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The principles underlying Discovery Bank’s business model

If you manage your money better, just as you manage your health better, you get better outcomes: Discovery Bank CEO Hylton Kallner.

SIMON BROWN: I’m chatting now with Hylton Kallner, the CEO of Discovery Bank. Disclaimer: I am a Discovery shareholder, which means I own some Discovery Bank. 

Hylton, I appreciate your early morning. I remember reading the book ‘Nudge’, oh, 10 or 12 years ago or so, and I remember chuckling to myself because in many senses it was describing the Discovery business model. Discovery, of course, by that point had been doing it for an age. It certainly worked incredibly well in the health space. 

How’s it going in terms of the venture into sort of nudging people towards being better with their money?

HYLTON KALLNER: Good morning, Simon. Discovery Bank has essentially really been alive now for 18 months or so and it’s going very, very well. I think everything that we’ve seen in the health space is directly replicable in banking and money, in terms of how people save, manage their debt, and save for retirement in the long- and short term, and in the kinds of outcomes that you’d like to see. So it’s entirely behavioural. 

If you manage your money behaviour better, in the same way as you manage your health better, you get better outcomes. That’s the sort of the model. And it’s exactly about nudging, as you say, our clients in the right direction: doing things that are good for them today that ultimately benefit them in the long term as well.

SIMON BROWN: And it is that sort of nudging. It’s almost was like a carrot – I do something that’s good for me in 20 years’ time. Typically, as a human being, I’m not interested in the long term – but [I may be] if you give me a small reward today to make me do that: it might be a smoothie, it might be a slightly better rate. 

Your sense of your customers who are coming through? Are they signing up because they want the better rates? Is it because they want to be better financially fit, or a combination?

HYLTON KALLNER: It’s definitely a combination of these. First of all, we built a completely new and different bank. It’s an entirely digital bank, and so it’s easy to use. It’s very simple. It’s very accessible. Especially in a Covid environment, where branches are obviously not even necessary, or you don’t want to be in one, our bank is perfectly built for that. So it is a different bank. The model itself of shared-value banking is really about ensuring that the value that’s created in the bank through better behaviour through savings, through lower defaults, we can then return directly to the customers who create that behaviour, to things exactly as you say, like better interest rates through very, very deep discounts at retailers, and our rewards currency, which is Discovery miles. So all of these things go to offering a better proposition for clients at the end of the day. It’s simpler to use, more accessible, and fully digital. 

But, as you say, the sort of core fundamental banking elements of interest rates and the associated rewards are higher for people that manage their money well. So they are definitely being attracted by both of those aspects.

SIMON BROWN: This might be me being ageist, but you are, as you say, an online bank, and certainly this is the future. And in fact, we’ve had them before in South Africa. Remember 2020, which sort of got stymied by the Saambou explosion back in the early 2000s. Do your demographics skew younger, because you are online – or is that just being ageist?

HYLTON KALLNER: No, I think that that’s a common misperception. The reality is that people who are seeking out the best rates are managing their money well, cover every demographic. And it’s independent of income levels also. So we’ve been appealing to all income levels, all sorts of age demographics, and it works really, really well. If you think about it, a senior or a pensioner is very much focused on the interest rates and managing their money well, and so the appeal of being able to improve your interest rates by demonstrating that you can manage your money well and use these nudges and behavioural incentives is really appealing to the seniors. 

At the same time, millennials love the sort of gamification of it,  going online, understanding exactly how they can improve their money status and do the right things and learn the right financial behaviours in the short term that are going to stand them good stead for their entire life. So it really does appeal across the spectrum.

SIMON BROWN: You talk around the “shared value” that the customer is a good money manager in a sense. Is that sort of simple stuff like “don’t have returned debit orders” because of insufficient cash, and don’t use debt recklessly. Is it as simple as sort of Money 101, almost?

HYLTON KALLNER: It’s literally that simple. It’s translating something fairly complex into literally something as simple as that.

So it’s about having the right level of savings, managing debt, having insurance or protection in place for unforeseen expenses, and especially retirement funding, and owning property on retirement.

Those are the five behaviours that we’ve seen account for 80% of the long-term and short-term defaults among clients and members of the public. 

So if you can manage those simple things in the short term, in the long term that will pay off. It’s really about education and creating life incentives because it’s about telling somebody to go out and have a run early in the morning, as opposed to having cake or lying in bed. The one is immediately valuable to them, the other one pays off in the long term, and managing your money is exactly the same,

SIMON BROWN: And the beauty these days of big data is you’re able to distil it down to those five points, and you know that if people do that over a lifetime of banking, they will be better off in retirement. It’s just that simple.

HYLTON KALLNER: It’s literally just that simple. And because they’ll be better off in retirement, we also know that they’ll be better off along the way, so they’ll have lower defaults for us as a bank. So we do better as a bank. We can return that value directly all the way through to the individuals that are creating that value. And it becomes a sort of a self-fulfilling cycle that they earn better interest rates, and they do better in the long term. And it really does work.

SIMON BROWN: That’s a Hylton Kallner, CEO at Discovery Bank. Hylton, I appreciate your early morning.

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Online Bank – No, APP Bank. They do not have internet banking which makes any half sophisticated relationship with your monthly money management dependent on reviewing ten lines on a screen at a time. I really do not know how one can manage your money like this

Integration – They punt integration accross their products strongly. Yes it can unlock value, but oh dear, like me, if one system fails to talk to the other (in my case the insure goals failed) then they are suddenly all “we are not the same business”. It took 8 months to sort out and an ex-gratia payment to just get me off their back.

Try changing your banking suite after discovering the T&C makes the more expensive suites bad value for money. Well that has not been developed yet (on purpose??). Now I have to phone monthly to get my fees reversed because it cannot happen automatically.

So, buyers beware. Good principles, I think so, but very pporly executed and still in it’s infancy. I personally will be leaving as soos as my iPhone benefit is paid. I just cannot do without internet banking and integration into my budget apps.

I just don’t see it really. The best behaved customers always pay their credit card, get the lowest interest rates when they do borrow, don’t mess up and pay fees for returned direct debits, etc. Essentially they minimise their banking customer footprint which must mean less money for the bank in interest and fees. Not so good for shareholders, but I could be missing something…

@Vallisneria Obviously Discovery will play their cards close to their chest when it comes to how they still make money when giving people paybacks, but why don’t they just reduce my fees upfront? Why do they need to borrow my money upfront, earn interest on it, and maybe pay it back to me if I played by their rules (which changes annually)? It sounds like the shared value model is intended to create value for them rather than the consumers.

Exactly. This time good money habits like not incurring interest is bad for them.
This isn’t like healthy behavior equals less claims!
I don’t think that stopping defaults on home loans is enough for them to be profitable?

I’ve been on their medical aid and life insurance for a considerable amount of time and will never opt for the banking and/or ST insurance. The medical aid is probably one of the best private schemes available in SA, but the complexity of their systems…..
First, you need a degree in actuarial sciences to understand your benefits, integrators, penalties, etc. Secondly, Discovery continually move the goal posts. Their Vitality program is a prime example. One year you get Y amount of points for reaching certain targets, with the following year being Y/3 points for the same thing, because you only scored x/3+z on something immaterial. Since CVD19, testing negative for HIV is a downgraded goal. Fitness/health/psychological goals already reached in March count for nothing. Hou verby….

Agree with KooS on the complexity. Still struggling to work out the benefits of being part of the Bank and the combined effect of all these facilities…

I’m happily with Capitec – where life is simple and straightforward.

Ive had it jumping through the convoluted loops of some opaque “benefits package” that supposedly benefits me, but in reality, is just a subversive means to corral me down a path that is really meant to enrich the CEO and his pals.

Much benefits to the peasants who drink their kool-aid? Not so much!

I’m done with stressing at every transaction point whether I have “optimised” my behaviour.

I walked away from FNB and their e-Bucks marketing games PRECISELY because of stressing at the daily irritation at EVERY micro-transaction. For what? And I had been a loyal customer for FIFTY years!

End of comments.

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