Adrian Gore: Building a bank is harder than you think

2026-03-04 - 08:13

Discovery CEO Adrian Gore says that despite a plethora of new banking entrants in the South African market in recent years, “it is much harder” than one thinks to start a bank and succeed. It launched Discovery Bank in 2019, and it has taken the group seven years, plus billions of rands in investment, to get to profitability. It had the scale advantage – sizeable life insurance, health insurance, investment and short-term insurance businesses – that very few entrants can match. He says that some new players will battle as they’re sub-scale, while with others, bureaucracy will be the problem. Beyond this, the traditional ‘big four’ (or ‘big five’, with Capitec) may look slow, says Gore, but that’s not necessarily the case. Plus, the incumbents are “are much bigger than you think,” he adds. “When you look at their profit pools and you look at the size of their lending books, they are ginormous”, which obviously is a positive for Discovery. Its bank has been able to take market share and get to profitability without much overt retaliation from larger rivals. ALSO READ: Capitec shoots lights out: up to R17.2 billion in headline earnings, becoming SA’s most valuable bank New entrants Since the late 2010s, Tyme Bank, African Bank, Old Mutual and Discovery have entered the space, while another entrant, Bank Zero, has been acquired by Lesaka Technologies (formerly Net1). Add to this global fintech player Revolut and Pepkor, who have both applied for banking licences (the latter’s has been granted), while the country’s biggest supermarket group Shoprite harbours serious ambitions of its own. This makes for an intensely competitive environment, which Discovery does not fear. The bank is well on track to reach – or surpass – its ambition of posting R3 billon in operating profit by the 2029 financial year (which starts in July 2028). Currently, the bank is adding roughly 1 300 customers a day and the group can now extrapolate the net interest income and non-interest revenue (fees) it can generate from each customer. It now has a base of 1.4 million clients with 3.4 million accounts. Revenue was up 34% in the six months to the end of December, at R1.5 billion. To grow customers Gore says that “if you grow to 2 million to 2.5 million [customers] and you assume the same underlying experience, [the] same quality clients,” with the metrics above, one easily gets to R3 billion by FY29. However, he is insistent that the group would rather look at the idea of “alpha”. Although R3 billion is a great absolute value, it is focused on quality. In its model, the client base will continue to grow from the 1.4 million base, while revenue per customer per month will also track higher. The operating leverage from having expenses per customer more than halving over four years is the trick. Since H1 2022, this is down from R336 per month (on average) to R144 in the current six months. Impairments are relatively flat through the cycle and this translates into the R319 million in profit for the six months, before the cost of acquiring new business. Actual profit, after the accounting, is R75 million for the period. ALSO READ: Capitec moves to keep banking fees the same: Here’s what other banks are charging Revenue collected per customer Currently, Discovery Bank is generating revenue of around R200 (R199) per customer per month on average, with just over 60% of this coming from fees (non-interest revenue). That same customer only costs R144 to service, plus an average impairment charge of R16. Gore says, if you grow client numbers by 15% a year and the expense base by 6% (inflation plus 1% or 2%), this results in a cost-to-income ratio of 40% to 50% by that FY29 timeframe. Hylton Kallner, CEO of Discovery Bank, says the current run-rate of profitability is “about R60 million to R70 million per month” before new business acquisition costs, which means “around about R20 million to R30 million per month” after this. “From an engagement perspective, we have ... 35% to 40% of the client base that is highly engaged or what you would call primary [banked]”. ‘Composite maker’ Where the bank is incredibly valuable is in what Gore calls being the “composite maker” in South Africa. Only roughly a third of new account sales are to existing Discovery customers, and this has been trending lower which is completely counter intuitive. This means the cross- and up-sell opportunities for the bulk of its new clients are almost endless. It has been successfully getting these new-to-the-group customers to take on additional products in the Health, Life, Invest and Insure verticals, but has not deliberately pursued this until now. In recent months, it has updated its app to show icons for these various product houses at the top of the screen and if a client didn’t already hold any of these, they would be labelled with a red cross. While it’s still early days, Gore says this small tweak has seen inbound leads more than double in certain cases. There’s a lot more to go... This article was republished from Moneyweb. Read the original here.