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When Discovery Bank opens its doors in March, it plans to take an old idea — letting customer behavior dictate the price for its offering — to a whole new level.

Instead of charging for services based on income and repayment practices, the South African bank wants to look at behavior more broadly, tracking the habits of its 4.4 million customers and offering better deals to those who live healthier lives. For example, those that use the company’s Vitality rewards program can earn points for visiting the gym, getting a flu shot or buying healthy groceries.

“The model allows Discovery to understand and price risk more accurately over a client’s life as they engage with the program,” said Barry Hore, Discovery Bank’s chief executive. “Our expertise and experience with Vitality show that the underlying human biases that are typical in health or driving behavior also apply to financial management.”

Discovery calls itself a “behavioral bank,” and it may presage a future of “self-driving finance,” in which banks and their competitors look to create “more viscerally rewarding experiences that belong ultimately to the customer,” said Jesse McWaters, who leads the study of financial innovation at the World Economic Forum. The bank is owned by an insurance and financial services firm (called Discovery Ltd.) that also owns the largest health insurer in South Africa (called Discovery Health).

It also highlights a problem banks currently face in engaging customers and convincing them to give up more data, which can help institutions make more relevant offers.

“Banks typically segment clients based on income,” Adrian Gore, the CEO of Discovery Group, told a packed auditorium in Johannesburg in November for a presentation of the branchless bank that resembled an Apple product release. “In our world, there are two dimensions: income plus behavior.”

Discovery refers to its model as “5-3-80,” which means that there are five behaviors that link to three risks that account for 80% of the reasons that people don’t meet their financial obligations.

The behaviors are spending less than you earn, saving regularly, insuring against serious events, paying off property and investing for the long term. According to Discovery, the extent to which someone engages in the five behaviors correlates with their risk of struggling with debt they cannot afford, being hit with expenses they did not anticipate or retiring without enough money.

Discovery feeds the data from across its businesses into algorithms that measure behaviors actuarially and enable the company to vary the pricing of products based on risk. The more data that customers consent to share with Discovery, the richer the rewards.

The insurer will fold the bank into the rest of its offerings, which are available to any South African with a smartphone. Soon the same app that tracks how many times a week you work out and whether you’re texting while driving will know whether you are spending less than you earn. For example, if the minimum repayment on your credit card balance does not exceed 5% of your salary, you earn the full allocation of Vitality points.

“We’ve done a lot of mathematical work to make sure the point allocations give us exceptionally good correlations to default,” said Gore, an actuary by training, who calls the company’s rewards “an incredibly powerful chassis for creating behavior changes. It’s a synthesis of different worlds coming together.”

Depending on your status — Vitality features five levels that ascend from blue to diamond — the bank will charge up to 6 basis points above the market rate for a personal loan and pay up to 3 basis points above market on savings. The bank will overlay onto Vitality one of four ascending status levels (gold, platinum, black and purple) that tie directly to income.

A customer who has a relatively low income but engages in financially healthy behaviors could have a gold account but diamond status, whereas someone who has a high income but fails to save as much as they could may have a black account without the highest Vitality status. As Gore puts it, “you can be low income but high status, or be high income and low status.”

'People don’t dislike banks, they dislike banking. We’re going to see more players differentiate themselves in making financial experiences more rewarding or easier.'

Despite being new to banking, Discovery has applied its model to credit risk with success. In September, the company agreed to buy the remaining quarter of a joint venture with South Africa’s First Rand bank that for roughly 15 years has offered a Discovery-branded Visa card. At the end of 2017, the loss ratio on the loan book of roughly 300,000 Discovery Card customers stood at 1.5%, compared with an average of 6% for other top-tier lenders.

In a further display of Discovery’s bona fides in banking, Mark Tucker, the chairman of HSBC, will become Discovery’s nonexecutive chairman in March while continuing to perform his role at the European banking giant.

To encourage customers to add banking to the services they already purchase from Discovery, the company is dangling lucrative incentives. With the right status, its insurance customers can get 25% cash back on healthy groceries at Woolworth’s and Pick-n-Pay, two of South Africa’s largest chains. But that will be bumped up to 75% for customers who also join the bank and sign up for certain products. Additionally, Discovery will double the cash back it offers on workout gear; boost by 40% the savings on purchases of fuel; and provide gym memberships and the latest model iPhone for free.

Besides the grocers, the company’s partners include Clicks, the Walgreens of South Africa; Shell and BP for fuel; and Virgin Active, which runs the country’s largest chain of health clubs.

Discovery has tailored the bank to its territory. In a white paper published in connection with the launch, the company cites data showing that 53% of South Africans borrow money through the use of a credit card, compared with 47% of people globally. The country’s household savings rate of 0.3% ranks well below the United States, where households tend to save about 5% of their disposable income. And 16% of South Africans can replace their income in retirement, compared with 38% of Americans.

Social finance on steroids

To be sure, the ability to assess risk through social factors predates Discovery. For years now, an array of companies and the lenders that purchase from (or partner with) them have used data derived from mobile phone use and social media habits to build credit scores and predict the likelihood someone will repay a loan.

But advancements in both technology and the learnings of marketers have broadened the data available to shape rewards and habits. Like Discovery, some auto insurers in the U.S. are using data derived from smartphone apps and devices installed in vehicles to monitor behavior on the road in return for discounts and the potential for reduced rates on premiums.

“We’re a customer-focused data company,” Tom Wilson, CEO of Allstate, which monitors roughly 1.1 million drivers through its Drivewise app, told Fortune in September.

Banks are upping their collection of data as well. Last April, Goldman Sachs purchased Clarity Money, which Goldman absorbed into Marcus, its online consumer bank. Clarity Money uses machine learning to track users’ spending and identify opportunities to save by asking users whether they want to eliminate recurring expenses like subscriptions.

Though the moves come amid the shift by banks and their competitors to automate spending and saving for consumers, it also highlights the advantage of being first to collect a data set. “We focus on returns to capital, but returns to data are important too,” said McWaters. “Fundamentally, it’s about ability to turn customer data into customer engagement. When that data is used to train machine-learning models they improve, creating a virtuous loop of more data and more engagement that can be very rewarding to first movers.”

Data plus delivery

Though the quality of data determines the ability to personalize, banks need to be able to deliver the information in ways that can help customers, according to Beth Johnson, chief marketing officer and head of virtual channels at Citizens Bank.

“I may know from the data that your child is going off to college, but personalization is just as much whether I have the mechanism to deliver the advice or service or product that ties to that into the hands of customers,” Johnson said.

For banks like the $159 billion-asset Citizens, delivery cuts across mobile and online channels, branches, advisers and call centers. “It’s having the data; the delivery mechanism; the words that register with customers; and the ability to test, measure, learn and change what I’m doing to make it more relevant, efficient and effective,” Johnson said.

Though Citizens starts with the data that it derives from customers, the bank also uses data from beyond the bank as part of its work to up the relevance of its offering. The bank also is investing in machine-learning technology that enables it to personalize the information, which Johnson calls “the hardest piece to get right.”

Johnson knows she’s competing to engage customers against expectations set by companies like Amazon, which has set the bar high with services such as Prime. “We need to make sure we’re beating them from a customer expectations standpoint,” she said.

The competition is barraging bankers from inside and outside the financial industry. The ability of big tech companies to optimize customers’ experiences give them an advantage over financial firms in appealing to consumers, according to a report published in September by Moody’s Investors Service.

'The secret sauce is delivering it in the end-to-end way, using the relevant data to make it personal.'

The tech companies each “have different business models and different motivations, but their motivations are first and foremost to engage their customers,” Warren Kornfeld, a senior vice president at Moody’s and co-author of the report, recently told American Banker.

Facebook, as part of a push to engage customers more deeply, reportedly has asked major U.S. banks to share information about customers’ account balances and credit card transactions. At the same time, JPMorgan Chase, together with Amazon and Berkshire Hathaway, has turned its attention to lowering the cost of health care. In a move that mirrors Discovery, the nation’s biggest bank by assets also has begun to offer users of its app the ability to redeem rewards from as many as 150 merchants that range from Staples to Starbucks.

Nor are Discovery’s competitors standing still. Standard Bank, South Africa’s biggest banks by assets, recently launched a branded cellphone service. And Discovery Bank is among at least a half-dozen new South African banks revving up in the coming year.

The scrambling across industries does not surprise observers like McWaters, who noted that while financial institutions hold an advantage given the wealth of data they hold, “if someone else is able to put together a relevant data set, it creates an opportunity for other players to establish themselves as the hub of people’s financial lives.”

That reality explains in part why Johnson, who joined Citizens in 2013 from Bain & Co., also oversees the bank’s data analytics efforts. “The ability to reach customers across channels is increasingly important if they’re not going to walk in,” she said.

In a further sign of both the cross-pollination and the mashup of know-how the market demands, M&T Bank in November named Christopher Kay, the chief innovation officer at Humana and a former executive at Citi Ventures and Target, as head of consumer and small-business banking as well as head of marketing.

Wherever the competition comes from, McWaters sees opportunity in a lesson drawn from the wave of fintech firms that have emerged in recent years. “One of the interesting learnings is that people don’t dislike banks, they dislike banking,” he said. “We’re going to see more players differentiate themselves in making financial experiences more rewarding or easier.”

The data promises to enable the experimentation. “The secret sauce is delivering it in the end-to-end way, using the relevant data to make it personal,” Johnson said.

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Customer data Fintech Customer experience Customer-centricity Citizens Bank Big Ideas