Why enter banking, and why now?

There is considerable debate about Discovery’s entry into banking. We are cognisant that our intent to disrupt established markets will invariably evoke strong responses. But it is important to contextualise the issues.

There are two themes: how will we differentiate, given a market that is oligopolistic and commoditised; and why now, given a tough economy and considerable uncertainty?

First, our approach to differentiation is, ironically, to do nothing differently — we are following our business model to a T. Our core purpose is “to make people healthier”, and this has led us to understand that within the most complex matters of life, death and money, there is a common DNA strand: behaviour.

It turns out that four poor lifestyle choices are responsible for 60% of the world’s preventable deaths and 80% of the disease burden. Similarly, five simple financial behaviours explain 80% of credit default risk and why people don’t have sufficient retirement savings.

Our approach is to use incentives to change irrational lifestyle choices, using technology as an enabler, and integrating this into financial services. SA has one of the lowest savings rates in the world; the number of credit users exceeds those with jobs; and over 60% of people cash in their retirement savings when they move employment.

If we create a bank that can change these destructive behaviours, we will have impact.

Because of this, we have built Discovery Bank on the same architecture and termed it a “Behavioural Bank” as it uses incentives to change financial behaviours. This is

different to existing loyalty and reward structures.

Our research shows that banks compete on three dimensions — fees, interest rates and rewards — creating a strategic “trilemma” for the banks: they can only compete on two out of the three. The incumbents tend to compete on fees and rewards, while the newer entrants compete on fees and interest rates.

In an attempt to understand fees, we initiated a study of more than 12,000 customers encompassing 600,000 transactions. The study found fees don’t equate to costs, and there is no such thing as free banking. Fees depend on what services the customer uses over time, and are poorly understood.

Our study also showed that bank charges amount to 0.3%—0.6% of people’s salaries on average. While this is material, managing the other 99.4% is crucial, if not more so. This is our primary focus. Our hypothesis is that by changing behaviour, we can create economic value that funds incentives, and this should enable us to compete on all three dimensions — with emphasis on changing behaviour leading to higher incentives and rates of interest — a virtuous cycle.

The second question is why now? Discovery was started in 1992, during the transition period from apartheid to democracy. It was a time of considerable uncertainty. We learnt from this that it is during difficult times that one should build because others are distracted and opportunities are undervalued. When good times emerge, you are then in full stride.

There is no hubris in our entry to banking, rather confidence in our purpose and model, respect for our competitors and, importantly, belief in our country.