Telkom moves into financial services

• South Africa
• Financial Services, Insurance, MTN, Telkom, Vodacom
• August 3, 2020

Telkom is an excellent example of a company that has had to move away from its traditional business model, although the journey has been anything but straightforward.

As Telkom emerges from a painful retrenchment and restructuring phase, the company is looking to the future. With more than 12m customers and a market share in the SA mobile market of more than 10%, Telkom does hold the keys to a powerful distribution channel.

The modern world is all about platform businesses and paying users, which Telkom has in abundance.

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Funeral cover as the obvious choice

When companies move into the financial services space to participate in that juicy profit pool, they usually start by selling funeral cover. Nobody knows exactly how big this market is in South Africa, but reliable estimates suggest somewhere between R7bn and R10bn.

You don’t have to look too hard to find all kinds of companies offering bundled services particularly to lower income customers, with funeral cover often featuring as the anchor product.

These products are almost always done in partnership with existing financial services product providers, because it doesn’t make sense for companies like Telkom to create their own funeral policies from scratch. Telkom brings the distribution channel and an insurance partner brings the product.

In this case, the partner is Guardrisk Life. The structure is a “cell captive” which is a fancy legal construct for an insurance structure that allows Telkom to participate in some of the underwriting profits (but therefore also the risk).

In other words, it lets Telkom earn profits as though the company is a licensed insurer. The alternative would be a pure commission model which is less lucrative but of course less risky as well. A company with a balance sheet like Telkom has the option of taking on this risk and Telkom has little choice but to try maximise profits from this space.

Online marketplace

It’s worth remembering that Telkom has pivoted another business – the Yellow Pages. Telkom owns 100% of the Yellow Pages and is rebranding the business into an online marketplace called Yep! – a platform that will allow businesses to sell directly to the public.

Yep! claims to already have over 500,000 businesses listed on the platform. Naturally, the company would’ve moved Yellow Pages listings onto the platform first. That’s the real asset that Telkom paid for when it bought the company.

Profitability will be the concern here. If Telkom tries to undertake order fulfilment and the like, shareholders might get nervous. Takealot hasn’t managed to be profitable despite operating at a scale that Yep! can only dream of.

Competition is fierce

Telkom is squarely up against the market powerhouses of MTN and Vodacom in this value-added services space, in addition to other funeral policy providers who distribute their products via other channels.

The online marketplace faces its own set of competitors, many of whom are established consumer brands with huge marketing budgets. It will be an expensive business for Telkom to get right.

It won’t be easy, but one must acknowledge Telkom for a strategy that has seen the group move away from fixed-line revenue, avoiding its very own Kodak moment.

Telkom is down 33% this year. MTN is similarly down 32% but Vodacom is up 11%, clearly the winner this year in this sector on the JSE.