Discovery to disrupt an old market with its new bank
Gore, with an existing customer base, to extend financial services to lending
THE bank of the future isn’t a distant threat to South Africa’s big four banking institutions; instead it’s a competitor that they could be facing within two years should the promise of Discovery’s banking foray be realised.
The Adrian Gore-led financial services firm is awaiting banking licence approval and this week said it had set aside R1 billion to build the digital infrastructure for the venture.
Should the licence be approved, Discovery will be starting a banking business without the legacy issues such as the countrywide branch network that weighs on rivals such as Barclays Africa, Standard Bank and Nedbank. As retail banks move towards digital platforms, the industry is reducing the number of branches, ATMs and staff to save on costs.
Venture capitalist and former FNB CEO Michael Jordaan said the addition of banking to Discovery’s stable of financial services was logical and made strategic sense. “They [Discovery] have an opportunity to leverage their lower cost base into lower bank fees and better interest rates.”
Jordaan saw this as a way to eliminate the expense of brick and mortar infrastructure. “Even ATMs are under threat from card swipes or cash-back at point-of-sale, which are far less expensive,” he said.
Discovery has an overall staff of 8 484, according to Bloomberg data. Nedbank, the fourthlargest bank, has 32 522 staff, managing 703 branches and 3 736 ATMs. Capitec has 11 440 staff, managing 720 branches and more than 3 000 ATMs.
Through its medical aid, insurance and boutique investment offerings, Discovery already had an aspirational, trusted brand and a satisfied customer base, “something many start-ups could only dream of”, Jordaan said.
Alexander Duys, head of equities at Mvunonala Asset Managers, said Discovery’s record of disrupting markets through Vitality gave it an advantage and “it’s plausible that their behavioural economics strategy can translate into banking”.
While not disclosing much detail on the establishment of the lender, Gore said in an interview with Business Times that the highly competitive banking environment was not a deterrent. “I believe if you offer people something they need, they buy your product. You don’t need strategic genius. And I believe we’ve got a chance to build something special.”
Gore and his actuarial partner, Barry Swartzberg, left Liberty Life to start Discovery Holdings in 1992.
In a data-intensive business, Gore believes they can apply their value-shared business model to create a financially savvy customer base.
Discovery Health has a 54% share of South Africa’s medical aid market, with 2.69 million customers. The company also has a growing insurance presence, with a 28.8% share of the market.
Nedbank has seven million retail customers. Capitec, the 15-year-old relative newcomer, has about 4.7 million.
To tap into its existing market reach, Discovery would have to offer a product that had a compelling price and provided extra value to clients, said Sasha Naryshkine, a director at Vestact.
“They [Discovery] don’t have to convince them too much to use a new service provider, they just need to draw you in further into the ecosystem.”
Apart from its medical aid clientele, Discovery also has a credit card offering in partnership with FNB that has grown to 253 000 cardholders in close to 12 years.
Quizzed on his potential competitor, FNB CEO Jacques Celliers said Discovery might come up with new innovations. “We’d have to have an answer for that. We’re quite comfortable competing in the local space within regulatory platforms.”
Duys said other banks would have to look at the quality of their own service to retain their customer base. “Innovation will be the key competitive advantage, as proven by FirstRand over the last few years, to gain and retain retail clients.”
Gore is quick to admit that Discovery is not great with new market initiatives: “We’ve always done better going into established markets. We’re disruptors. We go in at the end.”
We’ve always done better in established markets. We’re disruptors