According to a recent study by Fundação Getúlio Vargas, a Rio de Janeiro-based higher education institution, there are more smartphones, tablets and laptops in Brazil than there are people. As of May 2018, there were 306 million such devices for a population of 207 million, which has an average real monthly income of less than 2200 reais ($568). As a point of comparison, the US has 1.28 smartphones per capita against Brazil’s 1.06, but it can count on an average monthly income about seven times higher than the Latin American country’s. Including other portable devices, this equates to an average of 1.5 devices for every single Brazilian from which to access mobile or online-based services on the go, a figure comfortably higher than the global average and set to grow further. The number of smartphones alone in Brazil is expected to rise from 220 million today to 235 million by May 2019.
This is good news for Brazilian banks, which are pushing their digital offering, and for the new generation of digital-only names. But despite deep mobile penetration, there are obstacles to consider, ranging from the complexities of the local banking sector to legislation that only recently facilitated the proliferation of digital banking products.
This tardiness is surprising when looking back just a few decades at the level of innovation in Brazil. Itaú Unibanco chief information officer Ricardo Guerra says the country is a pioneer when it comes to digital payments: the bank’s own first digital transfer dates back to the late 1970s during the painful years of hyperinflation. “It was around 1978... that we implemented a current account that was able to do wire transfers online. We gained a huge competitive advantage because no one had that in the world at that time,” he says.
Hard to crack
Yet, compared with other parts of the world, innovation has somewhat stalled in Brazil; as a whole, disruptive newcomers do not find the country an easy market.
“Brazil is not for amateurs; it’s hard to play here,” says Mr Guerra, particularly when new firms must confront Brazil’s big banks. Bradesco chief information officer Mauricio Minas agrees. “Incumbent banks such as ourselves have been pushing very hard in accelerating [the digital transformation of] our business models. There’s a natural growth in the marketplace in digital platforms [from newcomers too]. Some of those are up and well; others have been suffering,” he says.
Indeed, in May 2018, when Brazil’s central bank liquidated Neon Bank because of a regulation breach, the lender’s fintech venture, Neon Pagamentos, which used the parent’s infrastructure for its digital accounts, was forced to stop acquiring new clients. The fintech had raised $22m only the day before the liquidation, a record Series A for Brazil.
Around the same time, online bank Banco Inter listed its shares on the local stock exchange. They dived soon after. Chief executive Joao Vitor Menin, however, attributes this to general market conditions rather than concerns over the fintech sector and insists that “we were able to hold an initial public offering because [investors] saw lots of revenue potential”.
David Velez, CEO and founder of Nubank, a São Paulo-based digital bank set up in 2013 and backed by Goldman Sachs, among others, adds: “Just as in any start-up industry, I believe we will have a natural maturation process, with some companies closing, others being bought by banks, and only a few [progressing] on a long-term trajectory.”
Fighting intertia
Mr Velez blames the high concentration of the Brazilian banking market for hindering innovation and, therefore, the creation of a fertile fintech ground. When Nubank received authorisation to operate as a financial institution in 2016, he says: “We broke the system inertia and helped create the path for more than 300 other fintechs that have been founded ever since. But, as of today, Brazil’s five major banks still own 90% of the market.” In terms of assets, those five lenders – Itaú Unibanco, Bradesco, Banco do Brasil, Santander and Caixa Economica Federal – represent about 85% of the market. In March 2018, Nubank filed a complaint with Brazil’s anti-trust authority, Cade, alleging anti-competitive practices in the credit card space by the country’s largest lenders. Banco do Brasil told The Banker that it provided all the clarifications requested by Cade and denies malpractice. The other banks declined to comment or did not respond to requests to do so.
On the other hand, as in other parts of the world, the new digital banks have some competitive advantages. They do not need to deal with the legacy issues and costly branch networks of traditional lenders and, therefore, can offer cheaper products and capture younger or lower income customers. “Innovation is a much bigger challenge for [incumbent banks] than for companies such as Nubank, which were born digital,” says Mr Velez.
Itaú’s Mr Guerra agrees that the market is changing, and he looks as closely at the fintechs and large tech companies as he does at the traditional competitors. New digital-only banks such as Banco Inter, Nubank and Banco Original are quickly winning over customers: Nubank and Original have 1.5 million and 600,000 customers, respectively, while Banco Inter is adding 4000 customers per month.
Identity crisis
For all in the Brazilian market, reaching the unbanked is a key objective. Despite being a pioneer in many respects, Latin America’s largest economy still has a comparatively low level of bankarisation, with domestic credit to the private sector hovering at about 60% of gross domestic product, compared with Chile’s 112%, according to the World Bank. In the US, the ratio is more than three times Brazil’s, at 192%.
Rules that allow for the opening of accounts through digital channels only, bypassing the requirement for physical proof of identity and address at the branch, were introduced in 2016. This has created an opportunity for pure digital banks and given all players the ability to reach the wider population.
“The focus for the second half of the year is the expansion of financial services products to segments of the population that traditionally had a very hard time accessing banks,” says Mr Velez.
The same is true for the established names, whose efforts go beyond requiring documents. At Bradesco, Mr Minas says his team is working to find a solution that meets the proof of address requirement, which many young people lack because they live either with their parents or with friends and are not formally on tenancy contracts or utility bills.
The current risk assessment model is also hindering the extension of banking services to new customers, as it requires a certain amount of data before granting credit to a new customer. “We can’t [always] credit score those new customers if they don’t have a credit history,” says Mr Minas. “We’re adjusting our algorithms and our credit score engine to allow us to issue some credit anyhow, with the information we already have.”
Positive spin
A newly launched project supported by Brazil’s banking association, Febraban, is one possible solution. Until now, credit scoring was based on negative incidents, which means that only cases of delayed payments or non-payments by existing customers were flagged up. New rules are changing this and allowing the collection of data for ‘positive’ credit scoring, pending explicit consent of consumers. This data would apply beyond the financial services sector and include any information that can speak to the reliability of a prospective customer, such as records of payments to utility providers. A further change to the law might turn the opt-in clause into an opt-out requirement, meaning that customer data would automatically be collected and shared unless otherwise requested.
Created in June 2017 and owned by Brazil’s largest five banks, database management fintech Quod will provide such positive credit scores once it becomes operational later in 2018.
“If a given person does not have access to a bank account or to credit, but that given person is a good payer of telecom bills or power bills, then this information means you are not starting from zero in terms of risk analysis,” says Rodrigo Abreu, CEO of Quod. “That’s different to providing credit to someone on which you have absolutely no information, which tends to be the case with banks.”
The product can be developed further, he says, and can be used by companies other than banks; it can also be used to prevent illicit behaviour and enforce more effective customer segmentation. “There’s a lot we can do with big data products, starting from positive credit scoring and analysis and then moving on to different areas such as fraud identification and prevention, customer identification and segmentation to help with the onboarding of clients,” adds Mr Abreu.
Time factor
More data and better analysis tools help create products wrapped around customers’ needs at a specific moment in time. “You need to offer the right product to customers at the right time of their lives. And to do that you need a high level of customisation, you need to gather any information you can about them, and have the analytical tools to understand and process that data,” says Alexandre Pinelli, head of digital channels and user experience at Banco Original.
Itaú’s Mr Guerra adds that monitoring customer behaviour led to the creation of a light version of its app, better suited for the low-income segment, once the bank noticed a disproportionately low take-up among those customers. “We found out that the size of the app was very important for that segment,” he says. “So we developed a light version of the app for customers that use smartphones with less memory. The light app has fewer options, it’s simpler, and it’s 10 times smaller.”
As consumers get a taste for the ease, convenience and general feel of interactions with providers from online retailers to cab-hailing apps, banks are intensifying their focus on replicating that same customer experience on their financial services channels. Bradesco’s Next app, launched at the end of 2017, aims to function as a digital bank as well as providing an environment from which customers can access other services, while Itaú has developed a tool that allows the use of its banking services simply through a keyboard switch. “You may use different keyboards for different languages or emojis on your smarphone; our mobile banking app is embedded in a specific keyboard,” says Mr Guerra. So, if during a chat with a friend on a different app the customer wants to transfer money to that person, he can do this by simply switching to the Itaú keyboard, rather than leaving the messaging app, opening the banking app and moving between the two to get information on account details and amount to transfer.
Mr Guerra is keen to emphasise the importance of user experience. “Today everyone is talking about user experience, but Itaú already had that focus back it the 1980s,” he says. “I’ve been working with the bank for 25 years, and every single manager, director, CEO I’ve had was talking about how important it is to think about the customer.”
Banco Original’s Mr Pinelli counters: “We were born digital: a single platform of core banking systems and a single platform of services, distributed through our channels. With this kind of structure, it’s very easy to get all the information, to see all the interactions that our customers are having. This information [is coupled with] the information from social media and other [publicly available] sources about our customers. With this set of tools we can really offer the best possible products for a specific customer at that specific moment in time.” As with other fintechs, he doubts established banks can replicate this as smoothly.
More competition will surely lead to greater innovation and better and cheaper products. Although potentially eroding the largest lenders’ domain and profit margins, digital battles look set only only to benefit Brazilians.
