Discovery bucks trend, runs risk with bank model
Analysts point out many bancassurance drawbacks and poor track record
The new Discovery Bank may be hoping to shake up the financial services sector by turning the insurer into a one-stop shop, but the bancassurance model, in which insurers and banks crosssell products, has met with limited success in the South African market.
While there have been good stories, with the Old Mutual and Nedbank partnership often held up as one such, there are few alliances between banks and insurers that have proved to be wildly successful.
Instead, many companies that have ventured into bancassurance have found the capital risks dampen the operational benefits — a burden felt beyond local borders and one that, some might argue, may see the model die a slow death.
According to Jaap Meijer, an analyst at Arqaam Capital, bancassurance groups in Europe did not cope well in the 2008-09 financial crisis, with both banking and insurance arms hit by losses on equity investments and impairments on their credit books.
“The global trend is moving towards a separation of the two, similar to what we should see in the Old Mutual Group,” he said.
Co-operation deal
Old Mutual this year set in motion plans to reduce its controlling stake in Nedbank to 19.9%. Nedbank CEO Mike Brown said the separation would not see a slowdown in the bank’s manufacturing and distribution of bancassurance products and that the two would continue “an arm’s-length agreement”.
What may be playing out between the companies is a realisation that dawned on some of their peers years earlier.
Jan Meintjes, an analyst at Denker Capital, said Old Mutual may simply have realised that it does not need to own Nedbank outright to take advantage of its distribution channels. The co-operation deal struck between Sanlam and Absa, as opposed to a merger, in the early 2000s came about as a result of a similar conclusion, he said.
“New rules in terms of capital requirements for banks and insurers have caused many of these businesses to relook at their ownership structures where these assets are combined,” Meintjes said.
Banks and insurers both keep regulated levels of capital and there is a cost to keeping that capital. “The capital requirements are quite harsh for an insurance company owning a bank, and the other way around,” Meintjes said.
Apart from the capital structure inefficiencies, operational challenges can also make partnerships unattractive, said Rahima Cassim, fund manager at Ashburton Investments.
“Integration can work with a clearly defined strategy and an IT infrastructure that enables the cross-sell of products. Legacy systems and ineffective attempts at breaching cultural divides continue to impede progress in this regard [however],” she said.
Balance sheets
In the case of Old Mutual and Nedbank, the alliance has worked as they have managed to optimise operational elements, but many others have stumbled at this hurdle. As two separate businesses, they run separate balance sheets, Cassim said.
“It is important to note that the balance sheets for banks and insurers are very different. This alone creates two very different business strategies from a capital structure perspective,” she said.
Bancassurance models had also generally favoured banks, said Meintjes.
The banks had the upper hand in negotiations with insurance partners because of their wide distribution channels. Insurers would rather talk to potential customers in a bank branch than through a salesman who spent most of his day driving around chasing leads.
“When these joint ventures were agreed and people were deciding on how to share profits, the bulk of the profit share [therefore] went to the banks. Standard Bank and Liberty is a good example of that,” he said.
But in the age of digital disruption it was difficult to compare bancassurance products of the past to what was being rolled out today, said Michael Goemans, CEO of the recently launched Investec Life. “The world has changed and so have client needs and expectations. Banks, or any company for that matter, should only offer products that add value to their clients,” he said.
Convenience
While the idea of consolidating their policy documents may be appealing to consumers, in a technology-driven world in which information is easily available, they crave choice.
They will only place all their eggs in one basket, if the value proposition was clear, said Meintjes.
But in addition to value, they want convenience and flexibility, which is where models that offer integrated services may stand to win.
“[Consumers] are, rightly, no longer prepared to tie themselves into overly complex, inflexible, lifelong contracts with insurance companies,” said Goemans.
“This is something that companies must adapt to, or else their clients will go elsewhere. In future, I think we will see that this may not even be to a traditional
Capital requirements are quite harsh for an insurance company owning a bank Jan Meintjes An analyst at Denker Capital
bank or insurer.”
Warwick Bam, an analyst at Avior Capital Markets, said the appeal of what Discovery was bringing to the market was in its Vitality rewards programme, which offered more than just financial benefits.
“What makes Vitality powerful is the brand and purpose. There’s an altruistic side to Vitality which builds trust between Discovery and it customers. Vitality takes members on a journey, thereby developing a relationship which epitomises client centricity.”
Loyalty programme
Despite the potential for increased customer loyalty from a cradle-to-grave financial service offering, there was a risk of clients dropping all products if one entity gave disappointing service, Bam said.
While Discovery has already launched a credit card facility, through FirstRand, the launch of transactional banking and other lending services would prove a challenge, Cassim said.
“These are expensive initiatives to fund, and the risk is cash burn, with Discovery needing to manage its growth strategy with its ability to fund that growth, and it is a cash-hungry business.”
While Vitality could give Discovery Bank an edge over its competitors, which run rewards programmes of their own, there is a question of customer engagement and the percentage of Vitality clients who are truly loyal and engaged, Cassim said.
“As a driver of loyalty, Vitality has done a good job, but whether or not a loyalty programme is the only way to drive loyalty and engagement in this age of the digital revolution and digital disruption is questionable.
“Innovation in the sector continues, and again, regardless of technology, service is about the soft touch, which can be lost in the digital space.”