Discovery Bank eating the Big Four’s lunch 

Discovery Bank’s new home loan product has shown strong growth since it was launched in May this year. The bank aims to disburse R766 million to clients by the end of 2024. 

Since launching, Discovery Bank has shown exceptional growth, reaching one million clients two years ahead of schedule. 

The bank has also hit significant financial milestones, reaching operational breakeven in the past financial year and generating over R2 billion in revenue. 

A major opportunity for the bank, and a key part of its future growth, is its home loan product that promised to disrupt South Africa’s R1.8 trillion mortgage market. 

South Africa’s home loan market is currently dominated by the country’s ‘Big Four’ banks – Standard Bank, FirstRand, Nedbank, and Absa – which finance around 90% of all mortgages. 

In an interview with Daily Investor, Kallner said the bank has very conservative targets, in line with its plan to maintain a high-quality, low-risk client base. 

“Given the growth of the bank and our deposit base, we have got fairly good runway with this product,” Kallner said. 

The bank had initially identified around 20% of Discovery’s clients that have existing home loans with other providers whose mortgages are mispriced and present a significant opportunity for disruption. 

Discovery Bank’s main advantage comes from leveraging its shared-value banking model to help clients reduce the interest rates on their home loans. 

“The unique nature of home loans means client and asset risk typically reduce over time,” Kallner said.  

“With high costs negatively impacting repricing or switching to a different bank, an estimated 60% of clients are overpaying on their existing home loans today.” 

Discovery Bank’s shared-value approach is based upon a win-win system whereby clients manage their money well, creating less risk for the bank. 

This enables the bank to offer their clients benefits, such as reduced interest rates, based on their personal data and money management. 

For the home loan product, Discovery Bank clients can reduce the interest rates they pay on their mortgage by up to 1%. 

Kallner revealed to Daily Investor that, based on the ability so save significant amounts of money on a home loan with the bank, it has been able to take clients from its competitors. 

Over 80% of Discovery Bank’s home loans come from clients switching their home loans from an existing provider to the bank. Only 20% are new home loans. 

Kallner said this percentage of new home loans has even exceeded the bank’s expectations as it was not their intention to bring in a significant number of new home loans. 

Despite this strong growth, Kallner said Discovery Bank is committed to its prudent capital allocation strategy and maintaining its high-quality client base. 

The bank’s commitment is shown by it only accepting one out of every five home loan applications. 

“We launched into the property market at a very difficult time, with interest rates probably at their peak,” Kallner explained. 

“Having said that, we actually have seen good flow, but obviously, switches have been the vast majority, which was what we expected.”

Discovery Bank’s home loan product is also important in that it drives sales for other parts of the company’s business. 

Whether this is through financing for solar panels, batteries, or home insurance, the home loan ecosystem has become an important source of new sales for the entire Discovery Group. 

Kallner did say there has been a slow uptake for its solar products due to South Africa going six months without load-shedding, but the insurance sales have been very strong. 

This is an example of how Discovery is leveraging its bank offering to bring new clients into its financial services ecosystem. 

Around 60% of all of the bank’s new clients do not have an existing Discovery product, making it a very attractive source of new clients for the company’s insurance businesses. 

This ecosystem also extends to Vitality rewards, with new home loan clients getting up to 30% back in Điscovery Miles on Discovery Bank purchases at select partner stores. 

Discovery Bank’s home loan product is administered by a team from SA Home Loans, which is 50% owned by Standard Bank. 

This partnership has enabled Discovery Bank to meet the high levels of demand since launch, with SA Home Loans providing the infrastructure.