Secrets behind Discovery Bank success

Discovery Bank’s no-compromises approach, the Vitality model, and its focus on client experience have driven its growth to over one million clients and put it on the path to generating R3 billion in profits by the end of the decade. 

CEO Hylton Kallner told Daily Investor that this approach influences everything the bank does, from expanding its offering to maintaining its high-quality client mix. 

Discovery Bank has grown in leaps and bounds since launching with just a credit card in November 2018. 

It has reached the key milestone of one million clients two years ahead of schedule and achieved operational breakeven in the second half of its recent financial year. 

The bank is expected to grow its operating profit by R400 million per annum from this year onwards and is on track to generate R3 billion in profits in the 2029 financial year. 

Kallner said this would be achieved by continuing to attract high-quality clients and bringing new products to market. 

According to Kallner, this is the bank’s first key attribute. He added that the bank will not sacrifice its high-quality client base for growth. 

“Given both the organic growth of the bank and additional products we make available to the client base, we can continue to grow this next phase and into the medium term without compromising quality,” he said.  

“That is certainly our intention. We have always said we would rather grow a little bit slower but do it in a way that is prudent and of very high quality.” 

Another key attribute of the bank is its deposit-led strategy, which is a key part of this sustainable growth. Discovery Bank has been extremely conservative in extending credit to clients, growing its deposits at a faster rate than its advances. 

In the most recent financial year, deposits grew 29% to R18.5 billion, while advances saw a 27% increase to R6.6 billion. 

This naturally leads to the next attribute, which is the bank’s focus on non-interest revenue as the main source of its income. 

Not only does this reduce the bank’s sensitivity to interest rates, but it also provides a much more stable source of revenue compared to lending. 

This approach results in Discovery Bank’s significantly lower credit loss ratio than South Africa’s incumbent banks, and its earnings are relatively immune to fluctuations in interest rates. 

These first three attributes lead to the final two, which are scaling the business and optimising its profitability. 

The bank has made strong progress in this regard, regularly launching new products and reaching the important cross-over point where its income per client is greater than cost per client. 

Kallner told Daily Investor that these attributes are underpinned by the bank’s no-compromises approach, its use of Discovery’s shared-value Vitality model, and its relentless focus on customer experience. 

The no-compromises approach extends from the bank’s unwillingness to sacrifice client quality for faster growth to its decision not to offer products where it feels it cannot add value. 

For example, the bank has no plan to move into vehicle finance as it does not think it offers an opportunity for disruption and will not be able to add any value to its clients in that area. 

The second underlying factor, the Vitality model, underpins Discovery Bank’s unique offering to clients and encourages better financial decisions, reducing risk for the bank. 

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. 

The behaviours that are rewarded include saving, being adequately insured, investing for retirement, and paying off home loans faster. 

As a digital-only bank, everything is conducted through the app, making the digital experience for the client extremely important. 

“The actual digital experience is something that we are absolutely focused on. It is something that we continuously look to improve and enhance,” Kallner said. 

A major part of this is not necessarily ensuring everything is perfect when launched but being agile and reacting to client feedback or needs. 

Kallner also said an often-forgotten part of being a digital bank is ensuring you do offer human support for issues clients have and ensure these problems are dealt with in the best manner possible. 

“So it is digital on the one hand, having every feature and product available on the app. And then, on the other hand, having immediate access to brilliant bankers and human support whenever you need it.” 

“I think that is what is driving the growth of the model, the digital experience on the app and then the full-service available through human support.”