If you’re an African Bank shareholder right now, you’ll probably not be in a very good mood. The JSE-listed microlender’s share price has plummeted like a falling piano in the last couple of days. The CEO has jumped ship and the company itself looks like nothing short of a biblical miracle, a takeover or a government bailout can save it now.
Not so long ago African Bank shares were trading at R40 with a super healthy dividend. It was an attractive investment. As of right now you can pick them up for as little as
85c 30c, but it’s not exactly a bargain even at that price.
So where did it all go so very wrong? The rot really is a result of a putrid combination of bad management, recklessness and the company’s poor business model. The first two points are self explanatory and best reserved for articles in The Economist, but what was wrong with the design of the African Bank business model and what can be learnt from their mistakes?
- It’s not all about the money: African Bank is a micro-lender, which means in the South African context that they lend money to desperate people at crazy, unethical rates and conditions. This is neither sustainable nor acceptable. Morally the design of their business was flawed. It’s good business practice to make a fair profit, but to do so by taking advantage of vulnerable people just results in bad karma. Although you can’t list this on a balance sheet, good karma is real and should be the starting point of any business model design.
- Transparency: African Bank saw an opportunity to sell more credit to desperate people by selling them over-priced furniture through Ellerines (the furniture retailer). They owned that business and it ended up biting back hard as a result of uncontrollable bad debts. Cause when you rip people off by taking advantage of them for not knowing any better, it will come back to haunt you. The lure of a new TV set or a comfy couch for the family room came with complicated terms and conditions that got a lot of people into serious financial trouble.
- Keep it clear: On that point, business models that are too complex in their design are difficult to manage. A bank owning a furniture retailer sounds like an innovative idea on the surface of it, but when used as a front to fleece your customers it gets messy to manage. Bankers and retailers do not mix well. Business units need to compliment each other and add to the overall mission of the company.
- Value: A business model is valuable when it makes a positive contribution to society, not just a sizeable profit for its shareholders. You need to be asking yourself the question; ‘If this business fails, will society be the poorer for it?’.
- Give back: African bank sold debt. Nobody dreams happy thoughts about debt. Sure it’s a financial instrument that can be a powerful tool when used correctly, but you’re not really offering your customers anything that they will get any kind of real satisfaction from. Even a bank can make customers feel special, feel valued, feel like they matter in life. Functional service brands have their place, but when functional at a steep price is all that you offer, the design of your model needs a bit more work.
As the old saying goes, ‘Live by the sword, die by the sword’. Business model design is not given nearly enough credit yet, but in time perhaps efficient and sustainable modelling will be one of those niche design categories that society will one day value.