Does exercising make you a better credit risk or life insurance risk? This article in American Banker indicates that Discovery Bank in South Africa thinks your behavior matters. While behaviors like gambling or bungee jumping may be indicative, this seems like a slippery slope:
“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, which is owned by South Africa’s largest health insurer (also called Discovery), is a “behavioral bank,” as the institution calls it, 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.
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.””
The article goes on to discuss other areas that utilize data to offer lower process, such as Allstate which monitors roughly 1.1 million drivers with its Drivewise app. This article is certainly worth reading and keep in mind that even if it makes you nervous about what the future will look like; know that China will get there first!
Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group