Adrian Gore, founder and Group Chief Executive of Discovery Limited, explains the motivation behind Discovery’s bold move into the well-established South African banking arena…
There is considerable debate about Discovery’s entry into banking. We won’t shy away from this - we are aware that our intent to disrupt established markets will invariably evoke strong responses. It is, however, important to contextualise the issues.
There are two themes: how will we differentiate, given a market that is commoditised and dominated by a small number of large companies; and why now, given a tough economy and considerable uncertainty. We have deep conviction in our answers.
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 strand – behaviour.
A need for instant gratification often pervades
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 driving behaviours explain 60% of fatal road accidents; and five simple financial behaviours explain 80% of credit default risk and why people don’t have sufficient retirement savings.
Sadly, people make these sub-optimal choices because we know from behavioural economics that individuals are not perfectly rational actors. A need for instant gratification often pervades in health, money management and so on.
Applying our Shared Value model to banking
Our approach is to use incentives to change irrational lifestyle choices, using technology as an enabler, and integrating this into financial services. We have created a Shared Value cycle that is good for our customers, us and broader society – and globally relevant.
Is this Shared Value model applicable to banking? In our view, particularly so: South Africa 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, failing to leverage compound interest – with catastrophic outcomes, given they are likely to live longer and in poorer health than they think. 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’ because it uses incentives to change financial behaviours. This is different to existing loyalty and reward structures.
Banks compete on three dimensions
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, it just depends on which two. The incumbents tend to compete on fees and rewards, while the newer entrants compete on fees and interest rates.
Further, fees are opaque, and in an attempt to understand them we initiated a study of over 12 000 customers encompassing 600 000 transactions. The study found that 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 between 0.3% and 0.6% of people’s salaries on average. While this is material, managing the other 99.5% is crucial, if not more so. This is our primary focus.
By changing behaviour, we can create value and compete on all three
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.
Uncertainty Presents Opportunity
The second question is why now? Discovery was started in 1992, during the transition period from apartheid to democracy. I recall the Boipatong and Bisho massacres – it was a time of considerable uncertainty. We learned 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. The Warren Buffet statement, “Be fearful when others are greedy and greedy when others are fearful” refers to wise investing, but it applies even more so to the building of businesses.
Confidence in our purpose and belief in our country
There is no conceit in our entry to banking, rather confidence in our purpose and model, respect for our competitors, and importantly, belief in our country. Given the size of the market and its national importance, expect more debate. We do.
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