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Banking the change – how insurers in banking will change insurance too

Discovery launching a bank has profound implications, not just for banking but for the insurance industry and for the way that consumers view money as a whole

“Discovery will be launching the world’s first behavioural bank,” enthused Adrian Gore from his podium at the landmark Discovery building in Sandton on 14 November. “Our ambition is to create a new category of banking, through which we dramatically impact the landscape.”

The next day, South Africa read its newspapers and newsfeeds and hoped this would push their banking fees down and the complacent banks behind them into the 21st century.

This is what Thokozile Mahlangu, CEO of the Insurance Institute of South Africa, calls “an exciting departure” for financial services – one of the established insurers disrupting another industry rather than being the one disrupted.

But what the public saw then, insurance saw from a long way off. Bankers too. Discovery Bank was initially a part of FirstRand in the form of its Discovery credit card offering, before agreeing to buy out the bank’s stake in September. Their entrance into banking had long been heralded before Adrian Gore took the stage.

What bankers did not anticipate, arguably, was the unprecedented volume of ‘Discoverys’. Five or six new banks are choosing the same moment to announce their disruption, which they have made no bones about.

“Our intention is to disrupt the market. As is the case with any business, as soon as something different comes into the market, the existing businesses must adapt. We wanted to offer customers something different that doesn’t come with all the legacy systems and the high fees – a product customers would embrace,” says Sandile Shabalala, CEO of Tyme Bank.

“Needless to say, the banks are terrified by all of this. They are putting on a brave face, but it scares the living daylights out of them,” says independent analyst and long-time banking expert Chris Gilmour.

The Capitec effect

The South African Consumer Satisfaction Index (SAcsi) has proven time and again how vulnerable the old guard is to public discontent and, as Mr Gilmour puts it, “their exquisite inability to compete and to really understand their customer”. Enfant terrible Capitec has scooped the highest scores in the SAcsi five years in a row. More than that, Charles Russell reports in Citi Research’s latest deep dive that banks would lose ZAR2.6bn on transactional products and ZAR350m on credits from Capitec disruption alone. With the likes of Patrice Motsepe and Michael Jordaan on board, there’s nothing to suggest that the six new banking entrants won’t make the same dent or greater, given time.

Citi Research also notes: “Discovery Bank, Postbank and Tyme are set to disrupt the SA banking landscape in the near future. Using conservative assumptions, we believe that the disruption will cost the big four banks 8% of annual SA bank earnings… ZAR4.8bn in annual after-tax earnings… Discovery’s reward-driven product offering should significantly increase the competitive space.”

Personal data

However, not all disruptors are dangerous in the same way. While Bank Zero is formidable on account of former FNB innovation hero CEO Michael Jordaan, and TymeBank is formidable on account of billionaire Patrice Motsepe’s backing, Discovery Bank is formidable because of its data.

“Discovery’s ability to use the data is arguably better than anyone in the insurance industry and maybe anyone in banking too,” says analyst Warwick Bam of Avior Capital.

“The banks are terrified”

– Chris Gilmour

The exploitation of personal data gathered on an insured to use in their banking life would “typically not” be allowed, says Caroline Da Silva, divisional executive for regulatory policy at the Financial Sector Conduct Authority (FSCA). “Data must be used for the specific purpose for which it was collected. However, customers must also take care where they are requested to consent to the sharing of their information. Financial institutions may ask their customers to consent to the sharing of their information to, for example, other entities that may form part of the group or to third parties which the financial institution may have agreements with.”

Then there is the fact that several experts seem to think that Discovery as an insurer moving into banking will not be an isolated incident.

“The other insurers are very much alive to this,” says Nedbank analyst Jones Gondo. Mr Bam agrees: “Financial services are recognising that the best place to interact with customers on a daily basis is in banking. I suppose that’s what Discovery has identified. So, the obvious one is Old Mutual – they’re effectively already there, they just don’t have their own licence, much like Discovery a year ago. It’s difficult to justify the cost of licensing and banking systems in the early days. With Discovery, that decision was easy because they had a sizeable customer base and already had a scalable offering. But we will see more coming into the space I think.”

Discovery Bank itself seems unconcerned by this – and seems to enigmatically suggest that fellow insurers themselves aren’t safe from Discovery disruption either.

“Much as we have seen other insurers follow suit and implement programmes that encourage healthy behaviour and good driving, we hope to positively disrupt and impact the landscape of financial services in South Africa,” says Discovery Bank CEO Barry Hore, when asked whether he thought other insurers would follow their lead.

“In what is an industry first, clients will be able to control their interest rates by managing their money well,” Mr Hore goes on to say.

This, coupled with Discovery’s somewhat grandiose claim to be the “world’s first behavioural bank” and backed by a compelling rewards structure, may pose a global threat. If met with great success here, it is not inconceivable that Discovery could roll out ‘behavioural banking’ in China’s Ping An Life, Europe’s Generali or with Vitality in its myriad forms in the UK, US, Singapore, Canada, Australia and Japan.

That is, if Discovery’s true target is banking at all.

“The main attraction Discovery sees in banking is that they are very interested in the data that comes from banking. They want to really understand customers better and make them quite sticky. It’s not about banking itself per se,” says Mr Bam’s colleague, fellow Avior analyst Harry Botha.

“The disruption will cost the big four banks

eight percent of annual SA bank earnings…

ZAR4.8bn in earnings”

– Citi Research

Lower fees and potential layoffs

Whatever the attraction, the move could disrupt banking in a number of ways. One, consumers would be pleased to note, is almost certainly fees.

“It will affect fees,” says Mr Gondo, “because technology is replacing the brick-and-mortar channel. We already have such a poor savings culture in South Africa and households are highly indebted with little disposable income, you really need to look at what really matters to people – and what matters to people is lower transaction costs and monthly fees. The Tyme banks of the future can bring these fees right down with their in-app digital solutions.”

But there may be a darker side, according to Mr Gilmour. “I think the only way the big banks can compete now is to cut costs ruthlessly and remorselessly. So, I think the end result is going to be mass redundancies within the banking sector.”

Designer banking

But that’s not all – it seems that the new kids on the banking block, and insurers in particular, have the power to actually change the nature of banking. Millennials tend to want their banking services and their insurance the same way they want their Ubers – in-app, personalised, cheap and right now.

The demand from the millennial consumer base for digital and personalised offerings seems to have at last reached the bottom line, according to Mr Gondo: “What you might see here is a mirror of what happened in the UK. In the UK, you’ve got more defined market spaces. You don’t actually need to be a complete wholesale bank, and that’s where these new entrants are focusing.

“So, someone might choose this bank for their personal account because of the fees and that one for their business as an SME because of the interest rate they get – it’s ‘designer banking’ more than anything else. People will be less sticky, less loyal to one bank for all their needs. It’s like what happened with cellphones – you keep your number and you shop around for another network, for the best rate. It’s a commodity now.”

This is arguably as potentially dangerous for insurers as it is for bankers. The slick in-app user experiences and millennial-friendly gimmicks like opening a bank account with a selfie (Discovery) or truly useful features like checking your credit score on your phone (Tyme) could come back to bite them. Consumers do not know what Twin Peaks regulation is, they don’t have the clearly delineated boundaries in their minds about standards in insurance and standards in banking, any more than they did when Amazon changed standards in retail shopping convenience and policyholders became more demanding overnight. There is a delicious irony in this for banking, potentially, if insurers enter banking and make it a far more customer-centric place, only to have the public then turn around and see insurance lacking.

Regulation actually supports this, according to Ms Da Silva. “The 2017 Financial Sectors Regulation Act includes objectives such as the promotion of financial inclusion and the transformation of the financial sector, which the FSCA will support. Regulators have also prioritised developing legislation that is more proportionate, which for example provides for a range of new types of entrants into the market, including cooperatives and fintechs. We are also cognisant of the importance for consumers of being able to efficiently and cost-effectively switch between banks, as this may also be seen as a barrier in the sector.” In fact, one of the six “strategic priority focus areas” named in the FSCA’s Regulatory Strategy published in October is “understanding new ways of doing business and disruptive technologies”, according to Ms Da Silva.

This makes sense, when one looks at the ongoing priorities outlined in FSB/FSCA manifestos for several years – incensed customers demanding from insurers the services they get from banking may not be comfortable for the industry, but it is for the consumer.

“The only way the big banks can compete

now is to cut costs ruthlessly and

remorselessly… mass redundancies”

– Chris Gilmour

The IFA angle

But that’s not all in the way of disruption. According to some, Discovery Bank and any imitators could change another aspect of the financial services segment entirely – the intermediary.

“I think what insurance and pension fund regulation was trying to do was de-link independent financial advisers (IFAs), but the advent of insurers and others coming into banking opens up a whole new arena for them,” says Mr Gondo. “If you’re going to really be independent, you have to look at these other offerings as an adviser. They may meet with a new client and say, ‘let’s take a look at your banking and banking fees’, and might go beyond just selling you your life and retirement plan, because now you can see who has the best savings rate and so on, there’s competition there. That could disrupt things.”

Ms Mahlangu agrees, but looks at disruption to IFAs differently: “Everything that happens in the industry affects all players. Discovery bank is bound to disrupt the intermediaries, but this can’t be seen to be negative. Disruption should motivate companies to find new ways to take advantage of new opportunities and evolve.”

It is a brave new world for both banking and insurance. South African insurers and banks may reach ever higher and become ever more intertwined as they try and compete – or simply be reduced to squabbling and lowering prices any way they can. But don’t bank on the latter.

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