South Africa’s Discovery Bank took what it had learned in the health insurance sector and applied the same behavioural data approach to personal finance. Akash Dowra, Head of Customer Insights and Technical Marketing, explains how it is truly a bank for our time.
Most neobanks promise super-slick apps, low or no fees and a gazillion ways to improve your financial management. Discovery Bank’s website offers something different: customer rewards for healthier living and responsible driving, followed by incentives for ‘banking well’.
This more holistic approach is inspired by its experience in the health and life insurance sectors, which it entered in the 90s as the Vitality brand and included a Medical Savings Account that put clients in control of their private healthcare spending.
As a company, it caught on early to the idea that gamifying such products and incentivising changes in behaviour with rewards, shifted the culture from one built around claims serving to claims prevention, and enabled people to live well for longer. If it worked with physical health, then why not financial health?
In fact, says Akash Dowra, head of customer insights and technical marketing at Discovery, there are more similarities than you might think.
“There are three behavioural traits we’ve looked at from a health perspective, which also affect finance. The first is over-confidence. Looking at our health business, 60 per cent of people who are high risk believe their health is above average.
“The second is frequent event miscalculation. Worldwide, 3.5 million people die from diabetes every year, while only eight die from shark attacks. Guess which people are more afraid of – a shark or a cupcake?
“And the last is hyperbolic discounting, where the effect of actions is so far in the future that the impact today feels so small that people end up making the wrong decision. In health, it’s that one extra cupcake; in finances, it’s walking past a shop and thinking ‘I could buy that jacket. It’s just R100 and R100 is not going to affect my retirement in 50 years’. The issue is, you’re spending R100 every other day, so even though the impact of one event is small, the frequency means it adds up to a lot over time.”
By linking health, life and car insurance with banking under the Discovery Bank umbrella, it’s developed a kind of financial Fitbit®, which tracks users’ day-to-day behaviour and then adapts premiums and interest rates accordingly. It uses the data to reward good behaviour with everything from cashback to discounted air travel and free coffees.
What claims to be ‘the world’s first shared-value bank’ launched last year, with what Dowra describes as a ‘social mission’ to change people’s banking behaviour and, in so doing, introduce a new fairness to the products and services they have access to in South Africa.
In the absence of a formal regulatory framework, like those in the UK and Europe, Discovery is instead applying open banking principles inspired by them, using application programming interfaces (APIs) like those it employed for Vitality to share data and build intelligence about every customer.
And it is notching up massive early support, despite South Africa not being the friendliest place for fintech startups due to its lack of a clear open banking framework and contrasting cultures across different African countries.
Discovery is just one of a number of forward-thinking companies trying to fill that gap amidst concerns about financial inclusion and the protection of customer privacy and personal data. And it has seen a surge of new customers during the COVID-19 lockdown, as customers increasingly look to digital channels to fulfil their financial services needs. It has so far attracted 275,000 customers.
Dowra explains the unique challenges it is now aiming to tackle.
“South Africans need help managing their finances,” he says. “We have one of the lowest savings rates in the world, a tenth of those in Europe, China and the US. And even though people might be relatively affluent, they still end up not being able to retire comfortably. Our spending behaviour also leaves a lot to be desired. We have more people with credit than in employment, for example. It’s a dire situation.”
And this trend is classless.
“We’ve seen this behaviour throughout the income levels. Even in the middle and upper-income brackets, 28 per cent of people spend more than they earn and only 25 per cent have sufficient savings to withstand financial shocks like losing their jobs. So, South Africans need help with their finances and this is complex, taking into account how much they save and how much they put into their retirement as well as how much debt they can take.
“Our job is to make it as simple as possible for clients to, number one, understand their finances and, number two, do something about it’.”
As a consequence of financial ignorance, a high proportion of the population is trapped in a vicious circle of having too much debt and struggling to service it at ultra-high interest rates.
“A large proportion of the population is in debt counselling,” adds Dowra. “The government has done a lot, it came upvwith the National Credit Act a while ago, which forces financial institutions to ensure a client can pay off their debt before issuing it, but there’s a high level of bad debts that banks have to price into their books, resulting in higher interest rates than normal. People that are good risks end up having bad debt priced into their rates as well, so everybody is affected by it.”
Is financial education not the answer? It’s more subtle than that, says Dowra.
“This sounds like you need to go back to school, and not many people want to do that. Because this trend isn’t circumstantial and we have people earning R1.5million (£100,000) in financial difficulty, it comes down to behaviours. We have learned experience and behavioural science from our health business, Vitality, so we researched what is driving the financial state of South Africans.
“We’ve identified five behaviours that result in 80 per cent of defaults. They’re very simple, such as spending more than they earn; not having enough insurance; not saving for emergencies; not saving for retirement and managing their secured debt poorly.
“You’d probably say ‘OK, that’s obvious’. But if it is, why don’t people do what they should? Even if you told them ‘you need to do these five things’, they still probably wouldn’t do them. This is where the behavioural science comes in.
“While financial education plays a part, you actually need to change those behaviours, so we incentivise people to do so by saying ‘if you don’t spend on this, and you save your money, we will reward you for it today. We gamify the system with active rewards, dynamic discounts and interest rates to make the rewards for the right actions more tangible.”
Discovery’s launch was mobile-first and app-based.
“We have a strong brand in South Africa. People trust us with their health and now their money.
“We went branchless to keep costs low and this offers great security. The bank is available when customers want it and we can reach a really big footprint of people at low cost. The savings we make from not having branches help us to fund additional rewards and incentivise even bigger changes.”
Discovery sees the ‘behavioural bank’ as providing a wider service to society – and that’s proved particularly so during the pandemic.
“At our core is our concept of shared value, a virtuous circle where we incentivise and nudge people to unlock economic value by changing their behaviour. Our Vitality Money statuses correlate to probability of default, so we know that, as a customer improves their financial wellbeing and Vitality Money status, their risk of defaulting on the credit we offer them is much lower. So, we drop the interest we charge them because why should they have to pay a premium for risk they no longer have?
“We’ve had lots of engagement so far, with clients moving up their Vitality Money statuses after two months of joining. We’ve had testimonials since the pandemic, saying ‘if you hadn’t incentivised me to save, I wouldn’t be in the position I’m in now, able to withstand shocks’. We’ve always said people need to save for an emergency and, while they were probably thinking about car crashes and no-one anticipated a pandemic, that resilience is paying off. Despite a lot of people having their salaries curtailed, we still have a zero default rate on our Diamond clients, and a zero arrears rate on the credit.”
Fusing the principles of physical and financial health in the eye of a global pandemic: it truly is a bank for our time.