Banking on behaviour

Published April 19, 2021

Should financial service providers take into consideration the positive behavioural change in consumers as part of their offering? Should the change be limited to only better financial management or have a broader connotation encompassing healthy living? Shared prosperity warrants an affirmative answer to both questions.

The idea is not utopian any longer. It is being put into practice by a South African financial group, Discovery. It emerged as the game-changer in the insurance arena when it helped a significant portion of its client base embrace a clean-eating, gym-going, safe-driving culture.

In 2019, the group launched Discovery Bank, the world’s first digital behavioural bank, in South Africa. Over a short span of two years, the bank has emerged as a key challenger bank witnessing a three-time faster growth in deposits relative to the market. Ranked as the seventh largest credit provider in South Africa, the bank boasts an arrear rate that is 65 per cent lower than that of the market. Discovery’s app, which is the main interface for its digital services, has a ranking of 4.6, above the industry average.

Banking with a thrust on better financial management has a promising future in countries with poor savings culture and high debt levels

Behavioural banking stems from behaviourism, an off-shoot of psychology, which emphasises that people’s actions stem largely from entrenched habits. The thrust of behavioural banking is on rewarding good behaviour and reducing the tendency to engage in bad one. The business model is focused on the adoption of healthier banking behaviour. Certain goals are set for clients that lead to sound financial behaviour. Based on the ideology of shared value, the offering consists of personalised products and services along with the availability of numerous incentives and rewards through a digital platform. These rewards range from dynamic interest rates to flight and gym discounts.

The reward programme of the current behavioural banking model is linked to the score on the following five key factors over time. One, spending vis-à-vis earnings: income used to pay off unsecured debt, such as credit cards and personal loans. The aim is to encourage spending less than earnings to avoid costly debt.

Two, insurance coverage: protections against unexpected expenses or loss of income.

Three, regular savings: adequacy of savings to cover any unforeseen expenses.

Four, managing property: comparison of the property value to the home loan balance. If the customer does not own property, the bank looks at the value of investments that could be used to cover rent and living expenses during retirement.

Five, retirement planning: are savings enough to make customers financially independent by the time they want to retire?

Banking with a thrust on better financial management has a promising future in South Africa given poor savings culture and high debt levels. According to Hans Overbeek, founder and chief executive of Cyber Finance, the number of people in debt who are relying on their credit to stay alive has skyrocketed, leaving the South African economy teetering on the edge of borrowed time.

The situation was exacerbated by the global pandemic. The household saving rate in South Africa stood at a mere 0.5pc in the fourth quarter of 2020 based on figures reported by Tradingeconomics.

The business model can be replicated in developing countries like Pakistan that struggle with lower savings rates and high leverage. According to World Bank data, gross domestic savings as a percentage of GDP stood at 5.4pc in Pakistan during 2019, considerably less than those of regional peers, including India (27.7pc), Sri Lanka (21.3pc) and Bangladesh (24.8pc).

A working paper on the household debt in Pakistan published by UK-funded Secure Livelihoods Research Consortium in 2019 reported that one-fifth of households on average are indebted in Pakistan. The study also revealed that about 40pc of over-indebted households were spending more than 100pc of their income on the repayment of loans.

A digital behavioural bank could be launched in Pakistan in collaboration with key insurance players or with commercial banks. This approach was also adopted by Discovery Bank, which first launched its credit card on the platform of First National Bank (FNB) as a joint venture with the latter. Now functioning as a fully operational bank, it has taken over the administration of all card accounts. The model is a win-win proposition for both the bank and the consumer: superior quality retail portfolio through rapid outreach without major brick-and-mortar investments for the former and a stable financial future along with healthy lifestyle for the latter.

The writer is a visiting faculty at IBA

Published in Dawn, The Business and Finance Weekly, April 19th, 2021

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