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They say a change is as good as a holiday. So it’s just as well we don’t call them bank holidays here, because South Africans historically do not like to change their banks. A report recently released by Discovery Bank, The application of shared value banking: A focus on interest rates and the potential benefits for South Africans, finds that "significant inertia and commoditisation have historically resulted in clients avoiding changing banks". The result? South Africans take up to a staggering 29 years to change their bank accounts – that’s roughly 70% longer than the British and double the time of our American counterparts.
However, things are changing at last. Younger clients, as well as those who are digitally engaged, are 20% more likely to change their banks than the average banking client in South Africa. The report identified three major trends in the financial services and banking sector that have a significant bearing on clients reconsidering the status quo – and thus their banking relationships.
Nature of risk
Banks have traditionally used socio-economic factors to determine individuals' risk of default. Research by Discovery Bank indicates, however, that although these factors are indeed relevant, they should not be the sole determinant of a client's risk profile, which is far more directly impacted by their behaviour. In fact, the report makes the surprising finding that more than 10% of individuals who earn above R1 million a year find it difficult to make ends meet.
"Clients who manage their money well are often mispriced due to their socio-economic standing," says Discovery Bank CEO Hylton Kallner. "Conventional banks are unable to segment based on behaviour. But with dynamic interest rates, Discovery clients can reduce their interest on borrowings by as much as 6.75% for managing their money well."
Technology
The world is going digital, and financial services can ill afford to get left behind. The industry was already increasingly embracing digital banking and payment solutions prior to Covid-19; the pandemic has merely accelerated that change, putting additional pressure on institutions that have been slow to innovate and digitise their servicing solutions. "There has been a rapid preference for and move towards digital banking and contactless payment solutions, technically making it unnecessary for clients to visit bank branches," notes Kallner. "The availability of online and digital servicing channels therefore reduces the barriers to entry, like long waiting times or administration, resulting in more choice for banking clients and making it easier to move between service providers."
The report also notes that, much as wearables can have a positive impact on user health through prompts, "mobile banking apps can be powerful tools to measure key financial metrics and behaviours, and that nudge clients to change their behaviour so they manage their money better". The influence of market-leading apps on choice of bank should not, therefore, be underestimated.
Social responsibility
Banks have a major role to play in guiding financial behaviour across the country. According to the report, South Africans have poor performance in this regard: "Almost 78% of South African household income is spent on debt, and the country has one of the lowest rates of saving in the world." The upshot of these high rates of debt and low savings has been a breakdown of trust between banks and society, with only one third of millennials trusting the institutions with which they bank. "Reducing major debt and creating a savings culture in South Africa are major socio-economic challenges facing both individuals and society and these are both aspects that banks can help with," said Kallner.
But if South Africans struggled to save pre-Covid-19, the situation has only become more severe. With millions facing greater socio-economic hardships than ever, the pandemic has rendered social purpose a necessity rather than a nice-to-have for businesses. "Companies with high environmental, social, and corporate governance are proving more resilient in this crisis, with the focus of stakeholder capitalism shifting to issues of societal protection (for example, payment holidays for clients or working from home)," says the report. The spotlight is increasingly on businesses to step up.
A new way of looking at banking
If these are the factors that influence South Africans when considering changing banks, then it makes sense to incorporate them into a banking model. Discovery Bank says its shared value banking model considers individual financial behaviours to understand how financially healthy clients are, rewarding them through the Vitality Money programme for engaging in sound financial behaviours.
This programme enables Discovery Bank to segment clients more accurately, providing lower borrowing interest rates for those who manage their money well, and higher savings interest rates for those who save longer. "We estimate that if 5% of the balances in demand savings accounts in South Africa were to move to Discovery Bank, it would earn clients an additional R1-billion in interest a year," says Kallner. "Discovery Bank offers one of the best risk-adjusted savings interest rates in the world among countries that are considered to have the lowest banking risk."
Kallner adds that clients with a higher Vitality Money status display strong signs of financial resilience. "Clients on Gold and Diamond Vitality Money status are 99% less likely to be in arrears, have deposits more than 17 times the average, and spend over 4.5 times more than clients that are unengaged, regardless of income level."
If a shared-value banking model can help banks and clients together to remain resilient in such trying times, then perhaps it could be just what’s needed to help South Africans rethink their choice of financial institution – at last.
This post was sponsored by Discovery Bank and created by BrandStudio24.
