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AmericasJuly 4 2018

Peruvian banks face digital challenge as cash appeal endures

A change of president and an uptick in GDP is cause for optimism in Peru. However, as the economy improves, the country’s banks face a challenge in prising citizens away from their traditional faith in cash. Silvia Pavoni reports.
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Peru

The excitement over Peru’s qualification to the FIFA World Cup finals was such that 43,583 tickets were snapped up by fans from the Andean country – which has a population of just over 30 million – to cheer on their team at the tournament in Russia. It was the first time Peru had qualified in more than three decades.

While the national football team’s progress ended in the group stages, Peruvians can take solace in their country’s economic prospects, as gross domestic product (GDP) growth has picked up again after a two-year slump. Both a reflection and a driver of Peru’s potential, the banking sector has also been gaining momentum, and Peru is also generating interest among foreign investors.

“I think there’s a solid case for Peru, thanks to the macroeconomic picture and how the financial system is run,” says Martin Castellano, head of Latin American research at the Institute of International Finance. “Investors remain excited about Peru.”

Latam star

Peru has outpaced Latin America’s economic growth for more than a decade, from the 9.8% peak of 2008 to the healthy 3.1% average GDP growth sustained between 2014 and 2017, when the region tilted into recession. Prudent fiscal policy management has also helped contain the external shocks of lower commodity prices, particularly copper.

More recently, political uncertainty has been calmed by the new administration of Martín Vizcarra. The previous government, which had a minority in Congress, lost power because of the resignation of president Pedro Pablo Kuczynski, who had been linked with Odebrecht, the Brazilian construction conglomerate at the centre of Latin America’s largest corruption scandal. Now Mr Vizcarra has the political backing to restart much-needed infrastructure programmes, which should prove to be a boon for the wider economy, as well as for foreign investors.

Elsewhere, another problematic issue for Peru appears closer to being resolved. Traditionally a highly dollarised market, investors were concerned about local banks’ dependence on the international markets for funding in dollars. But central bank measures to de-dollarise the economy, and interventions to contain currency volatility, have paid off.

“This was a system that had a dollarisation rate in savings and deposits in the 80% range [a decade ago]. [It has been moved] downward into the 30% range,” says Mark Narron, an analyst at rating agency Fitch. “Whenever there was a mismatch between soles deposits and soles loans, the central bank stepped in to provide local currency liquidity.”

Peru banks 0618

Solid and profitable

Peruvian authorities have also introduced measures to strengthen the banking sector, which have ranged from pushing towards international capital requirement standards to introducing net stable funding ratio requirements and definitions on what would qualify as Tier 2 subordinated debt.

“The banking system is quite well regulated [in relation to others in] the region. The superintendency for banks and insurance is moving towards Basel III standards, and has advanced very well towards higher capital standards and better quality capital," says Mr Narron. “It has introduced a whole range of very positive regulations to improve safety and soundness of the system.”

As well as proving solid, the banking sector is also still very profitable and the country’s top five lenders showed an average return on capital ratio of more than 35% in 2017. Traditionally, mortgages and corporate loans have been driving these returns. However, as the sector becomes more competitive, different products look set to drive profitability.  

Gonzalo Camargo, deputy general manager, business development and digital transformation, at BBVA Continental, says market competition “has reduced spreads in mortgages in a very aggressive way”. He adds: “We, as a bank, think these [products] will continue to grow but spreads will continue to reduce. That’s good for the customers and it is good for the economy. A lot of markets in Peru are beginning to act more like middle-income countries.”

On the other hand, he says, a new, larger profit pool is forming in retail loans, both to individuals and small businesses, and in credit cards.

Room for growth

While many of the economic figures look impressive, Peru is still an underpenetrated market. As a percentage of GDP, loans to the private sector are still shy of 40%, notes Scotiabank’s CEO Miguel Uccelli, but represent a significant improvement on the past few years. Only a decade ago, the rate was nearly half this figure and, after the economic bump suffered in 2017, it is rising again.

Santander Peru’s CEO, Gonzalo Echeandia, notes how bank customers holding deposit accounts have nearly trebled, going from 8 million in 2009 to more than 21 million in 2017. Consumer loans and credit cards are rising too. All are set to perform better with the improved macroeconomic outlook.

“The banking system has been growing between two to three times faster than the GDP,” says Mr Uccelli. “That’s been decelerating [and we registered] historical low numbers in September 2017, when the banking system grew below 5% year on year, the lowest rate in 14 years. Now it is picking up again; since October 2017, it has been returning to double digits.”

Bankers agree that digitisation will help bankarisation. “We’ll probably see 10 [or more] additional points over the next 10 years [bringing] bankarisation up to 50% of GDP,” says Mr Echeandia. “Digitalisation and digital innovation will serve to reach a broader part of the population with lower costs [for banks]. More than a matter of competing on pricing, it will be a matter of competing to get more customers.”

Mr Camargo agrees, and says that because many Peruvians are outside the banking system – or do not primarily rely on it for their savings or other transactions – “the main competitor of banks in Peru is cash, not another bank”.

Cash carried

BBVA Continental has found a traditional distrust of banks means Peruvians tend to withdraw wages paid into their bank accounts by their employers and keep them at home in a safe, divided into paper envelopes according to their use.

“Food, films, services, utilities, buying a trip to Russia for the World Cup – this practice is not exclusive to the low-segment income, we saw it in the high-segment too, because they don’t trust banks, [or believe that] banks charge commissions [on savings] or because they believe that if they keep money in the bank, there’s a higher probability they’ll spend it,” says Mr Camargo.

About 60% to 80% of payroll customers at BBVA withdraw cash on payday. Overall, payroll customers represent about 40% of all depositors at the bank. “This story is true for the whole system,” adds Mr Camargo.

For this reason, BBVA launched a digital product that replicates the envelopes system and allows Peruvians to divide up their money into savings ‘pockets’. Launched in early 2018, 4000 customers signed up in the first three months.

Digital route

Interbank’s CEO, Luis Felipe Castellanos, is encouraged by the take-up of digital products in Peru, which are transforming the way the lender looks at its future growth too. “We’re very much focused on digitalisation. Only few years ago we had a banking strategy and a digital strategy; now we have a single core strategy that includes digitalising everything that Interbank does,” he says.

About 25% of Interbank’s customers can now be defined as 'digital', he adds – these are customers who are active users of the bank’s digital channels and who have not visited a branch or phoned a call centre in the previous 90 days.

At BBVA, two-thirds of personal loans are delivered through digital channels. “This is huge for a country such as Peru, where penetration of smartphones is about 60% of the population,” says Mr Camargo.

The ability to serve (and profit from) the wider population will increase as banks learn to assess customers’ credit risk better, including new joiners who were previously outside the financial services network, while cutting distribution costs will also help bankarisation.

Low income, high potential

At Banco de Credito del Peru (BCP), the country’s biggest lender, head of retail banking Percy Urteaga notes how far the bank has come in a relatively short period of time. “Until a year ago, it was unthinkable to give a consumer credit worth 500 soles [$150] because the distribution cost was too high. Now we have designed digital channels and 20% of consumer credit is given out through [them],” he says.

Out of BCP’s 8 million retail customers, 7 million are classified as low income, he says. “Of these 7 million, we barely know half of them – we can’t offer them credit products, only saving products.” The other half is split equally between the customers the bank knows, and those flagged up as 'risky'. BCP is now looking at new tools that include social media data to assess customers’ credit risk.

Until a year ago, it was unthinkable to give a consumer credit worth 500 soles [$150] because the distribution cost was too high

Percy Urteaga

Further cost reductions can come from opening up banks’ codes and letting outsiders work on them. For example, Mr Camargo talks of BBVA Continental’s decision in 2017 to publish online the econometric model designed to forecast which clients are more likely to leave the bank and organise an open data challenge. High attrition rates (20%, in the case of BBVA) are a stubborn issue as many jobs are unstable or seasonal, which leads to Peruvians closing their accounts or leaving them dormant.

“We put our code on the web and offered $4000 to the person who was able to improve the forecast rate of the model the most, and we received 500 applications and models from about 100 people – 100 [professionals] outside of the bank working [on this project], it’s amazing,” says Mr Camargo. The winner turned out to be an experienced data scientist who the bank “couldn’t afford in our payroll. But for just $4000 he improved by a factor of two the prediction accuracy of the model”, adds Mr Camargo.

Invasion of the fintechs

Collaborations will become increasingly important as banks seek to work with fintech firms. In Peru, this sector is characterised by a lack of rules governing and supporting the development of fintechs and limited availability of specialist capital to fund their operations. This means fintechs can be innovative partners to banks, developing and applying their ideas more widely, rather than being competitors.

“There’s no local regulation on fintech yet, nor is it on the horizon; the future is still uncertain for fintechs to start investing and developing huge amounts,” says Scotiabank’s Mr Uccelli. “We don’t see them as competition but as a complement.”

Mr Camargo is also convinced about the potential of fintechs in Peru. He talks enthusiastically about the resourcefulness and entrepreneurial spirit of Peruvians, assets that are being noticed outside of the country too – he points to the case of Cinepapaya, the Peruvian-based online film ticketing company bought by the US’s Fandango in 2016.

“Fandango is a huge company but it’s going to adopt the Peruvian technology to serve the region,” says Mr Camargo. “Compared with Mexico, Colombia or Argentina, Peru’s fintech market is small but growth is impressive and we’re probably going to [match] Colombia’s in three or four years. I’m very optimistic about the creativity of the Peruvian people.”

Creativity, innovation and a well-run banking sector can only help the Peruvian economy and reduce the country’s steadily declining – but still high – poverty rate of 20%. While banking is unlikely to generate national pride, as football does, it could score better and longer lasting results for Peruvians than the national team.

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Read more about:  Americas , Americas , Peru
Silvia Pavoni is editor in chief of The Banker. Silvia also serves as an advisory board member for the Women of the Future Programme and for the European Risk Management Council, and is part of the London council of non-profit WILL, Women in Leadership in Latin America. In 2019, she was awarded an honorary fellowship by City University of London.
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