Discovery to shake it up

Innovation’s been rare in SA banking over the past five years but Discovery’s imminent offering may change that. BANKING: NEW ENTRANT TO RIVAL BIG FOUR IN THE PREMIUM SEGMENT

Speak to any banking executive publicly and they’ll describe the market as very competitive. Why, then, are the bundled prices for so many accounts so similar?

Importantly, this doesn’t mean there’s collusion. Rather, the market might not be as cut-throat as people believe.

Privately, bank executives might be rather satisfied with the competitive nature of the market. Upstart Capitec stole a march on all four larger rivals, but the business models and cost structures of the full-service banks meant they couldn’t really compete profitably at the lower end of the market. Arguably, they still can’t. There’s a lot more money to be made off interchange fees, credit cards, vehicle finance, insurance and home loans – as long as the economy keeps growing.

As is evident in recent financial results, the big four have all suddenly (re)-defined premium/premier/platinum and private clients customers as “target segments”.

Not only are these customers, on average, more profitable, but there’s also a mad scramble to sign up every possible one of these kinds of customers before Discovery’s banking proposition launches, which is likely to be early next year.

Innovation has been rare in SA banking over the past five years. The odd interesting move is dwarfed by countless dead-on-arrivals. Discovery’s offering may change that, as it mounts an assault on (mostly) rich South Africans, a segment of the market it knows a lot about. In its 2015 annual report, Discovery noted its card product “is currently the largest standalone card in the country” and had been named by Visa “as the most successful co-branded card globally”.

This gives it an incredible base to work from.

Key to Discovery’s model is tying together all the data it knows about its members to deliver “shared value” to them.

In other words, it uses Vitality to drive engagement, which makes people healthier and allows for surpluses to be shared in the form of discounts and cashbacks/rebates.

The Discovery Miles rewards model is well-established and the link between Vitality (points and engagement) and cashback is clear.

It wouldn’t make sense for Discovery to turn the model completely on its head and make banking free, or even ultra low-cost. There’s too much money on the table here. But it could force down pricing of high-end accounts.

Already, the Discovery Card business makes about R200 million in profit a year. Given that it doesn’t play in the merchant/ clearance/acquiring space, this is a sizeable number. It’s conceivable that the Discovery banking business could be a R1 billion contributor to profit within five years.

Expect Investec’s specialist banking franchise to come under pressure.

The market is waiting to see how Discovery moulds together premium banking, health insurance and Vitality.

Hilton Tarrant works at immedia. He owns shares in FirstRand and in Discovery.

Most successful co-branded card globally

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