No fireworks for Discovery bank
CEO Gore plays down talk of an industry game-changer
● The imminent launch of Discovery’s new banking operation might have the market agog, but CEO Adrian Gore is doing everything he can to lower expectations.
In an interview with Business Times, Gore gave few details about the planned operation beyond saying it would be consumer-oriented and might, in the long term, expand into corporate and investment banking.
While speculation over the plan has built up over the past two years, Gore said the idea of a bank had been germinating since 2009. He downplayed any suggestion that it will make a big initial splash in a market dominated by Capitec and the big four, Standard, Absa, FirstRand and Nedbank.
“If you have a value proposition that resonates, I think in two or three years you know if people like the proposition,” he said.
“I think it is five to seven [years] to get any real financial value out of it and seven to 10 [years] to get scale.”
He scoffs at any suggestion that a Discovery bank would be a threat to existing players in a sector that will become increasingly crowded with new entrants in the coming months. “I’m actually worried we are overrated. I mean, we’ve got to earn our spurs.”
Gore said Discovery was giving itself three years to judge if the bank was “a workable product”. He offered no clues as to whether it would get involved in the mortgage or vehicle-finance sectors, or even if it would open “bricks and mortar” branches.
Analysts have said one advantage Discovery has over its established competitors is that it enters the market with a clean sheet in terms of overheads — it will not be hampered by the costs of running hundreds of branches and employing the staff to run them.
However, technology giants such as Apple and Amazon have seen value in having a physical presence, despite their digital advantage over their rivals. Apple has more than 500 stores globally, and Jeff Bezos’s retail giant has been building stores.
Gore said he expected tough competition from the established banks with their long experience of the business. He “hoped” Discovery had the right people for the job.
“It will make mistakes, I am sure of it; every business we have done has. These things are organically grown.”
Gore said he worried whether the Discovery banking product would meet the needs of customers and win their approval. If the bank could not offer value to customers, it was unlikely to survive.
At Discovery’s annual results this week, the insurer said it was on track to start the bank after reaching an agreement with FirstRand to buy its stake in the Discovery credit-card venture. This transaction was a condition of the Reserve Bank for the granting of a banking licence to Discovery.
The company agreed to pay R1.8bn for FirstRand’s 25% stake in Discovery Card, which was launched in 2004. The group will issue stock to fund the deal, which is still subject to regulatory approval.
The registrar of banks required that FirstRand reduce its cross-holding in Discovery and fully eliminate it within five years.
Some analysts have suggested that Discovery, because of its various ventures across the globe, might have to undertake a rights issue to raise enough capital to make a dent in the local market. But Gore disagrees.
“We have worked so hard on making sure the capital model can sustain growth in China — all the stuff we are doing . . . this 25% from FirstRand was not planned,” he said.
“I don’t see any need for a rights issue beyond this, unless there is considerable
I’m worried we are overrated . . . we’ve got to earn our spurs Adrian Gore
Discovery Group CEO
growth somewhere we did not expect. We have buffers built into our plans all over.”
One strategy Discovery might employ with the bank is to replicate its Vitality loyalty system, which rewards beneficial behaviour. In the bank’s case this would be behaviour that promotes “financial wellness”.
“With the Discovery card the group has seen that clients that have Vitality tend to spend more on the card,” Gore said.
He could see the bank expand into business banking, but initially the focus would be on individual consumers.