Incentivising financial health

DISCOVERY: FOCUSING ON CHANGING FIVE BAD HABITS

Model has worked for health, life and car insurance.

Just as Vitality Health is premised on “making people healthier and live longer”, Vitality Money – the foundation of Discovery’s new bank – is grounded in behaviour analytics.

In a white paper released at Discovery Bank’s unveiling, it contends there are five controllable behaviours, which “left unmanaged, are linked to three risks that lead to 80% of reasons why individuals don’t meet their financial obligations”. The five behaviours are: Spend less than you earn; Save regularly; Insure for adverse events; Pay off your property; Invest for the long-term. Sounds like common sense, except the paper points to a raft of data showing South Africans are struggling on practically all five.

Discovery says the behaviours, if unmanaged, lead to three risks:

Unaffordable level of debt;

Exposure to unexpected expenses or loss of income;

Insufficient income in retirement.

The bank argues the “hurdles that need to be overcome to get individuals to make better financial decisions are not too dissimilar to those we face in encouraging healthier lifestyles or more responsible driving, and similar behavioural models apply”.

It says its research, together with other studies, confirms a “few simple changes in behaviour can have a big impact”.

Importantly, the white paper also critically states that “financial health is less about how much you earn and more about how you manage your money...”

It says its findings are consistent with those from the US Consumer Protection Bureau and Australia and New Zealand Banking Group.

It has sampled its Discovery base too, to better understand why people miss debt repayments: 47% of respondents said they’d missed debt repayments due to an “unplanned expense”, 39% because they “forgot”, 25% due to “job loss”, 17% “irresponsible spending”, six percent failed to allow for an interest rate change and six percent reported the reason as “other”.

The trick is to ensure the rewards and incentives offered by the bank actually change behaviour.

The bank believes the dynamic discounts and rewards offered by Vitality Money as part of the chassis’ shared-value model are compelling enough.

Group chief executive Adrian Gore says the dynamic pricing of interest rates is “transparent, equitable, efficient and controllable, with no cross-subsidies”.

Applying the shared-value model to banking is simple: the incentives drive behavioural change, which results in clients who are healthier financially.

This, in turn, should translate to increased deposits (and greater persistence, improved product usage) and lower defaults.

It’s this latter point that’s key to the actual business of banking.

Discovery is effectively expecting to be able to more correctly access and price default risk using its Vitality model.

If Vitality has been proven to work for health, life and car insurance, why wouldn’t it work for banking?

We’ll know in a year or five.

Hilton Tarrant works at YFM.