expands its reach into townships and rural areas, while also reshaping parts of its merchant business and exiting non-core operations such as ATMs.

Lesaka Southern Africa CEO Lincoln Mali said the company currently operates 267 branches across South Africa and views distribution as one of its strongest competitive advantages. “We believe that distribution is very important for us to get to as many communities as possible,” Mali said.

The company’s “community sites” are designed as low-cost service points operating from existing community infrastructure such as halls, enabling Lesaka to expand its footprint without building full-scale branches. “What it means is we’re again extending the footprint without taking on more costs,” Mali said.

The rollout comes as Lesaka’s consumer business continues to accelerate strongly.

The consumer segment delivered an 81% increase in adjusted Ebitda during the third quarter ending March, supported by customer growth, higher product penetration, and rising cross-selling activity.

Active consumers increased 19% to more than 2-million customers, while the company’s base of permanent social grant recipients rose to 1.7-million customers, representing roughly 14.6% market share.

Management believes that share could eventually increase to 25%.

Executives argue that future growth will not rely solely on taking customers from rivals, noting that roughly 150,000 new grant recipients enter the market every month.

The distribution models that we have enable us to be where the customer is

—  Lesaka Southern Africa CEO Lincoln Mali

Mali believes its expanding distribution network positions it to capture a disproportionate share of those new entrants. “The distribution models that we have enable us to be where the customer is,” he said.

The company’s operating model also relies heavily on field-based distribution. According to Mali, roughly 60% of Lesaka’s employees work directly in communities rather than waiting for customers to visit branches.

Half of Lesaka’s active consumers now use two or more products, while 20% use what management described as the “full product suite”, up from 17% a year ago.

Management said there remained significant room to expand lending and insurance penetration within its existing customer base.

So far, consumer lending remains the largest contributor to earnings growth.

Loan originations increased 33% year-on-year to about R856m, while the outstanding loan book expanded 73% to around R1.4bn. Much of that growth has been driven by the rollout of Lesaka’s nine-month loan product, which now accounts for nearly half of all new loan originations.

Insurance is also becoming a more meaningful contributor to earnings, with 704,000 active policies. Lesaka has now started selling funeral and insurance products to non-Lesaka customers within the social grant ecosystem, targeting what management estimates is a 3-million-person uninsured market.

While the consumer division is firmly in growth mode, Lesaka’s merchant business remains in what management describes as a strategic build phase.

Active merchants increased 6% year-on-year to 132,000, driven by 8% growth in community merchants, which include businesses like taverns and spaza shops, following a restructuring of the company’s sales force.

Corporate merchant numbers declined 4%, largely due to heightened competition in lower-margin acquiring products such as standalone point-of-sale devices.

“If you take a corporate merchant who only has that POS device with us, a competitor comes and says, ‘I’ll offer you a better price’, [and] that merchant will give that competitor a chance,” Mali said.

The current focus was less about maximising headline merchant growth and more about improving ecosystem quality and long-term profitability, he said. The strategy centres on increasing product density across merchants through bundled software, payments, lending and cash-management products.

Mali said future growth would increasingly come from embedding multiple solutions into merchant operations across industries such as hospitality, fuel retail and township commerce. “Our strategy is not to compete on price; it’s to compete on value,” he said.

Lesaka, which is in the process of completing its takeover of the digital Bank Zero, has also exited the ATM ownership business after years of losses, a move management said aligns with broader changes underway in South Africa’s banking system.

The ATM operation had historically been loss-making, although management had reduced annual losses significantly over recent years. Mali said the economics of operating a dedicated ATM network no longer made strategic sense without significant scale.

“What we’ve been doing for a while is to give our customers a choice: they can go to any ATM and retail outlet, and therefore it’s not dependent on them coming to our specific ATM,” he said.

Lesaka is still pursuing acquisitions to expand its footprint in the continent.

Business Times