Old Mutual says it received Prudential Authority approval to apply for a banking licence in South Africa, plans to launch in 2024, and break even in three years.

The financial service company announced the development in a voluntary trading update for the nine months from 1 January to 30 September 2022.

“The establishment of an entity in the Group with a banking licence is a natural progression of our core strategy, helping us to sustain our customers’ prosperity through an enhanced transactional banking capability,” Old Mutual informed shareholders.

“The Group has existing lending and transactional solutions which, in South Africa, consist of our Money Account and an unsecured lending product.”

Old Mutual said these services are offered mainly to its Mass and Foundation Cluster customer base.

It also noted that its unsecured lending product is already a strong contributor to group profitability.

“The current transactional solution is delivered through a commercial arrangement with a third-party bank.”

According to Old Mutual’s website, its third-party partner is Bidvest Bank.

Old Mutual said the partnership is being “reassessed”.

“While this commercial arrangement has allowed us to gain experience in transactional banking services, a divergence of aspiration requires us to reassess our future arrangement to deliver on our customer needs,” it stated.

“The establishment of a bank within the group will allow us to hold the primary relationship with our customers, driving greater regular interaction with them and enhancing the cross-sell opportunity across the group.”

Old Mutual said having an in-house bank will also enable it to accept retail deposits, providing a cheaper source of funding.

“We are building this transactional capability using the latest technology that will allow enhanced servicing and personalisation,” Old Mutual said.

“This, together with a cloud-based technology stack, will enable us to deliver cost-effective, flexible and scalable solutions to our customers.”

Old Mutual has approved R1.75 billion in expenditure to complete the build of its transactional capability.

“In line with the business case, we have incurred costs of R830 million for the current period and approximately 10% of these costs were capitalised,” it said.

“Once relevant Prudential Authority approvals are received, the launch is targeted for the second half of 2024. The entity is expected to break even three years after the launch.”

Old Mutual said that as the bank matures after breaking even, the return is expected to be significantly above the target return of 4% in excess of the cost of equity.

“We are currently working on our application under Section 16 of the Banks Act for the registration of the bank,” it said.