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Discovery CEO Adrian Gore says that despite a plethora of new banking entrants in the South African market in recent years, \u201cit is much harder\u201d than one thinks to start a bank and succeed. It launched Discovery Bank in 2019, and it has taken the group seven years, plus billions of rands in investment, to get to profitability.<\/span><\/p>\n Read: It had the scale advantage \u2013 sizeable life insurance, health insurance, investment and short-term insurance businesses \u2013 that very few entrants can match. He says that some new players will battle as they\u2019re sub-scale, while with others, bureaucracy will be the problem. Beyond this, the traditional \u2018big four\u2019 (or \u2018big five\u2019, with Capitec) may look slow, says Gore, but that\u2019s not necessarily the case.\u00a0<\/span><\/p>\n Plus, the incumbents are \u201care much bigger than you think,\u201d he adds. \u201cWhen you look at their profit pools and you look at the size of their lending books, they are ginormous\u201d, which obviously is a positive for Discovery. <\/span><\/p>\n Its bank has been able to take market share and get to profitability without much overt retaliation from larger rivals.\u00a0<\/span><\/p>\n<\/blockquote>\n New entrants<\/strong><\/p>\n Since the late 2010s, Tyme Bank, African Bank, Old Mutual and Discovery have entered the space, while another entrant, Bank Zero, has been acquired by Lesaka Technologies (formerly Net1). Add to this global fintech player Revolut and Pepkor, who have both applied for banking licences (the latter\u2019s has been granted), while the country\u2019s biggest supermarket group Shoprite harbours serious ambitions of its own. This makes for an intensely competitive environment, which Discovery does not fear.<\/span><\/p>\n Read: ADVERTISEMENT<\/p>\n CONTINUE READING BELOW<\/p>\n<\/div>\n<\/div>\n The bank is well on track to reach \u2013 or surpass \u2013 its ambition of posting R3 billon in operating profit by the 2029 financial year (which starts in July 2028). <\/span><\/p>\n Currently, the bank is adding roughly 1 300 customers a day and the group can now extrapolate the net interest income and non-interest revenue (fees) it can generate from each customer. It now has a base of 1.4 million clients with 3.4 million accounts. Revenue was up 34% in the six months to the end of December, at R1.5 billion.\u00a0<\/span><\/p>\n Gore says that \u201cif you grow to 2 million to 2.5 million [customers] and you assume the same underlying experience, [the] same quality clients,\u201d with the metrics above, one easily gets to R3 billion by FY29.\u00a0<\/span><\/p>\n However, he is insistent that the group would rather look at the idea of \u201calpha\u201d. <\/span><\/p>\n<\/blockquote>\n Although R3 billion is a great absolute value, it is focused on quality. In its model, the client base will continue to grow from the 1.4 million base, while revenue per customer per month will also track higher.<\/span><\/p>\n Read\/listen: The operating leverage from having expenses per customer more than halving over four years is the trick. Since H1 2022, this is down from R336 per month (on average) to R144 in the current six months. Impairments are relatively flat through the cycle and this translates into the R319 million in profit for the six months, before the cost of acquiring new business. <\/span><\/p>\n Actual profit, after the accounting, is R75 million for the period.\u00a0<\/span><\/p>\n<\/blockquote>\n Currently, Discovery Bank is generating revenue of around R200 (R199) per customer per month on average, with just over 60% of this coming from fees (non-interest revenue). That same customer only costs R144 to service, plus an average impairment charge of R16. Gore says, if you grow client numbers by 15% a year and the expense base by 6% (inflation plus 1% or 2%), this results in a cost-to-income ratio of 40% to 50% by that FY29 timeframe.\u00a0<\/span><\/p>\n ADVERTISEMENT:<\/p>\n CONTINUE READING BELOW<\/p>\n<\/div>\n<\/div>\n Hylton Kallner, CEO of Discovery Bank, says the current run-rate of profitability is \u201cabout R60 million to R70 million per month\u201d before new business acquisition costs, which means \u201caround about R20 million to R30 million per month\u201d after this. \u201cFrom an engagement perspective, we have \u2026 35% to 40% of the client base that is highly engaged or what you would call primary [banked]\u201d.\u00a0<\/span><\/p>\n \u2018Composite maker\u2019<\/strong><\/p>\n Where the bank is incredibly valuable is in what Gore calls being the \u201ccomposite maker\u201d in South Africa.\u00a0<\/span>Only roughly a third of new account sales are to existing Discovery customers, and this has been trending lower which is completely counter intuitive. <\/span><\/p>\n This means the cross- and up-sell opportunities for the bulk of its new clients are almost endless.\u00a0<\/span><\/p>\n<\/blockquote>\n It has been successfully getting these new-to-the-group customers to take on additional products in the Health, Life, Invest and Insure verticals, but has not deliberately pursued this until now. In recent months, it has updated its app to show icons for these various product houses at the top of the screen and if a client didn\u2019t already hold any of these, they would be labelled with a red cross. <\/span><\/p>\n While it\u2019s still early days, Gore says this small tweak has seen inbound leads more than double in certain cases. There\u2019s a lot more to go\u2026\u00a0<\/span><\/p>\n Read: Not only sleep-tracking, big Discovery Vitality changes ahead<\/p>\n<\/p><\/div>\n
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