Slow start for Discovery Bank

Signs up 22 000 customers in first three months.
The bank needs ‘roughly 500 000 to 600 000 clients’ to break even. So far it has 22 000. Image: Moneyweb

Discovery Bank has signed up over 22 000 customers in the three months since it began onboarding members of the public. Those customers have a total of over 50 000 accounts.

Originally, it had expected to publicly launch in March, but says the “slight” delay was “to ensure the delivery of a robust, brilliant bank”. This allowed it to make “refinements” to key elements of the bank. One of these was the overhaul of its Discovery Miles rewards proposition, which is being pivoted into what it describes as “e-money”.

Effectively, cashbacks and discounts will be converted into Discovery Miles, which can be spent in the same way as cash within its ecosystem and at its rewards partners. This means rewards will be able to be monetised. In the early onboarding phase (before June), customers told Discovery they didn’t just want dynamic discounts.

In the nine weeks since it started accepting new clients, its 22 000-strong base has made R193 million in deposits, with credit card facilities totalling R900 million granted. Of this, around R200 million in credit has been used. These numbers sound high, but in truth represent deposits of under R4 000 per account and credit facilities of R40 000 per customer (on average).

An extensive media campaign for the bank, including a TV commercial, started flighting on Tuesday.

Building the bank has come at significant cost to Discovery. It anticipated spending R3.2 billion and has come in under budget (at R3.1 billion). The build phase (R1.7 billion) cost more than expected, while the test and run phases came in under budget (the run phase was significantly lower).

The group has had to look to banking for growth in South Africa, given that it has successfully entered all major insurance markets.

Insurance

Discovery Life holds a 31% share of the retail affluent market – the leader by some margin. While normalised operating profit was down 9% for the full year to June 2019 (to R3.2 billion), this was a significant improvement on the first half. That period was impacted by high-value mortality claims volatility (which saw a reduction in operating profit of 13%). New business growth remains strong at 6%.

Health

The 1% growth in new business (annual premium income) at Discovery Health was driven entirely by growth within closed schemes (excluding the new closed schemes taken on). New business in the open Discovery Health Medical Scheme declined by 1%, or R70 million, to R5.3 billion.

Factoring in NHI

Key to the future of this business is how successfully it manages to (what it euphemistically terms) “navigate” government’s National Health Insurance (NHI) plan. As at last September, it held 56.6% of the market by members, according to the Council for Medical Schemes.

The group says it is “supportive” of an NHI system “that assists in strengthening and improving the healthcare system for all South Africans”.

It says the “publication of the NHI Bill creates an important opportunity for active collaboration between the Department of Health and the private healthcare sector, and Discovery intends to play a significant role in this collaboration”.

Read: NHI benefits and implementation remain undiagnosed

It adds: “The bill states that medical schemes will provide ‘complementary cover’ to the NHI once it is ‘fully implemented’. 

“Discovery Health is seeking clarity on these aspects of the bill.”

Its “strong view is that substantially limiting the role of medical schemes would be counterproductive to the NHI, because there are simply insufficient resources to meet the needs of all South Africans”.

More frankly, it states that: “Limiting people from purchasing the medical scheme coverage they seek will seriously curtail the healthcare they expect and demand. This will erode sentiment, strip the country of skills, and impact the economy. Crucially, by preventing those who can afford it from using their medical scheme cover and forcing them into the NHI system is an approach that will also have the effect of increasing the burden on the NHI and will drain the very resources that must be used for people in most need. This would be detrimental to all South Africans, and would undermine the objectives of the NHI.”

In a voluntary update last month, it said: “Importantly, we do not envisage any material impact on the medical scheme administration business of Discovery Health for the foreseeable future. The rollout of the NHI is expected to take place over an extended period, and will be constrained by the current fiscal position. In addition … the bill remains open to interpretation regarding its impact on medical schemes, and we expect medical schemes to continue operating alongside the NHI.”

In its results announcement on Wednesday, it said: “The bill is not expected to have a material long-term impact on the Discovery Health business and may in fact present new opportunities for growth and product innovation.”

Discovery Group results for the year to June 2019

 

Operating profit

Change

New business

Change

Discovery Health

R3 billion

+10%

R6.6 billion

+1%

Discovery Life

R3.3 billion

-9%

R2.3 billion

+6%

Discovery Invest

R966 million

+9%

R2.6 billion

+6%

Discovery Insure

R155 million

+128%

R1 billion

-1%

Vitality Health (UK)

R758 million

+29%

R1.3 billion

+22%

Vitality Life (UK)

R578 million

+12%

R1.2 billion

+10%

Ping An Health (China)

R106 million

+89%

R2.518 billion

+76%

Vitality Group

R161 million

+71%

R922 million

+43%

By the end of Discovery’s 2020 financial year, all mature and emerging units in the group will likely generate in excess of R1 billion in new business (currently only one doesn’t).

New business

It also generated R386 million in new business from new initiatives:

  • Vitality Invest (to some extent replicating its Discovery Invest model in the UK)
  • The launch of umbrella funds in South Africa, and
  • Discovery Insure Commercial, which offers cover for modern business risks such as cyber threats and social media reputational damage.

Source: Discovery annual results presentation

These businesses (and the bank) lost R1.3 billion in the year, which represents 21% of earnings. This investment in new initiatives is expected to peak at 24% of earnings next year, but Discovery says “spend on new businesses is expected to decrease toward the long-term goal of 10% of earnings over the next few years”.

Source: Discovery annual results presentation

Its model is repeatable; the operating losses will turn to profits. Some initiatives will however take longer than others.

For the bank – the biggest bet among its new initiatives – Discovery needs “roughly 500 000 to 600 000 clients” to break even.

That’s a very tall order. For one, not all of the 300 000 existing Discovery Card customers are going to migrate to Discovery Bank. And for perspective, consider that it has 828 000 Vitality members in South Africa.

Of course, a growing economy will change matters.

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

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It comes as no surprise. Two, possibly three reasons here:

TRY BEFORE YOU BUY IN

Most people would not simply switch banks, they would try the new one first, maybe with smaller transactions, maybe with limited transactions, and if it all works, then go all the way. In fact, this is exactly the approach they followed as a bank, rolling out in a limited way at first – it is a low risk approach. So a slow start for the bank is to be expected.

OFFERING

Not having things like an access bond available, allowing you to freely transfer between such accounts, and other similar bigger financing or smart investment options with transfers between them and you transactional account, would mean that they are attracting a different type of client, the type reflected in the figures above.

COST

They really do not offer anything better than any other bank, but charge exactly the same. In fact, upon analysis, my current bank offered me better value for money, and a proven record as a bank, something they still need to earn. You’d think for this reason they would discount their offering, at least initially, but that’s not the case. So they appear greedy, and guess what, people don’t like greedy banks…

THE UGLY

I was invited to join them, and had some questions not answered on their website. I used the email address provided in the invitation email to request answers to my questions. After a week had passed without any response, not even a confirmation of receipt, I contacted them again. Then again after a second week, and a third time. It’s now almost 2 months later, and I’ve yet to have a reply…

I have also been called 3 times to join them. Every single time I referred them to the email, even forwarded it to them on one occasion, but then even they were unable to answer. On all three occasions they promised to get back to me, they never did. An I am definitely not going to run after them if they want my business.

You’d think that they would jump when trying to lure a client away from another bank, in stead they are not slipping, nor sliding, they are falling flat on their face. Who would join a digital bank when they cannot even manage their digital communication during the sign up process? The result of this is that I will now NEVER join them, as they couldn’t even get the basics right – multiple times.

I have been a discovery cardholder for many years and have a perfect credit history. They have all of my spend, vitality and credit history and so I would’ve expected to be high on their list. Not so, it took a long time for them to contact me to switch.

When they did, a call centre agent started railroading me through a script as if it was a foregone conclusion that I would switch. However, I have a few questions, 2 of which I explain below:

– why will it now cost me more to move from my existing credit card to a new card

The answer was that it is a transactional account and they now have Vitality money etc etc…

I don’t want another transactional account, I just like having the rewards on the credit card. I already have a relationship with a bank, a good bank, not a particularly amazing one [their rewards system is poor] but they have shown support by financing cars and houses over the years at good interest rates. This for me is really important and valuable – but Discovery can’t finance anything – so that begs a question, are they really a bank?

-If this is going to cost me more money than is it mandatory that I switch?

The agent kept referring me to the fact that Discovery “own the card” blah blah. So what? I asked if they going to cancel my account if I don’t switch over. Could I just wait till my card expires in 2021. The agent didn’t have the answers and promised to get back to me – that was 6 weeks ago!

Promises, promises, unfulfilled promises – they have delivered later than expected and the roll-out has been poor!

I am painfully disappointed in my Discovery Bank experience to date.

1. They’re double dipping fees on the migrations from FNB. Billed my card on the old platform and then the next day again on Bank platform. No response for two weeks to my query.
2. No website
3. No CSV bank statements… Seriously?
4. No Discovery Miles tracker or history.
5. You can only contact them by phone yet they are supposedly a next-gen bank. Right.

I’ve signed up for another credit card and will be using Discovery only for cashback or miles multiplier vendors.

Discovery provide my buildings, contents, car and health insurance policies. To date I haven’t had a single approach regarding their banking services. If my experience is indicative of their cross selling skills it’s going to be a long time before they reach critical mass in the banking space.

If you think this loss is bad…wait until you see what happens when ( and if) the NHI is launched!
So few, continue to have to look after so many! Not sure if they have the energy and wherewithal to continue into the future!

Reading the comments clearly Discovery is not a bank – they are a bucket shop

One thing that caught my eye in the article was the point where they budgeted R3,2 billion and came in UNDER budget at R3,1 billion. Perhaps they should’ve tendered to build all the OVER budget power stations for ESKOM.:-)

Coming in under budget does not say much until consideration is given to what was budgeted for. They may have budgeted for two “power stations” but only ended up with one for what they spent. Based on general comments, I suspect this venture of Discovery will fall way short of what they have achieved to date.

Discovery is simply another parasite which preys on your hopes of something for nothing in the Vitality program … and probably kickbacks from other companies sucked into their hype.

Mr Gore qualified as an actuary and has been slicing inducing the percentages ever since. But hey! with an estimated net worth of $480 Million he’s made a mint out of those South African Discovery clients.

Wow…22,000 new customers in 3 months?
This pales into comparison with recent reports indicating that Capitec Bank opens on average 100,000 new accounts PER MONTH (albeit to the loss from other banks).

The relatively small Discovery Bank monthly uptake could be indicative of a dwindling pool of wealthy citizens.

I’ve been a Discovery client for 19 years. I have the Medical, Life and Short term and have been on Vitality Diamond status for many years and recently signed up for Discovery Bank, taking the Black Card and Transaction account combo suite (essentially the top product) to see how Discovery differentiates itself as a “digital” and “behavioral” bank once you combine all the bells and whistles.

My experience thus far sadly has not been great and I would not recommend Discovery Bank to anyone.

Reasons:

1. As others have already indicated, Discovery’s lack of service (in particular email replies) is atrocious. I currently have 4 email queries that remain unanswered, with the oldest now more than a month old. When Discovery does reply, it’s a standard reply, stating “a Discovery Banker will contact you”. However they never do. It’s become quite laughable now as replying to this automated email with “ when can I expect this Discovery Banker to contact me?”, solicits the same reply, “a Discovery Banker will contact you”. I’m currently stuck in a infinite loop of uselessness.

2. Fees. Discoveries fees are complex and not easy as claimed. By my estimation there are 12 different options and none of them offer any material savings over any other bank. Despite qualifying for “Diamond” status on Vitality Money (which btw saw me needing to deposit a minimum of R100,000), the interest offered is below that of other financial services providers (I.e. Allan Gray Money Account). I also don’t like the hidden fees in the credit card transactions; in particular should you use your Discovery Credit Card for foreign purchases, it appears Discovery adds 3% to the exchange rate as a fee. (I’m yet to find where this is stated on their website or in the credit card agreement and it seems Discovery is just slipping this fee in. The cherry on the cake (as the expression goes), is that Discovery charges you an immediate credit facility fee once the credit card account is electronically created on their side, shoving your yet-to-be received card into debit irrespective of you having no beneficial ability to use the card (as they are still manufacturing it and then giving you the run around with their courier – as mentioned above). Complaining about did see me get an email response back stating this is standard banking policy…to which I must conclude – so is it my standard policy to close my account and tell you where to get off.

3. Card Delivery Service.
It was a real struggle getting the new card delivered . Discovery make use of DSV couriers (while under normal circumstances are quite good), however failed dismally to deliver the card even on their own communicated process. You are told your card will be delivered on a certain agreeable date and that they will call you 30min before the courier arrives; which sounds great. Unfortunately no courier arrived on the communicated date and no call was received to communicate any change. Second attempt no call – hence not available. Each failed attempt adds approximately another week before DSV looks to try redeliver. Eventually got the card after 3 weeks of it being ready. I did receive a “please rate your card delivery experience” email once the card was delivered, but to me again discovery seems to think Card deliveries are a great metric to judge customer satisfaction. (If you’re reading this Discovery, it isn’t. Delivery is an expected service, not some outstanding differentiator. You’d be best advised to concentrate ALL your efforts and fixing your dysfunctional lack of customer service.

4. Card format
Discovery seems to think the vertical card format must be unique. It’s actually a pain; in particular the 16 digit Number is also etched in black making it virtually impossible to see the numbers and rendering the card useless to any mobile App that uses the camera to auto complete the card details.

5. Not a Real Bank
It has no web interface at all. Just a mobile App, which has frightfully lackluster features. Interest charges are not visible on a daily basis and don’t even get updated at month end (like the rest of the banking world). Instead (for whatever reason). Discovery updates interest and other fee debits the 8th of the month. There is no explanation or calculation as to how the interest was derived at as well. There is currently no way to migrate or set up debit orders on the transactional account, but you are charged as if you enjoy these services unabashedly.

Can Discovery fix this? I think so. Stop trying to drive volume numbers and get the fundamentals of great customer service in order.

Interesting read…. Must say, I enjoyed it.

22000 customers over 50000 accounts. They are already in trouble.

I’ll stay with Capitec

Ditto. Functional needs are consistently met at a low basic cost. I see no need to pay all those exorbitant additional fees simply to be seen to have the “Discovery” label. Happy with generics.

Interesting, I though they would be directly marketing to their existing consumer bots, who would lap it up like the good corporate drones that they are!

End of comments.

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