DISCOVERY’S ADRIAN GORE ON STARTING A BANK
Adrian Gore started Discovery 25 years ago. Today, the group has become a global leader in financial services and plans to extend its offering by opening a bank.
the day after finweek interviewed Discovery founder and CEO Adrian Gore – 10 March – marked 25 years since he first sat down at his desk at the company.
When Gore formulated the original Discovery healthcare model, the concept of rewarding consumers for being healthy was fairly alien.
“We started out in the 90s with this Vitality idea. It was really opportunistic when we stumbled on it, but it became profound as we pursued it. At the time it wasn’t a natural thing to incentivise healthy living,” Gore tells finweek. They faced quite a pushback as it was deemed that the concept was wasting valuable scarce healthcare resources on paying for gym memberships.
“Something that has become obvious to people today wasn’t 20 years ago.” All of Discovery’s businesses use this shared-value business model – financial incentives and other behavioural interventions are used to “nudge” changes in individual behaviour; and members are rewarded for their healthier lifestyles. It’s this model that has seen Discovery branch out into various financial services offerings, and garnered favour in international markets as well. And now it’s building a bank.
“We built the company on quite a simple framework: purpose, values and ambition, and the ambition has gotten bigger and bigger as we’ve evolved,” enthuses Gore.
In 2014 Discovery set the goal to be the “Best insurer in the world and a powerful source for social good” by 2018 – a rather brazen ambition.
Gore firmly believes that this goalsetting culture is a very powerful tool in that it creates loss aversion. He explains that it is an entirely self-created ambition and will be self-measured.
“We have tried to delineate it based on three dimensions: How good our businesses are; how good our underlying assets are – in terms of our global Vitality brand, using data to design the lifeenhancing products, our values being intact, and the science of our model; and our overall impact – how many people we affect in terms of wellness and improving their lives. And then return on capital and profit growth.”
Translating this into tangible measures would see Discovery growing earnings at CPI + 10%; the Vitality Shared-Value model demonstrably showing that the 15m consumers the group services are dramatically healthier; and remaining a disruptive player in the markets where they have a presence by being number one in new business growth.
A globally leading organisation
This inherent ambition continues to propel the Discovery group globally, where it has entered several markets – from the US, UK and Europe, to China and other Asian countries. The UK business has seen a tremendous push in the last two years. In December 2014 Discovery bought out Prudential’s 25% stake in the UK Life and Health joint venture. The buy-out cost the group R2.8bn and since then it has invested R4.5bn in the UK business, including 60% of the R5bn rights issue of December 2015.
The release of the group’s interim results in February showed that the UK business was hit quite hard in terms of profit. The first thing that comes to mind is Brexit. This saw currency headwinds in the UK turn into tailwinds, but Gore points out that in order to crisply define what affected the UK business, there are two factors to consider, one of which is the exchange rate – something he does not deem a major concern. The other factor that has influenced earnings in the UK is the long-term rates of interest.
“They’re incredibly low, the lowest they
have been for hundreds of years. As with any services business we do better with higher rates of interest,” he explains. “You do a valuation that looks at the rates of interest at that point in time. If the rates are lower than we expect, you get what we call a strain, which puts pressure on the business from time to time.”
That said, Gore doesn’t believe that negative rates of interest can continue for a prolonged period of time and that the current situation is likely to normalise: “It remains a risk factor but we are not overly concerned.”
For him the UK outlook is good and despite the effect on profits, the underlying businesses are performing really well with close to 1m members and strong engagement in Vitality, and the group remains optimistic about where it is heading in that market.
Gore is bullish about the group’s partnership with Ping An Health in China.
“Ping An is one of the world’s great companies,” explains Gore. From, for example it’s e-health platform Good Doctor, to its fintech prowess in Lufax, which is the biggest peer-to-peer lending platform. “We are dealing with an unbelievable partner.”
At present, the venture in China has been capital light for Discovery, but this could change depending on how fast the company grows.
“There are a few clear strategies that require capital within the next four years that we’re quite comfortable with. We’ll strengthen the balance sheet; invest more in new business flow. And we think if we can continue to grow it at the rate that it has been, the business will be dramatically bigger. The company has been growing at 55% a year. If you can do that for four or five years, you will see a seven-fold increase.”
Gore says there is a strong sense of confidence that the China business will be built into something substantial, given that government’s commitment to building private healthcare in China, and the commitment of Ping An Group to building China’s largest comprehensive healthcare player.
Banking on the future
The Discovery group has built an impeccable financial services stack over the past two decades and while the group continues to make global plays, here in South Africa it has embarked on the very ambitious venture of opening a bank.
Last year they received approval from the Registrar of Banks to establish a banking presence, provided that they meet a set of conditions by the end of October this year – within 12 months of the original approval.
Gore believes that they are well on track and will make the deadline. “The challenges have been significant, it’s a big undertaking. The capital spend has not been that big in the context of Discovery, but it is a full frontal development in every aspect,” says Gore, including technology, product, distribution channels and regulation – which make for a complicated roll-out.
The South African banking sector is strong and competitive, but Gore believes that Discovery has a strong business case for entry, and given the immense pace of fintech development, Gore would argue that absent to the Discovery model, there are many disruptive opportunities in banking. One need only look at the rise of innovative payment systems and peer-to-peer lending, for example.
“Don’t get me wrong, our banks are very strong and competent,” emphasises Gore, but based on the Discovery model of behavioural-based financial services, they felt strongly that they would be able to enter the sector.
He says it would be “a natural expansion of the success of the Discovery card and transactions around it. And our system allows us to price credit better.” Add to that the fact that they already have an established client base – one they intend to tap into fully.
“On the back of all of this there was a feeling that we could build a much more modern bank,” says Gore. “We think we will make it.”
“We built the company on quite a simple framework: purpose, values and ambition, and the ambition has gotten bigger and bigger as we’ve evolved.”
Discovery CEO Adrian Gore at the group’s interim results presentation in February.