Discovery Bank: How far has it come?


In the six months after its launch in July 2019, Discovery Bank attracted 78 000 customers, with a collective 180 000 active accounts. Of these, 40% are are high-income holders of black credit cards.

The bank managed to attract R1.2 billion in customer deposits, R200 million more than it lent out, differentiating it from most competitors who grant more credit than they get in deposits.

However, with a target of opening at least 500 000 active accounts to become viable, Discovery Bank still has a long way to go, and analysts say its pace to date has been slow as the digital bank has only migrated less than half of its existing credit card clients to the bank. About 192 000 Discovery credit card holders are still with FNB, which was previously the credit provider for those cards.

Rate of acquiring customers

During the Discovery group's results presentation on Thursday, CEO Adrian Gore admitted that the bank has been slow on this front, but promised that the migration would be done by the end of the group's 2020 financial year in June. Despite the delay, Gore told investors that he was "satisfied" with the pace of progress to date and said he is "pretty confident" that the bank is tracking its business plan very well in terms of timelines set to achieve the break-even target of 500 000 active accounts. 

This and the new adviser distribution force supporting the bank now should accelerate the speed at which Discovery Bank is acquiring customers, said Gore. In the six months of the bank's existence, financial advisers brought in less than half of the cardholders. From January 2020, 1 300 in-house Discovery agents and 4 500 independent financial advisers started supporting Discovery Bank.

What do analysts think?

Harry Botha, banking analyst at Avior Capital Markets says while it is encouraging that 42% of the 78 000 Discovery Bank customers are new – people who didn't own Discovery credit cards – the bank's progress has been "fairly disappointing" in terms of migrating its existing customer base to the new bank given that this was always part of the plan.

"So, the biggest problems are probably that they have been late with migrations and the bank's features have been underwhelming to date. Other than discounts provided at retail partners there is no obvious incentive to switch to Discovery Bank yet. The new features might help improve customer experience and ultimately customer satisfaction," said Botha.

That said, given the rate at which Discovery has acquired new customers who didn't hold its credit card before, Botha said if this continues, the bank will comfortably reach 500 000 customers in the next three years with their current target market.

Richard Cheesman, senior analyst at Protea Capital Management also said that the migration of the existing Discovery Card accounts has taken longer than expected. He said given that Discovery Bank seems to be adding approximately 10 000 clients per month currently, its client acquisition is not as fast as some of its competitors. He said the slower acquisition rate is, however, offset by the fact that Discovery is getting much more valuable clients.

He added that the bank’s client base will be significantly bolstered once Discovery migrates all of its credit card customers.

"Discovery’s adviser network will start selling the product in the second half of the year. This will aid the bank's client acquisition. The jury is still out if Discovery will earn a sufficient return on the capital deployed in this endeavour, but Discovery does have a history of successfully launching innovative products," said Cheesman.

As for the bank’s profitability, Botha said the feedback from Discovery has provided no insights into that.  "Have they built an Investec which produces a 15% SA ROE or a FNB with a 30% to 40% ROE? Based on Discovery’s targets it should be more than 20%, but it's still early in terms of the bank’s ramp-up."

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