The Brazilian digital banking market has another contender, a digital-only start-up called Neon, which opened its virtual doors in July 2016, targeting millennials and promising no monthly or annual fees. Robin Arnfield reports
Start-up Neon is the latest digital start-up in Brazil, joining other digital-only financial institutions Banco Original which launched Brazil’s first digital-only consumer banking platform in March 2016, digital lending platform BankFacil and mobile-only credit card issuer Nubank.
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By GlobalDataBrazilians love their smartphones, making them an attractive target for fintechs and for large incumbent banks such as Banco do Brasil, Bradesco, Santander and Itaú Unibanco, which have invested heavily in their digital channels.
Brazil is the world’s fourth largest smartphone market with an installed base of 70 million smartphones in 2014. According to a study by Brazilian banking association Febraban (Federação Brasileira de Bancos), internet and mobile banking accounted for 52% of total Brazilian banking transactions in 2014. One in four (25 percent) Brazilian current account customers uses mobile banking, Febraban says.
Bradesco will be launching a digital-only bank called Next by the end of 2016 to compete with the fintechs. However, Bradesco, which also uses the brand name “Next” for its branches of the future in shopping malls and some of its online banking services, declined to comment when contacted by RBI. Bradesco won the Latin American Bank of the Year 2016 award from RBI in June 2016.
Investments
The start-ups have raised significant amounts of investment money. In June 2016, BankFacil, which offers low-cost secured loans with interest rates starting at 1.05% per month, raised BRL15m ($5m), bringing its total investment funding to date to BRL25m.BankFacil says it ended 2015 with originations totaling BRL100m in collateralised loans.
In April 2016, Nubank signed an agreement with Goldman Sachs for loans totalling around $50m to finance its credit card receivables portfolio. Nubank, which charges lower than average interest rates, had previously raised almost $100m in its four equity fund-raising rounds since its launch in 2013.
Banco Original, which offers current accounts, credit cards earning cashback, and seven different investment products, is a subsidiary of Brazilian holding company J&F Investimentos. “The total amount of our investment in our digital banking platform is around BRL600m,” Marcos Lacerda, Banco Original’s Chief Marketing Officer, tells RBI.
Neon
Founded by 24-year-old entrepreneur Pedro Conrade, Neon is a spin-off from Brazilian FinTech firm Contro.ly which was established in 2014. Contro.ly offered prepaid MasterCards online and had around 10,000 cardholders. “Contro.ly customers have been offered an easy upgrade path to opening Neon accounts, and don’t have to go through the account-opening process,” says Juan Mazzini, a Senior Analyst at U.S.-based Celent.
Neon promises an alternative to what it describes as the ‘frustrations that have plagued the traditional (Brazilian) bricks-and-mortar banking industry, including long lines, bureaucracy, and hidden fees’.
“My distaste with the traditional banking model started after a disastrous experience during international travel where my bank didn’t bother to help me through a tough situation,” Conrade, Neon’s CEO, said in a statement “It was then that I realised I was just another number to them.”
Conrade told RBI that Neon aims to sign up 100,000 active customers in its first year of operation. “Our focus is on young consumers who want a closer relationship with their bank and want to start their financial life without getting into debt,” he says. “
We offer all the features and services of a traditional bank, with the difference being that customers carry out transactions on our website or via our Android and iOS apps. Two other key differences are that we are totally free of annual or monthly charges, and that we are the first Brazilian bank to use facial recognition biometric authentication within a banking app. We also offer 24-hour chat facilities with customer service representatives via Facebook, our website and our app.”
Social media sites such as Facebook, Instagram and Twitter play an important part in Neon’s engagement with its customers, Conrade adds.
Conrade says Neon helps its customers manage their finances and avoid getting into debt by providing tools to categorize their spending habits and to create goals for saving money in fixed-income time deposits called CDBs (Certificado de Depósito Bancário/certificate of bank deposit). Neon’s CBDs pay higher rates of interest than traditional banks’ CDBs, he says.
The minimum balance required to open a Neon account is BRL100 . Each month, a customer’s first cash withdrawal and interbank transfer are free of charge. Starting with the second interbank transfer per month, interbank transfers cost BRL3.50. The second ATM withdrawal per month costs BRL6.90.
Neon customers are issued with one physical and one virtual Visa-branded debit card. The physical card can be used for point-of-sale purchases at retail locations, and the virtual card for online purchases. Neon doesn’t currently offer credit cards, nor does it offer a digital wallet. “Developing a digital wallet is on our roadmap for the next few years,” says Conrade.
Facial recognition
Instead of user names and passwords, Neon uses IdentityX, a biometric authentication platform developed by US-based Daon, for its facial recognition security feature. Banco do Brasil and Bradesco, two of the country’s biggest banks, use biometrics at their ATMs, but no Brazilian bank apart from Neon currently offers biometric authentication for digital banking.
“Customers have to use our facial recognition system to access their accounts and perform transactions such as internal transfers and payments,” says Conrade. “When a customer first downloads our app, their smartphone automatically takes a photo of them which is used as part of the customer registration process and as authentication for future banking sessions. The technology doesn’t just make it easier for customers to access our service but also ensures greater security in banking transactions.”
“Brazil is a great market to launch face recognition technology, because it is one of the most connected markets in the world,” Lindsay Lehr, Senior Director at US-based Americas Market Intelligence, says. “Brazilians are early technology adopters and highly connected on social media. But I would imagine that face recognition could feel gimmicky, and limit its reach to only those in a certain age bracket, probably under 25 or 26.”
IdentityX
“Built on the heritage of our software that helps secure national borders and critical infrastructure, IdentityX is a universal authentication platform for mobile devices,” says Jonathan Distler, Daon’s Director of Solutions.
“IdentityX enables multi-factor authentication using biometrics such as faces, voices and fingerprints to improve the customer experience with a more convenient, secure alternative to passwords. It allows customers to register once and authenticate themselves across multiple channels, for example within a mobile app and on a PC for online banking transactions. Once a consumer experiences how much easier it is to do business with innovative digital banking companies. the experience with a traditional bank is very frustrating. Mobile banking and biometric authentication are the future.”
In the IdentityX platform, customers register a mobile device and use it to enroll their biometrics (face or fingerprints), says Distler. “Once enrolled, customers are able to login with the registered device and their preferred biometrics,” he says. “No password is needed because customers must have possession of the mobile device used to enroll their biometrics. IdentityX has the ability to integrate one-time-passcodes into a security process if our clients so desire. However, we don’t send login passcodes over SMS as they are susceptible to man-in-the-middle attacks.
Distler says that a Daon client first decides which transactions should be protected – for example mobile login – and maps the required security according to their risk classification. “They are then able to configure and enforce these business rules in IdentityX,” he says.
Several additional Brazilian financial institutions are planning to use IdentityX with their customers, Distler says. “Other financial organizations which use IdentityX include MasterCard for payments, USAA (US financial institution serving the U.S. military) for banking, and challenger digital-only banks such as U.K.-based Atom Bank,” he says.
Analyst comments
“The Brazilian market is interesting,” says Mazzini. “We’re seeing a lot more activity in Brazil than in Mexico in terms of new banks being launched. Brazil has seen the launch of BankFacil, Banco Original, Neon and Nubank, while the only new digital-only bank in Mexico is Bankaool.”
Originally known as Agrofinanzas, a non-bank lender to Mexican farmers and agribusinesses. Bankaool obtained a full banking licence in 2012 and launched its digital-only retail banking distribution platform in 2015.
Mazzini says Contro.ly will have been inspired to get a banking licence for Neon because of the success of Nubank, which by April 2016 had received around 2m applications for its credit cards. This figure includes rejected applicants, successful applicants and people on a waiting list for a card while their credit history is checked by Nubank. “I think that Nubank will follow Contro.ly’s example with Neon, and get a banking licence,” Mazzini says.
“The publicity received by Nubank, Brazil’s first online-only financial services company which successfully raised significant amounts of investment dollars, has attracted others to the space such as Neon,” says Lehr.
“As a start-up bank, you have to ensure your platform works well and offers a good customer experience from the start,” Mazzini says. “So this is why Neon initially restricted its customer numbers and launched with only 5,000 customers. If you offer fee-free banking like Neon does, then hundreds of thousands of customers will apply for an account, but with a small staff you can’t support this.”
One of the big banks’ advantages is that they have the necessary infrastructure to be able to handle volume and scale up, which start-ups don’t, Mazzini says. “Digital-only banks like Banco Original and Neon face a problem in how they will be able to scale up to meet demand,” he says. “So Neon was wise to grow slowly. One advantage of restricting new customer numbers is that the people who get accounts feel like an elite. It becomes highly desirable to belong to a bank that restricts customer numbers, and word gets around.”
Young people
Mazzini warns that Neon’s focus on young people may cause difficulties for the bank in the short term, as the Brazilian economy is floundering. “Young people in Brazil have been hit hard by the recession,” he says. “The Real has depreciated by 40% and inflation is over 10%, while unemployment among 18 to 39 year-olds is over 30%, compared to around 10% for the country as a whole. So this affects the opportunity for banks to win customers in the youth segment. However, even unemployed young people will need a bank and will likely have money to deposit with Neon.”
Lehr says Neon’s decision to stick to debit cards, as opposed to also offering credit cards, caters to millennial needs to avoid debt accumulation. “Also, offering a virtual debit card will help millennials access highly demanded aspirational goods and services only accessible with an electronic payment method such as taxi rides (Uber), online streaming (Netflix, Spotify) and food delivery, etc.,” she says.
As Neon has very few fees, the big question is how it will make money. “I think Neon may be looking to cross-sell more financial services to its new customers,” Mazzini says. “Also, the very few fees that Neon charges are actually higher than fees charged by some other banks for the same services. However, unlike Neon, other Brazilian banks charge a registration fee just to open an account, and a monthly statement fee. Neon doesn’t charge for monthly statements as they are delivered digitally.”
Marketing
“At its core, Neon is basically a prepaid card with excellent marketing and client interfaces around it,” says Guilherme Lima, founder of Brazilian consultancy Ponto Futuro Consultoria Estratégica. “While it may sound trivial, this – plus a very disciplined branding effort – seems to be working wonderfully for Nubank’s credit cards.”
“While Neon’s success will depend on execution, it is safe to say that Brazilian millennials don’t value the same attributes that even the Gen Xers did, and don’t take some of these attributes for granted – for instance, a bank’s financial soundness and balance sheet strength,” says Lima. “Instead, millennials’ focus is more heavily on convenience and on frictionless consumer experiences, which is a daunting task for bricks-and-mortar banks for technological and organizational reasons.”
“Two interesting developments to watch are how Brazil’s digital-only banks will increase their product portfolio, which they will have to do to achieve break-even eventually, and how they will manage to keep their user interface straightforward,” says Lima. “Also, how will traditional banks compete in this new digital arena? How initiatives such as Bradesco’s reported plans to launch its own digital bank, Next, will co-exist with the traditional banks’ legacy infrastructure will be fascinating to watch.”
