In the slums and jungles of Brazil, banks have found a new source of growth since the onset of the COVID-19 pandemic in March 2020. The long lockdown for the health emergency forced people far and wide in Latin America’s largest economy to do more online, including banking. In response, banks had to step up their digitalization efforts to meet this sudden surge in digital demand, helping them in turn to improve their competitive edge with a host of new – and not so new – digital banks eating into their business.
It hasn’t been easy. Financial technology companies, or fintechs, are delivering credit to small companies and poor families by using data analysis, a process that is turning upside down the way banks have always done businesses.
“Digital banks can catch up with the wealth of data that traditional banks have by providing access to consumer and company data,” says Marcos Magalhães, CEO of Banco BS2, a Brazilian digital bank. “Data replaces loan guarantees.”
Based in Belo Horizonte, BS2 is an example of how digital business models are finding market failures to achieve growth in the financial sector. BS2 began in 1992 as a traditional bank specialized in payroll loans, but it went fully online in 2017, billing itself as a digital hub for financial services. During the pandemic, BS2 targeted its lending to small and medium enterprises with annual turnover of BRL1 million ($180,000) or more. By using data provided by clients and external sources, BS2 can approve credit lines in a matter of minutes. It also provides services such as an electronic dashboard that allows clients to select receivables that can be used to automatically raise money based on pre-approved limits.
More than trying to be innovative, BS2 says it is keeping up with the evolution of its public. “Consumers are the first to new adopt digital concepts, and it takes a while for organizations to follow them,” Magalhães says.
Brazil is a hotspot for financial innovation. Newcomers to the sector are identifying the inefficiencies in the highly concentrated market to offer more efficient solutions to consumers that they reckon are poorly served by traditional banks. The country’s flagship digital challenger is Nubank, winner of LatinFinance’s Digital Bank of the Year award. The São Paulo-based bank has amassed more than 40 million clients in Brazil since it was founded in 2013, and it expects to continue growing. Nubank raised a whopping $2.6 billion in an initial public offering this past December to fuel its international expansion in Colombia and Mexico. But other fintechs and digital banks are nipping at its heels in Brazil, fueled by initiatives such as the central bank’s open banking project, which aims to nurture more competition in the sector.
Brazil’s traditional banks are aware of the threat of these innovative challengers. Febraban, Brazil’s powerful federation of banks, is pressing the government to impose more robust regulatory requirements on fintechs to level the playing field for all. In the meantime, however, banks are buying fintechs and supporting startups to up their own game.
Elsewhere in Latin America, the digital banking wave is still far from becoming a tsunami. But it is poised for growth in this mobile data-hungry region. In 2020, mobile data traffic shot up 25% in Latin America and the Caribbean as lockdowns for the pandemic kept them at home. This boosted the number mobile internet users to 358 million, or 57% of the population, at the end that year, up from 52% in 2018, according to GSMA, a London-based industry group for mobile phone-based technology. The number of users is expected to reach 423 million in 2025, or 64% of the population.
At the same time, mobile money accounts and use are surging in the region. The number of accounts shot up to 38.6 million in 2020 from 19 million in 2016, with most of the growth coming during the pandemic, according to GSMA. Latin America is now the most active in the world for mobile money use.
These are reasons enough for banks to become digital outfits, and more are making the effort.
“In six to 12 months, our bank will be almost unrecognizable,” says Diego Masola, CEO of Scotiabank Chile, winner of the 2021 Digital Transformation Bank of the Year award. “We will offer products tailor-made to each client in real time. The customer experience will be much more fluid.”
Scotiabank Chile began its digital transformation before the pandemic, but it had to accelerate the process after taking everybody online to avoid contagion after the health crisis hit, Masola says. The ratio of clients who use digital channels has since doubled to almost two-thirds of the total, and Scotiabank Chile has had to adapt its home banking portal and apps at a faster pace than originally planned to offer more services. Products like loans and factoring for companies have been added to the digital offer, and new services like private banking are set to go online. The bank is also preparing a chatbot using artificial intelligence to improve customer experience, as Masola believes that clients are not going to return to physical branches even after the pandemic.
“In Chile, digital banks are not yet a threat. But they will eventually arrive here, and when they do, we want to be able to compete with them,” Masola says. “They have a cost-to-revenue ratio of 20% to 25%; our ratio is around 40%. We have to work so that our products can compete with theirs. In a year’s time we should be able to offer the same things that Nubank offers in Brazil, but with the advantage of already having one million clients and a tremendously broad presence in the market.”
Santander Chile, our Bank of the Year in that country, is not staying put either. During the pandemic, the bank’s quantity of digital clients shot up 39% to reach almost 2 million, says Roberto Moreno, head of investor relations.
Itaú Uruguay, our Bank of the Year in Uruguay, is following a similar path. “We made a large investment in technology and digital services to enable clients to do the most operations they could remotely,” says CEO André Gailey. “We do not see a way back from digitalization. On the contrary, the process will only get accentuated.”
More than 90% of all new accounts at Itaú Uruguay were opened digitally in 2021, and more than 90% of all transactions made by the bank were also made online. That was twice as high as in 2019, Gailey says.
Despite the growth – and the potential for more, the digital transformation of the financial sector raises a few existential questions for banks. A big one is what to do with all the physical branches that used to be a mainstay for their retail business. Gailey, for one, says that rather than places to make transactions, branches can be used as hubs for specialized services that clients go to for advice and support.
“Physical branches will increasingly be focused on adding value. They will remain important for those decisive times in the life of a client,” he says. “When one wants to purchase life insurance, contract a mortgage loan, or start a pension plan, it is important to have human contact with the bank.”
Others, however, see little future in in-person banking services, as these can be provided more efficiently via digital channels that since the pandemic people are becoming increasingly comfortable with using.
“We had one branch in Belo Horizonte, but we have just closed it,” BS2’s Magalhães says. “Nobody went there, as our experience is 100% online.” LF