Nothing festive about more debt

With the festive period upon us, South African consumers are likely to be feeling the pinch. Many of them are already in more debt than they can handle, and this year have had to bear the brunt of a VAT increase and a number of steep petrol price hikes.

To help cover all the extra expenses of the season, some might consider using a credit facility at their grocery retailer, such as Pick n Pay or Woolworths. But debt counsellors New Frame spoke to in the build-up to the festive season cautioned consumers against increasing their debt to make ends meet these holidays.

Debt Counsellors Association of South Africa president Russell Dickerson warned South Africans against using credit offerings from food retailers. “When you are in the debt trap, you won’t get out without debt counselling,” he said.

“Consumers will definitely buy food on credit, even though credit shouldn’t be used for that,” said Dickerson. “Credit should be used for houses, cars, businesses, education – not living expenses.”

Chris Craven, from debt-counselling service Zero Debt, said if consumers had to borrow money on credit to buy groceries, they were probably already over-indebted.

He said many indebted consumers simply borrow money from Peter to pay Paul. “We advise consumers to use as little debt as possible. But if a person needs food, they need food. Whether they get the money from the bank or the grocery store, it doesn’t make much of a difference.”

‘Responsible’ credit

The ability to buy groceries on credit is not new in South Africa. Although Pick n Pay only launched its new credit offering in September last year, Woolworths has been offering a credit card for more than a decade through Woolworths Financial Services, a joint venture between Absa and Woolworths that was launched in 2008, offering multiple credit cards, as well as loans and insurance.

Responding by email to questions from New Frame, Woolworths Financial Services said the company was a responsible credit provider that extended credit in line with the provisions of the National Credit Act, which requires it to complete “robust affordability and risk assessments” before entering into credit agreements with customers. “In addition to our legislative obligations, we adhere to our strict internal credit risk policies, which enable us to extend credit responsibly and to treat our customers fairly.”

In April, Pick n Pay announced it had extended more than R1 billion in credit to 56 000 consumers. But that figure accounts for total lines of credit extended, whereas actual debt is closer to R200 million. Pick n Pay’s credit offering is run through its Smart Shopper card, and offers consumers 55 days’ credit with no interest, no joining fee and a R10 monthly service fee.

Pick n Pay deputy chief executive Richard van Rensburg told New Frame the retailer provides “responsible and low-cost credit” to its customers. He argued that many customers pay for groceries on credit for the sake of convenience.

“Our store account, linked to Smart Shopper, is designed for them, enabling them to benefit from lower fees and charges than those of other providers,” he said. “We don’t advise customers to buy food on credit, but for those who do already or would wish to, the card gives them value.”

“This service is provided by [Pick n Pay’s financial partner in its credit offering] RCS, and Pick n Pay does not earn anything from interest,” said Van Rensburg. “We do make savings on the bank interchange fees, which are given back to the customer in the form of double Smart Shopper points for using the account. This means all groceries purchased on our store account receive an additional half a percent discount.”

Van Rensburg said Pick n Pay had “strict processes and credit-granting thresholds” in place beyond the requirements of the National Credit Act.

A moral dilemma

Dickerson said although he could understand the motivation for retailers wanting to offer consumers the ability to buy food on credit, the move is  “detrimental” to the financial health of South African consumers. “Is it the right thing, morally?” he asked rhetorically.

He noted that some retailers did not just offer credit, but enticed consumers to use the credit through offers such as money back on their first spend. He said it usually takes about a year from when credit facilities are taken for debt counsellors to pick it up in consumers’ debt profiles, which is why the impact of Pick n Pay’s credit service, which was launched only last year, is not yet visible.

Dickerson pointed to South Africa’s notoriously reckless practices of loaning money to people who are already heavily indebted. If these cases were investigated properly, he said, the debt involved could be written off in court.

Craven estimated that up to 40% of all lines of credit in South Africa could be extended recklessly, and that investigations into reckless lending  have resulted in complaints against debt counsellors to the National Credit Regulator. “They want us top stop investigating reckless lending cases,” he said.

Not for every customer

A sample of customers surveyed by New Frame leaving Woolworths and Pick n Pay outlets in Johannesburg suggested that buying groceries on credit was not very popular.

Some openly laughed at the proposition, whereas others expressed anger. Many questioned the ethics of grocery retailers offering credit, with one young man calling it a “plot for bankruptcy” and a “path to starvation”, insisting he would never buy groceries on credit. Another said debt was holding back the black middle class.

Two middle-aged women admitted they previously had Woolworths cards, but had cancelled them. One said she had done so because she had been tempted to buy things she couldn’t afford. “I prefer paying with cash now,” she said. The other said she sometimes used it to buy groceries, but her mother would “flip her lid” when she did that, so she cancelled the card.

One consumer said he wouldn’t use credit to buy groceries, but could understand why people would. “The National Credit Regulator must make sure there is no reckless lending,” he added.

The big, bad lender

RCS provides in-store credit for a range of retailers, including Cape Union Mart, Supa Quick and Coricraft. RCS began as the Foschini group’s consumer finance business, but was snapped up in 2014 by French bank BNP Paribas.

With more than US$2 trillion in assets, the bank has been referred to as the JP Morgan of Europe. In the past few years, particularly in 2017, it has been in the news for the wrong reasons, receiving huge fines for its part in currency scandals, sanctions busting and tax evasion.

It was fined US$246 million by the US federal exchange for its role in a currency scandal, while the New York banking regulator levied a fine of US$350 million in the same year.

Also in 2017, three French social justice organisations launched legal action against the bank, alleging its complicity in the Rwandan genocide by transferring US$1.3 million from the National Bank of Rwanda to the Swiss bank account of a South African arms dealer to facilitate the purchase of 80 tonnes of weapons.

Back in 2014, BNP Paribas was fined US$8.9-billion for breaking US economic sanctions by processing billions of dollars for Sudanese, Iranian and Cuban entities between 2004 and 2012. In 2016, Sudanese citizens took the bank to court, alleging it had facilitated the financing of the Janjaweed militia.

Lloyd Gedye

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