EXPLAINED: How Discovery’s new bank will work
The 'behavioural' tech-led entity will be based on a tried and tested Vitality model, says its CEO
The Discovery Bank, which is due to launch in March 2019, will be a completely digital “behavioural bank” and the latest manifestation of Discovery’s shared-value insurance model, it was announced on Wednesday.
Discovery chief executive Adrian Gore says the bank is built on the tried and tested Vitality model: behaviour that is good for business is good for consumers and for society.
Describing the bank as “tech-led”, he says it will provide a full retail offering, excluding home loans and vehicle finance. The bank’s product offering is designed to change the poor culture of managing money that is endemic in SA. This change will be the result of encouraging and rewarding “financial resilience” in the same way that Discovery Insure encourages good driving and Discovery Health encourages a healthier lifestyle.
Financial resilience will be measured according to five behaviours that affect financial health: spending less than you earn, saving regularly, insuring for adverse events, paying off your property so that you own your asset by the time you get to retirement, and investing for the long term.
The bank will measure how you steward your finances by analysing your bank account, and will draw on your personal data from the likes of Astute, an information exchange between financial services providers, and Lightstone Property.
Your financial health score describes the extent to which you can meet your current and future financial obligations. Your score can vary depending on how you manage your spending, whether you save regularly, have insurance, pay off your property and save for retirement.
In Vitality style, you will be assigned a status ranging from blue to diamond, which is determined by your behaviour. As you move up in status you will be rewarded with dynamic discounts, including favourable interest rates when borrowing from the bank.
Gore says the use of the Vitality status as a proxy for credit risk is a more transparent and equitable way of charging interest than the “opaque” model used by traditional banks.
If your unsecured debt repayments constitute 5% of your net income, Discovery regards that as too high and you will lose out on rewards and struggle to move up in status from blue, he says.
On the savings side, Discovery will also use your Vitality status to determine what interest to pay you on deposits in the bank. For example, if you have three months’ of discretionary income in savings, you will qualify for preferential interest rates.
Since Discovery has acquired, from First National Bank, the loan book carrying about 300,000 consumers with Discovery credit cards, these consumers will automatically become clients of Discovery Bank.
Gore says that while the bank’s obvious target market is consumers of Discovery products, its offering will appeal to a “very broad” market.
Discovery is keeping tight-lipped about its fee structure, but says it is not competing on fees but rather on behaviour.
Making the point that financial health is less about what you earn and more about how you manage your money, Discovery says individuals with higher personal incomes have, on average, higher financial health scores (57) than individuals with lower personal incomes (53.8). They are also less likely to be in arrears with debt payments – 34% have missed at least one repayment on an unsecured credit facility in the past 12 months versus 38% of those with low incomes.
“Despite these differences, the distribution of measures of financial health by income groups are wide and overlap substantially. For example, 35.9% of individuals with a personal income of between R500,000 and R1m a year have missed repayments on their unsecured credit facilities in the past 12 months, including 9.1% who have missed three or more consecutive repayments. These figures are only marginally better than those of individuals earning less than R250,000 a year – 37.7% and 13.1% respectively.”
This shows that individuals can be relatively financially healthy without necessarily having a high income.
Financial awareness and education are critical to initiate behaviour change, Discovery says. In a study by the Organisation for Economic Co-operation and Development (OECD), SA ranked lowest out of 20 countries in terms of financial education, with limited understanding of financial concepts such as inflation and compound interest.
Gore says that 10% of the bank will be owned by black depositors, who will be given shares. The details of this have yet to be finalised.
The statistics cited by Discovery paint a bleak and all-too familiar picture: South Africans borrow more than most upper-middle-income countries, according to Discovery. “Globally, 47% of adults borrowed money last year, including through the use of a credit card. In SA, the rate was higher at 53%”;
Credit use in SA is outpacing employment growth. “The over-indebted gap is widening, and there are now eight million more credit-active consumers than the total number of employed people in SA. Credit facilities such as credit cards, overdrafts and store cards make up 65% of South Africans’ credit accounts;
While we binge on credit, we are also saving less than our peers. SA’s net household savings rate, at 0.3% of household disposable income, ranks well below many other countries in the OECD. “In addition, only 40% of South African respondents to an OECD survey were classified as active savers, compared to an average of 64% across other countries”;
Less than 20% of breadwinners have enough of a financial buffer or an emergency fund to be able to cover a relatively modest unexpected expense;
Only 8% of South Africans retirees retire with 75% of their final income;
A staggering 86% of South Africans either have no plan or are not confident in their plan for retirement. Discovery says simple changes can have a big impact. For example, individuals who save regularly and have emergency savings of at least three months’ income have a financial health score of 65, which is 15 points higher than individuals who do not save. Similar results are seen when comparing individuals who manage their spending – they score 55 versus 43 for those who do not.
People who are in the habit of saving at the start of every month tend to have larger emergency savings balances than those who save what is left at the end of every month.