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Discovery Bank, ARC’s play near… bring on the competition!

Time for some new entrants to shake up both ends of the market …
Discovery’s model is tying together all the data it knows about its members to deliver “shared value”. Picture: Moneyweb

Speak to any banking executive publicly (!) and they will describe the market as “very” competitive. Why, then, are the bundled prices for so many accounts so similar, often to the point of being identical? Take the mid-market ‘gold’ accounts… these cost R98, R100, R100 and R105 per month at the big four retail banks. Surely strange, when executives admitted to the Competition Commission’s Banking Enquiry in 2006 and 2007 that the prices South Africans are charged for banking services are not directly linked to the cost of providing the underlying transactions themselves.

Importantly, this does not mean there’s collusion (nor am I suggesting anything of the sort). Rather, the market might not be as cutthroat as bank bosses might have you believe. Sure, they’ll fight for certain segments of customers, but all four have done extraordinarily well in the ten years since the financial crisis (and in the ten-year commodity boom leading up to it).

Privately, these execs might be rather satisfied with the ‘competitive’ nature of the market. Of course, upstart Capitec stole a march on all four larger rivals but the business models and cost structures of the full-service banks meant that they couldn’t really compete profitably at the lower end of the market. Arguably, they still can’t. There’s a lot more money to be made off interchange fees (paid by retailers), credit cards, vehicle finance, insurance and home loans (as long as the economy keeps growing).

Read the fine-print in recent financial results from the four full-service retail banks and it is no surprise at all that they’ve all suddenly (re?)-defined premium/premier/platinum and private clients customers as “target segments”.

Not only are these customers – on average – more profitable, but there’s clearly a mad scramble going on to sign up every last possible one of these kinds of customers ahead of the launch of Discovery’s banking proposition. With this likely early next year, there’s less than six months left to try and lock these customers in.

Has there really been any real innovation in South African banking over the past five years? Carbon-copy (and complicated) rewards schemes and ‘fusion’ credit/debit card offerings don’t count. Banking apps are seen by many as the ‘default’ channel these days.

The odd interesting move (like Standard Bank’s Shyft forex wallet app) is dwarfed by countless dead-on-arrivals signed off by over-enthusiastic middle managers. Banking has become boring.

Read: Standard Bank forex app cuts the mustard 

Discovery’s offering may change that as it mounts an assault on (mostly) ‘rich’ South Africans, a segment of the market it knows an awful lot about. In its 2015 annual report (the 2016 version contained scant references to the card business, given the announcement of its intention to enter banking), Discovery noted that its card product “is currently the largest standalone card in the country” and had been named by Visa “as the most successful co-branded card globally”.

This gives it an incredible base to work from. Key to Discovery’s model is tying together all the data it knows about its members1 to deliver “shared value” to them. In other words, it uses the Vitality chassis to drive engagement, which makes people healthier and allows for surpluses to be shared in the form of discounts and cashbacks/rebates.

The Discovery Miles rewards model is well established (Discovery learnt a lot from former joint venture partner FirstRand/FNB) and the link between Vitality (points and engagement) and cashback is clear.

Discovery CEO Adrian Gore
Image: Supplied

It wouldn’t make sense for Discovery to turn the model completely on its head and make banking ‘free’ or even ultra low-cost. There’s too much money on the table here. But, could it force down pricing of high-end accounts in a similar way to how FNB ‘democratised’ platinum/premier banking? I’m not sure that’d be a stretch….

Already, the Discovery Card business makes about R200 million in profit a year. Bearing in mind that it doesn’t play in the merchant/clearance/acquiring space, this is a sizeable number (Nedbank’s entire card and payments business reported headline earnings of ±R800 million in 2016). Could the Discovery banking business be a R1 billion contributor to profit within five years? It’s conceivable…

Expect Investec’s specialist banking franchise to come under pressure. Cynics will say there hasn’t been much innovation there for years, apart from fees!

I, for one, cannot wait to see how Discovery moulds together premium banking, health insurance and its world-leading Vitality programme. It’s going to be a tough choice between a bank I’ve been with since age six (and my love of eBucks) and the new ‘old’ kid on the block….

***

On the other end of the market, Capitec will next year find itself head-to-head with a ‘real’ competitor for the first time. Under Patrice Motsepe, Ubunto-Botho Investments (Sanlam’s empowerment partner) was always going to be a long game.

The deployment of much of the capital from this holding into African Rainbow Capital (ARC) sets the group up to create a black-owned, black-controlled bank. South African fintech outfit Tyme, owned by the Commonwealth Bank of Australia (CBA), will be the vehicle for this. It should obtain its banking licence in September and ARC has an agreement in place to buy a 10% stake.

Johan van der Merwe, co-CEO at ARC told Bloomberg last week that “the South African banking environment is due for a bit of disruption”. He added that the lender would be a “disruption over and above” whatever disruptive role Capitec had been able to play.

Currently, Tyme’s technology powers a money transfer service in Pick n Pay and Boxer stores, via a ten-year partnership. Over 700 self-service kiosks have been rolled out (at the ±1 000 stores) and these enable a new customer to be on-boarded in four minutes at a cost (to the bank) of just $4. These have seen the registration of 150 000 customers who have performed in excess of 350 000 transactions.

CBA has leveraged this technology to its business in Indonesia and there, customers are able to “open an account, obtain a debit card, and use it at an ATM in around 10 minutes”. Expect this level of innovation in the local market.

Reports have suggested Tyme is signing up 5 000 customers a week, which is not to be scoffed at given the service is currently limited to mobile money transfers (by comparison, Capitec is adding 120 000 customers a month).

ARC and Tyme are not going to build a big bank on the top of Pick n Pay’s store footprint alone. Expect additional partnerships and distribution deals (Sanlam is surely an obvious bet), but it’s how they service and target the ‘informal’ segment that will be key.

Capitec is not a sitting duck, but it is playing catch up on technology spend. Product innovation (more often than not hamstrung by the limitations of IT systems) will need to accelerate to respond to whatever Tyme comes to market with (not to mention African Bank’s quiet evolution towards being a proper player in retail banking).

* Hilton Tarrant works at immedia. He can still be contacted at hilton@moneyweb.co.za.

* He owns shares in FirstRand, first purchased in July 2011, and shares in Discovery, acquired in September 2013.

1 At the end of FY2016, it had 35 million years of health data, over five years of mortality data and more than 4.5 billion kilometres of “telematics linked driving”. It will no doubt provide an update on these in its year-end results on September 18.

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2 points:

In a very competitive market, prices will generally be similar.

Banking ought to be boring.

And those banks who want to attract their new client base or those who want to hold onto their existing customers and ensure they are not attracted to competitors who will now be actively canvassing the business, you best start giving your existing customers a better deal, and a more efficient honest option to stay with you.

Remember, if you want loyalty – get a dog.

‘’Speak to any banking executive publicly (!) and they will describe the market as “very” competitive. Why, then, are the bundled prices for so many accounts so similar, often to the point of being identical? ‘’
I think it’s very elementary – it’s called collusion!
Banking lately is all about daily, hourly meetings by your number of committees – at my old PLC influenced shop the ‘’meeting request ‘’ I think became the most used app.
‘’If Moses had been a committee, the Israelites would still be in Egypt’’
J.B. Hughes (1969 – )

I’m surprised that Virgin money’s credit card is still struggling considering its no annual fee model versus Discovery card’s large miles and annual fee… especially for those users that cannot be bothered to get enough cash back to cover the annual fees.

That is because Virgin Money do not appear to be actively looking for business like the others.

Remember, if you want loyalty – get a dog. And those banks who want to attract their new client base or those who want to hold onto their existing customers and ensure they are not attracted to competitors who will now be actively canvassing the business, you best start giving your existing customers a better deal, and a more efficient honest option to stay with you.

I’m all for competition, but not for more consolidation of financial capital in fewer and fewer hands. The finance, insurance and real estate sectors have become monopolistic in character, abetted by global corporates, creating disproportionate control and influence over supposedly sovereign governments and their citizens.
This consolidation of this influence has become dangerously out of control and rapidly becoming law unto themselves.
These cartels should be dismantled and converted to truly public corporations with widespread and diverse shareholdings, where there is a limit on the number of shares that can be accumulated by any single investor or grouping of investors. Conglomerates are poisonous to the development of inclusive economies and tend to promote economic slavery and dependence on handed down largesse. The system is breaking down fast, except for those in the top 1% and is paving the way towards massive civil unrest and mayhem. One only has to read Michael Hudson’s book “Killing the Host” to realize how fragile and fundamentally unsustainable current economic practices and management are and how they negatively impact on the real economies of true service delivery and productive output. These sectors of the economy are not truly part of an economy’s GDP, but are really an overhead element, that in practice enriches itself, through the creation of unrestrained debt promotion.

Crazy to copy Standard Bank’s expensive SAP core Banking system, when starting a new bank!??? But I suppose when you appoint ex-bankers and Insurance IT execs, they know no better and hopefully will reduce risk, BUT you and me (i.e. customers) will pay!???
This is the ideal environment that any company strives for……
…….. the old adage, “big brother is watching you” applies to those customers of Discovery who hold all (or most) of their offerings. I certainly do not want them to know EVERYTHING about my lifestyle, my habits, my doctors, my holiday trips, my grocery spend, the cars I drive (and how well I drive?), etc. etc. etc.
Bottom Line, knowledge is power, BUT this is too much power in their hands – especially with the maturity of AI engines!??
No thanks, I may even move my Medical Aid and make sure I dont use ANY of their other offerings.

Discovery Card, as I understand it, is outsourced to FNB, which explains the dismal service levels. Far from tapping the ‘premium’ segment, its credit assessment process is a box-ticking exercise by call-centre staff. The integration with other Discovery products – some of which are excellent – is its only selling point. I will share your optimism only if the Card is taken in-house and a more imaginative approach developed.

Assorted gimmicks can’t compensate for a poor core product. Innovation for its own sake is no substitute for service.

Bottom-line:I don’t trust Discovery regarding client info hoovering by them & their smoke-and-mirrors’ marketing games re Vitality/Medical ‘aid’.Why would banking with them be any different?It’s all about making bucks.Their’s not mine.

End of comments.

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