Brazil’s digitally-savvy consumers have warmed to neobanks such as Nubank, the world’s largest digital bank, Neon, Banco Inter, and Banco Original. In response to these challengers, several incumbents have launched digital-only banks, while European fintechs Revolut and N26 plan to enter Brazil. Robin Arnfield reports.
With its estimated 55 million unbanked consumers and more mobile phones than the country’s 211 million population, Brazil is a fertile market for challenger banks offering totally digital customer experiences and lower interest rates and fees than incumbents.
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By GlobalData“Brazil’s digital banking market provides the same story as other regions,” says Celent Senior Analyst Juan Mazzini. “Incumbents are reacting to new entrants by offering better digital services, and some incumbents are establishing a separate neobank and developing an open API strategy.”
“Brazil’s banking industry consolidated considerably over the past decade,” says Katie Llanos-Small, Editor of Latin American banking publication Iupana. “But now it’s starting to get more competitive, as digital-first challenger banks compete for a share of the retail market.”
“In general, Brazil’s Central Bank is enthusiastic about open banking and instant payments, both which will stimulate the entry of new players such as digital banks, e-wallet providers and other financial services firms that help financial inclusion,” says Ralf Germer, CEO of PagBrasil.
Demographics
Banking consultant Francesco Burelli, a Partner at Arkwright, says unbanked and underserved Brazilians are attractive target markets for incumbent providers as well as for new entrants.
“Brazil’s high number of unbanked is due to factors such as consumers not meeting banks’ statutory regulatory requirements and the affordability of bank fees,” Burelli says.
“An even greater percentage of the population is underserved in terms of loans. Despite Brazil being the world’s third largest lending market, about two-thirds of demand for credit is left unaddressed by traditional lenders, due to a mix of eligibility and affordability in an environment where interest on personal loans is 100-200% APR and revolving credit can easily exceed 400% APR.”
In recent years, all Brazil’s big banks have made major investments in digital technology to address the demand for online channels, improve customer service, optimise their branch networks and respond to fintech competition.
Brazil bank branch numbers decline
“The small number of large players that dominate Brazil’s banking market developed mobile banking services as an additional channel for their products, but left their high lending margins and strict customer eligibility criteria untouched,” Burelli says.
According to Moody’s Investor Service’s “Banking System Outlook – Brazil September 2019,” in 2018 Brazilian banks spent over BRL 20bn on technology, and between 2014 and mid-2019, the number of branches fell 8% to about 21,300 in Brazil.
In 2018, mobile and online banking accounted for almost 60% of banking transaction volumes in Brazil, the Moody’s report says.
“Brazilians are switching very quickly to digital banking channels,” Llanos-Small notes. “Even incumbent banks such as Santander are demonstrating impressive rates of digital take-up.
“But neobanks such as Banco Inter and Original have adapted very swiftly to the digital environment and have impressive customer acquisition rates. Nubank has huge customer acquisition power, although it’s unclear how that translates into revenues and profits.”
Despite growth in digital banking volumes, branches remain an important channel in Brazil. According to Boston Consulting Group’s Global Retail Banking 2019 report, 11% of Brazilian bank customers are face-to-face customers, while 67% are hybrid customers and 22% are digital customers. By contrast, 15% of UK bank clients are face-to-face customers, 35% are hybrid customers, and 49% digital customers.
BCG defines face-to-face customers as people doing most of their banking through branches and conducting digital transactions once a year or less. Hybrid customers conduct online transactions and visit branches at least every two to three months. Digital customers conduct digital transactions at least every two to three months and visit branches once a year or less.
Barriers
“In Brazil, 67% of the population has access to smartphones, according to a study by We are Social and Hootsuite,” says PagBrasil’s Germer.
“In addition, there are over 150m Internet users. eMarketer forecasts 21 million proximity mobile payment users in Brazil by 2023. In addition, Brazil is currently the only country in Latin America where Samsung Pay, Google Pay and Apple Pay are all present.”
Germer says that the main barrier for mobile payments is consumers’ reliance on cash and the high number of unbanked consumers. “Brazilian fintechs must find ways to include unbanked consumers in the financial system by offering solutions that offer faster, safer, and cheaper (or even cost-free) payments,” he says.
The challengers
Launched in 2016 by its parent, Brazilian holding company J&F Investimentos, Banco Original was the first Brazilian bank to offer 100% digital accounts including digital account-opening. Within two years, Banco Original had attracted over 600,000 customers.
Nubank, the largest Brazilian fintech, began as a credit card issuer and evolved into a bank offering loans, digital savings accounts, current accounts with direct payroll deposit and ATM withdrawals, and small business services.
The neobank’s view is that Brazilians pay the highest bank fees and interest rates in the world, but get the worst banking services. Nubank aims to charge consumer borrowers interest rates that are 30-40% lower than incumbent Brazilian banks’ interest rates.
Nubank’s CEO David Vélez was quoted by Reuters as saying in October 2019 that his firm now has 15m customers, which marks a 25% increase from its total customer numbers in August 2019).
Vélez said that around 10 million of Nubank’s customers have the bank’s distinctive purple fee-free credit card. As Nubank’s credit card significantly undercuts the 400% APRs typically challenged by mainstream issuers and has a totally digital application process with no hidden fees, it is now the sixth largest Brazilian credit card issuer.
Nubank, which recently launched operations in Argentina and Mexico, received a $180m investment from China’s Tencent in October 2018. In July 2019, Nubank raised $400m in a Series F funding round led by US investment firm TCV, which the Wall Street Journal said valued the fintech at over $10bn.
“Nubank has developed deep integration with mobile applications, enabling consumers to have a deeper control of their financial products compared to what was traditionally offered by incumbents,” says Burelli.
Neon-in partnership with Banco Votorantim
Founded in 2016, Neon began as a prepaid card issuer called Controly and now offers banking services through a partnership with Banco Votorantim.
Neon offers a digital account linked to a physical credit card which has no annual fee. The digital account can be used for mobile air-time top-ups, bill payments and ATM withdrawals, while the credit card is available in virtual form for online shopping and for services such as Netflix, Spotify, and Uber.
Like other Brazilian neobanks, Neon sees an opportunity to target SMEs with digital services, since the small business segment needs lower-cost alternatives to business bank accounts offered by incumbents. In September 2019, Neon acquired Brazilian fintech MEI Fácil, which provides banking and payment services to micro-entrepreneurs.
In 2018, Neon raised BRL72m in investment, and, as of September 2019, had 1.6m active clients, including individuals and companies.
Other Brazilian digital-only banks include:
Banco Inter, formerly called Banco Intermedium, which offers accounts for SMEs and consumers, and claims to save customers an average of BRL 353 on account fees per year;
Superdigital, Santander Brazil’s stand-alone digital platform;
Next, a neobank founded by Bradesco, one of Brazil’s largest banks,
Banco C6;
Banco BS2, which offers a hub for digital financial services including digital accounts and foreign exchange services, and was formerly known as Banco Bonsucesso.
In July 2019, Banco Inter raised BRL1.3bn, the majority of which was invested by Japan’s Softbank. In its investor presentation, Banco Inter said that it had 2.5m digital account-holders in June 2019, up from 1.9m in March 2019, and that 60% of its digital account-holders were under 36 years old.
In September 2019, SoftBank agreed to increase its stake in Banco Inter from 8.10% to 14.94%.
New entrants
State-owned savings institution Caixa Econômica Federal has announced plans to launch a digital-only bank, which, given CEF’s size, will likely be a major player. Also, Brazilian lender Banco Pan, which includes Brazilian financial services firm BTG Pactual among its shareholders, plans to launch a digital operation in June 2020.
Brazil’s largest processor and acquirer Cielo said in August 2019 that it plans to offer digital banking services to SMEs. In October, Cielo, which is owned by Banco do Brasil and Bradesco, launched the Cielo Pay digital payment account, which is targeted at SMEs but can also be downloaded by consumers, the firm says.
Cielo Pay provides SMEs with a digital wallet and enables them to accept payments without needing POS terminals by generating QR codes on their smartphone, sending a payment link, or receiving a boleto bancário online payment receipt. It also enables merchants to receive payment at the time of a purchase, pay bills, withdraw cash from ATMs, make purchases using physical and digital cards, transfer money to their contacts, and access loans from Cielo’s partners.
Latin American e-marketplace Mercado Libre plans to start offering online loans in Brazil and Mexico. In November 2018, Mercado Libre received a payments institution licence from central bank Banco Central do Brasil (BCB), and plans to offer digital savings accounts as well as loans.
“Given the attractive market and fast growth of players like Nubank, it’s unsurprising that global new entrants like N26 and Revolut are opening offices in Brazil and entering the market,” says Burelli.
N26 opened an office in São Paulo in February 2019 and Revolut is including Brazil in its global expansion efforts following its recent partnership with Visa.
Instant payments and open banking
Brazil is a fertile ground for fintechs because of government- and BCB-driven developments in its banking and payment systems.
The central bank is developing a low-cost 24/7 instant payment system based on QR codes, which will be open to fintechs and payments institutions. The new system will offer P2P, P2B (person-to-business), B2B, and payments to and from government agencies. Payments institutions are regulated by BCB and allowed to offer m-payment/m-banking services including digital wallets to low-income consumers.
The instant payment system, due to launch in November 2020, is expected to drive adoption of digital banking and payment apps and services.
“An interesting space to watch will be how the retail payments market evolves because, to a certain extent, payment services such as digital wallets are a gateway to customer acquisition for banks,” says Iupana’s Llanos-Small. “The central bank’s low-cost instant transfer system will introduce more competition as well as cutting a revenue stream for incumbent banks.”
Brazil’s highly concentrated banking industry has spurred BCB to encourage the growth of fintechs in order to drive competition and innovation. Its pro-competition measures include a plan to implement open banking in 2020 and the development of a fintech regulatory sandbox.
Open Banking
BCB governor Roberto Campos Neto has publicly stated that his priorities include expanding financial competition through open banking, which he says should be considered by FIs as an opportunity rather than a threat.
Brazil’s far-reaching open banking initiative will cover banking product information as well as transaction and balance information and payment initiation. The 12 largest banks – which together account for 86% of Brazilian loans and assets – will have to open their customers’ transactional account information to third-parties including fintechs.
“It’s not clear yet whether the Brazilian government will mandate open banking like in Europe, but open banking is clearly on the agenda,” said Aite Group Senior Analyst Ron van Wezel.
“I think emerging markets like Brazil will see more traction for open banking and payment innovation than mature markets. There is so much more to gain in emerging markets to combat high prices for financial services, stimulate financial inclusion, and replace cash by digital payments.”
According to Burelli, Brazil’s open banking initiative will allow non-bank fintechs to register as payments providers and, via open banking, initiate payments through current accounts or e-money accounts.
A number of incumbents such as Bradesco, Itaú Unibanco, and Banco do Brasil as well as digital-only start-up Banco Original are experimenting with open APIs. Banco do Brasil launched its Open Banking developer portal in June 2017.
“While all the major banks have undertaken initiatives to assess the implications of open banking and to develop a suitable market strategy, some smaller players like Santander have been faster in moving ahead,” Burelli says.
“In April 2018, the fintech venture capital fund of Santander Group, Santander InnoVentures, invested in Creditas, a start-up that is leading the digital lending wave in Brazil. Larger banks are slower to react to open banking due to the time needed to implement API interfaces and roll out the necessary connectivity.”
Payments services
“Brazil has one of the highest cards penetration and utilisation rates in Latin America and has the highest card acceptance rate in the region,” Burelli says. “The Brazilian market has a comparable higher cost of payment acceptance throughout all merchant segments and attractive interest margins on credit to SMEs and retail borrowers than other Latin American countries.
These revenue pools offer the opportunity to players to develop cheaper value propositions and make it attractive for merchants to develop their own payments alternatives and lure customers away from traditional card payments through attractive rewards.”
In addition to merchants, telcos and payments firms such as Alipay and PayPal are likely to offer retail payment services in Brazil. “Brazil’s move to open banking regulation will open the market to authorised third-party providers and new competition, creating the conditions for a perfect storm of opportunity and price compression for new entrants and incumbents alike,” Burelli says.
Itaú Unibanco
The largest private-sector Brazilian bank, Itaú Unibanco was one of the first to offer digital banking to its customers, enabling them to access online all the services offered by the bank including loans, investments and insurance.
“But our path is different from the other major banks,” Itaú Unibanco said in a statement emailed to RBI. “Instead of creating a separate digital banking operation like Bradesco’s Next, we chose to transform our actual regular retail operation.
So, in 2014 we launched what we call ‘digital branches’ offering 100% digital customer service from 8h to 22h (regular branch banking hours in Brazil are from 10h to 16h). Using this channel, customers can contact Itaú on their mobile phones, via our banking app, or through text messages, and complete all transactions remotely. This was the first initiative in Brazil to offer 100% digital banking.”
Following a beta-test, Itaú has launched a digital payment system called Iti for iOS and Android users who are customers of any Brazilian bank. The Iti app, which already has hundreds of thousands of users, allows them to register credit cards, transfer money to bank accounts and to other Iti users, and make payments via QR codes.
Iti was conceived as a democratic platform. “To register, users only need to input several basic pieces of personal information, and the app doesn’t ask for formal proof of income or home addresses,” Itaú said. “This allows the inclusion of a large portion of the Brazilian population who aren’t currently being served by traditional banks.”
