Unaccountable 00038| Net 1 and CPS- Welfare Profiteers

By Erin Torkelson, Abby May and Michael Marchant

The most cynical corporations seek to rip off the poor. Few have been as effective as Net1 and Cash Payment Services (CPS). While they have rebranded, they have not paid back their illicit profits owed to millions of South Africans

 

Between 2012 and 2018, South Africa’s social grant payment system, designed by Net1 subsidiary Cash Paymaster Services (CPS), showed how social welfare can be used by private actors for profiteering through the sale of financial products. Despite court orders that the contract was unlawful, and that CPS must pay back any profits made from it, this has not happened. Further, newly rebranded Net1 – now Lesaka – continues to profit from selling financial products to social grants recipients. Its privileged access to this market can be traced back to the original unlawful contract between SASSA and CPS.

More than 30 per cent of people in South Africa rely on a social grant to survive and in some instances to support their families. Since the introduction of the R350 per month social relief of distress grant (SRD) in response to the social and economic crises brought on by the Covid-19 pandemic, this has increased to nearly 50 per cent. South Africa’s social welfare system, though inadequate, is thus of paramount importance to supporting millions of people.

Despite its importance, South Africa’s social welfare system is once again facing an administration crisis. Since the beginning of November 2022, thousands of social grant recipients have either been unable to receive their grants or have had grant payments delayed due to technical ‘glitches’ in the system. These issues followed the Postbank taking on the job of administering grant payments after the South African Post Office – now in provisional liquidation – could no longer do the job. The Postbank, which should be administering these grant payments, is ill-equipped to take on the job; Open Secrets and Black Sash have written elsewhere about Postbank’s awful track record of mismanagement, fraud, and corruption. Regardless of the risks, SASSA remains committed to the Postbank taking on the contract, and grant recipients have borne the costs.

This is the last in a long line of decisions by SASSA that have been disastrous for grant recipients. The sheer number of grant recipients has made the social welfare system an attractive target for profiteers in the private sector. Together with mismanagement by SASSA, this has made millions of people vulnerable to predatory financial practices. The Chair of the Digital Frontiers Institute, David Porteous, warned in 2006, that “The regular cash flow of grant recipients may also make them an attractive target for lenders who may use irresponsible marketing techniques to lead to unsustainable indebtedness.” This continues to be a real risk in South Africa.

https://youtu.be/P0zt6iJ_pXU

SASSA’s unlawful CPS contract

CPS has a long history with South Africa’s social development administration, dating back to paying grants in rural provinces in the 1980s, when it was owned by First National Bank.  It continued to do this after being purchased by Net1 in the 1990s. As a result, when SASSA announced that it wanted to consolidate grant payments under one company, CPS emerged as the clear favourite because of its experience paying in relatively remote areas.

SASSA contracted CPS, in 2012, to distribute grants nationwide. At the time, this was the second largest government contract ever issued, after the infamously corrupt Arms Deal in 1999. The contract empowered CPS to embark on a massive enrolment drive, collecting the personal information of around 17 million beneficiaries and opening bank accounts for 10 million recipients. This would prove essential to allowing other Net1 subsidiaries to profit from the sale of financial products to grant recipients.

Despite the size of the contract in terms of value and public importance, it was declared unlawful by the Constitutional Court in 2013 after it was challenged by ABSA subsidiary AllPay. The process was deemed unlawful because SASSA changed the wording in the request for proposals at the very last minute, resulting in CPS being the only company that could win the contract. Originally, the requirement for biometric verification was only “preferred”, but this was changed to being “mandatory” at the last minute.

AllPay and CPS both had the capacity to verify recipient biometrics during enrolment, but SASSA now specified that they wanted a service provider to be able to do biometric “proof of life” checks every month. CPS claimed to have the capacity to verify grantees via fingerprint or voice biometrics each month, though the latter never worked and was stopped. The Constitutional Court ruled that this last-minute change reduced the number of viable bids to one and precluded a proper comparison of costs.

Despite these contractual irregularities, the Constitutional Court recognised that grant recipients had to be paid and that an order jeopardising this would not be just. As a result, it allowed CPS to continue acting in terms of the contract to ensure grant recipients were paid. Private companies like CPS securing contracts with state institutions that cannot afford for the terms of the agreement to not be effectively executed is critical in understanding how Net1 and CPS continued to unabashedly profiteer from an unlawful contract. It is a systemic oversight in both procurement and regulatory frameworks that must be scrutinised. 

CPS and Net1 opportunistically exploited the absolute necessity of social grants being paid. Over the next years, the Net1 group of companies would make a mint from their access to and control of the grants payment system, at great cost to many beneficiaries.

The process was deemed unlawful because SASSA changed the wording in the request for proposals at the very last minute, resulting in CPS being the only company that could win the contract.

Net1 subsidiaries flog financial products to grant recipients

From the very start of the contract, SASSA knew CPS’s business model included making additional profits by selling financial products and services to grantees. These products included loans (Moneyline), funeral insurance (Smartlife), airtime and electricity (uManje Mobile), and payments (EasyPay). All these companies were subsidiaries of Net1.

This proved so profitable because Net1 and its subsidiaries had unrestricted access to South African grant recipients, both in person and via their electronic data. CPS was allowed to build a system for grant recipients, separate from the National Payment System (NPS), which is the South African banking standard. Governed by the Reserve Bank, the NPS is the clearinghouse for all payments and settlements between banks. Net1 created a parallel banking system, which could be linked to the NPS but was not directly part of the NPS, giving it significant control over the bank accounts of grant recipients beyond official oversight.

Net1 could thus make grant payments, sell financial products, and extract repayments for those products without bearing any risk. Grant recipients could not default on their debts, because Net1 controlled the entire financial flow from the National Treasury into individual bank accounts and could debit those accounts early and automatically. A Financial Mail feature article written by Black Sash, chronicled the stories of three grant recipients who experienced these unsolicited deductions without their consent.

Maolaotse Grace Bonokwane, needed to fight for a refund upon discovering deductions from her bank account for airtime purchases affiliated with a number belonging to neither herself nor anyone in her family. Pension grant recipient Sipho Bani had deductions off his account for a loan he never received due to inadequate information capturing, and many more grant recipients had deductions made on their grant payments for a 1Life funeral policy they never took out.

Net1 made more money on these “financial inclusion” products than from grant distribution between 2015 and 2017. It is difficult to estimate the exact cost to grantees of Net1’s control of the data. However, Black Sash conducted quarterly surveys with grant recipients at pay points. Between October and November 2016, 25.5 per cent of recipients surveyed nationally said that money was deducted from their grants without consent. In some “hot spots”, like Khayelitsha, around 50 per cent of recipients said that they experienced deductions without consent.

This process was so profitable that companies like Moneyline did not market their loans to low-income consumers in general but to social grant recipients specifically. Investigative journalist Craig McKune, then at amaBhungane, demonstrated how Net1’s financial statements were very explicit about how it targeted grant recipients. In fact, Net1 had two microlending businesses: one that was accessible to anyone and another that was only for grantees (Moneyline). The former business was unprofitable because of the high default rate on loans, but the latter was very profitable because grant recipients were prevented from defaulting on loans.

As Net1 put it, “[W]e consider [social grant-based] lending [to be] less risky than traditional microfinance loans because the grants are distributed to these lenders by us”.  Social grantees could not default because Net1 had monopoly control over the entire grant payment process. CPS ensured that any debits owed to Net1 subsidiaries were paid early and automatically before grantees received their money.

As a result, Net1 bore none of the risk of a typical microfinance business when lending to grant recipients. In addition, the South African government guaranteed grants. There was no risk at all that the debts would go unpaid. Yet even though the risk of non-payment was nearly zero, interest rates on social grant-based credit were significant. Net1’s CEO Serge Belamant often said that his products were the cheapest available, partly because Moneyline’s official interest rates were 0 per cent per month. But the costs of credit were hidden in service fees that could be as high as 5.33 per cent per month (on a six-month loan of R1,000). This was within the law and the limits set by the National Credit Regulator, but it amounted to an effective interest rate of a staggering 32 per cent on such a loan.

In this way the company was not only profiting from an unlawful contract but doing so through unscrupulous conduct that risked the sustained livelihood of grant recipients. CPS has always denied that there was anything wrong with this, arguing that it was simply applying an early debit order, like most banks do. However, that does not take into account that CPS was in charge of both the payment of the grant and the deduction. It was not at arm’s length from participants in the transaction. It demands the question: at what point will the extensive profiteering off vulnerable communities be seen as unjust?

https://youtu.be/nlUkMIqXv_Y

 Net1 pivots to EasyPay and plays the long game

Throughout CPS’s contract with SASSA, Net1 and CPS were looking ahead. They created another product exclusively geared toward grantees: the EasyPay account, which would ensure that CPS had continued access to grantees’ bank accounts if and when the contract with SASSA ended. The EasyPay account ultimately gave Net1 more control over grantee banking beyond SASSA’s purview.

Net1 aggressively marketed EasyPay to grant recipients. Black Sash paralegals found that some people were told that the EasyPay card was the “new SASSA card”; others were told that credit was “not allowed on the old SASSA card”; and still others that EasyPay is the cheapest, safest bank account “for life”. Over 2 million grantees opened EasyPay accounts without filing the necessary declaration with SASSA to have their grant paid into a new bank account. Through the CPS contract, grantees could “consent” to new product offerings with their fingerprints. Upon giving “consent”, they were moved out of the CPS banking environment, which had some oversight by SASSA, into a private arrangement with EasyPay.

Net1 were right to plan for a period with a contract with SASSA. As Black Sash, investigative journalists and academics exposed the unlawful contract and dubious deductions, political sentiment turned against Net1. Then Minister of Social Development, Bathabile Dlamini, attempted to amend the Social Assistance Act to stop debit orders on the CPS/Grindrod bank account. Dlamini had been an early champion of CPS and Net1. The Constitutional Court declared her conduct “reckless and grossly negligent”, and Dlamini was convicted of perjury in March 2022 for lying to an inquiry about the social grants crisis.

Yet the strategy of pivoting to EasyPay has worked. In May 2022, Net1 changed its name to Lesaka in an effort to avoid the negative image Net1 had after its conduct in relation to the SASSA contract. Lesaka means “kraal” in Setswana and Sesotho, and Lesaka says that it has chosen this name because it is committed to communities and seeks to drive “financial inclusion”. This was the same promise that CPS and Net1 made a decade ago, and the evidence from communities is that little has changed in the business model.

In 2022, the cost-of-living crisis brought about by the Covid-19 pandemic, rocketing fuel and food prices, and chronic unemployment, have left millions of South Africans desperate to access cash and looking for loans wherever they can find them. Reporting by GroundUp in June 2022 revealed that hundreds of thousands of social grants recipients with EasyPay cards queue for grants and then take out loans against these grants from MoneyLine on the same day. In Lesaka’s reporting to its US shareholders (it is listed in the US as well as South Africa), it says that its strategy is to grow the number of EasyPay customers so that it can “cross-sell” financial products such as insurance policies. Sound familiar?

As GroundUp concludes, the success of this business model is down to the “preferential access to this vast market was handed to them “on a plate” when CPS was given the SASSA contract in 2012”.

Lesaka means “kraal” in Setswana and Sesotho, and Lesaka says that it has chosen this name because it is committed to communities and seeks to drive “financial inclusion”. This was the same promise that CPS and Net1 made a decade ago, and the evidence from communities is that little has changed in the business model.

 

CPS yet to pay back the money

As mentioned, South African courts have never settled the issue of the automatic deductions discussed previously. However, four years after the Constitutional Court declared the CPS contract unlawful, in 2017, the Court made a new order directing CPS to pay back the profits it made in terms of the unlawful contract. SASSA claims that this is over R500 million. This was a significant victory that entrenched the principle that companies should not profit from unlawful contracts.

Yet despite the order, CPS has engaged in a drawn-out fight against repayment. When it first filed its audited financial records with the court in terms of the court order, the records were contested by numerous parties, including Treasury and the accountants hired by SASSA. A report by RAiN Chartered Accountants concluded that CPS had overstated numerous expenses, and that it may have been understated its profits by as much as R843 million. RAiN also expressed concerns that more information was needed to determine if CPS had engaged in unlawful profit shifting. Civil Society organisation Freedom Under Law approached the Constitutional court in 2021 alleging that CPS was under-declaring the profits made in terms of the contract by R800 million.

As a result of these concerns, in April 2021, the Court again ordered CPS to completely open its records to an independent auditor to determine the profits it must pay back. CPS has been in liquidation since 2020, and its provisional liquidators asked the court to delay enforcing this order. Their application was again denied by the Constitutional Court in February 2022. It is now more than a decade since CPS was first unlawfully awarded the contract by SASSA, and six years since it was directed to repay its profits.

Net1 and CPS blaze a trail

The conduct of Net1 and its subsidiaries in relation to social grant beneficiaries is a stark warning about how private actors can profiteer from the social welfare system in South Africa. In 2021, Open Secrets investigated new companies moving into the social grants system and partnering with SASSA to build digital systems for social grant applications. The Open Secrets report, Digital Profiteers: Who Profits Next from Social Grants? exposed the role of GovChat, a small South African technology firm part owned by listed tech company Capital Appreciation, in seeking to profit from its role in the grants system.

GovChat has so far offered its digital services to SASSA for free. However, Capital Appreciation is on record saying that it is constantly looking at ways to monetise GovChat’s work on social grants. In a radio interview in 2021, Capital Appreciation CEO Bradly Sacks stated that while GovChat does intend to make money and charge for its services, the SRD grant process was done out of true altruism.  But perhaps the offerings of free services are a way to get a foot in the door. At the moment, GovChat helps SASSA with grant applications, but Capital Appreciation is eyeing what CPS and Net1 used to control: the payments system. In response to the Financial Mail’s questions to them about the Open Secrets publication, Sacks said that while the investment was about “giving back” to the country, he also admitted that there were commercial opportunities for Capital Appreciation. In particular; he added “GovChat could evolve to a mechanism of grant distribution, and payments is very much in our DNA”.

It may well be that SASSA is already considering this due to the state’s inability to create a functioning payments system. In June 2022, a massive technical outage at the Postbank meant that the majority of people owed the R350 SRD grant were unable to collect it. Similar issues were experienced again between November 2022 and January 2023. In this context, SASSA may well look to turn to another private service provider to manage the grants payment system.

While it may seem a necessary or even attractive step to engage the private sector in grant delivery, the story of Net1 and CPS revealed that SASSA fundamentally failed to protect grant beneficiaries from private companies seeking ever greater profit margins. The unsuccessful efforts to ensure repayment of these profits from CPS should be a damning indictment against all involved. The reason for such penalties is to ensure that reparations are made and to create a disincentive for their repetition. Now we have neither.

A key lesson from CPS and Net1 debacle is that SASSA placed grant recipients in a financially exploited position with a private company that monopolised the grant system to serve its benefit. Such welfare profiteering cannot be repeated.

Unaccountable, we have not forgotten.