Without branches: the boom of digital portfolios and banks in Brazil | finance

Until recently, online banking was synonymous with traditional banking with internet banking. Today is different. Banks that operate exclusively over the internet have fallen in favor of Brazilians and are closely monitored by fintechs that offer digital accounts or wallets.

If you’re not a customer of one or more of these services, at least you’ve heard of a few. And you’ll hear more. Besides banks, digital banks and fintechs, retailers and even telephone operators are joining the fray to guard your money.

But where do we go with this dispute? Will there be a lack of customers for either bank or digital wallet? There is no simple answer to these questions. But I advance that the developments of this story are very interesting.

central bank gives the green light

It’s not your impression. The number of digital banks or accounts offered by fintechs soared in Brazil, especially in 2020, and continues at a strong pace.

Although some movement in the sector had been officially noticed years before, the rise of digital banks in Brazil began in April 2016, when the Central Bank published Resolution No. 4480 to regulate the opening and closing of accounts in this type of service.

There were others. In January 2020, for example, Central Bank Resolution No. 4,753 came into effect and overturned a series of ties in the banking system, including the rules that required the presentation of physical documents (paper) to open accounts.

Did we need regulation? Well, digital bank is different from digitized bank. The latter is an institution that starts operations in the physical branch model and then starts offering services on the internet. A digital bank is born and remains online, therefore, needs specific parameters and requirements for that medium. Regulation provides this.

Notable examples (but not the only ones) of institutions that represent the new times are the Original and Inter banks. Both arose from organizations operating in the physical world. The Original came from the merger between Banco JBS and Banco Matone. Inter started as the financial Intermedium in the 1990s, became a bank in 2008 and, in the following years, took its operations to the digital model.

Intel: with physical headquarters, but no agencies (image: publicity/Inter)

The rise of alternatives to conventional banks gains strength, through official channels, from 2018, when the Central Bank released regulations that gave more autonomy to fintechs, companies that were born for the internet.

One of them is CMN Resolution No. 4,656, of April 2018, which allows companies of this type to operate in the offer of credit without having to depend on banks or finance companies for this – until then, many of these fintechs operated only as banking correspondents.

Boosting credit fintechs was just one of several measures taken by the Central Bank to tackle the problem of banking concentration in Brazil. But even before these actions, the presence of financial services controlled by technology companies (and not necessarily by banks) was already strong in the country, see the example of platforms such as PicPay, Mercado Pago and RecargaPay.

Digital wallets (or payment accounts)

From this point on, concepts can get confused. So, before we go any further, let’s get some clarification.

Originally, we only had the ideal of digital wallets. There is no clear definition of what a digital wallet is, but we can assign this name to services that mediate payments after the user registers credit or debit cards.

This is the case for platforms such as Google Pay, Apple Pay and Samsung Pay. From this perspective, PicPay, Mercado Pago and RecargaPay (and others) can also be classified as digital wallets, as they also allow card registration.

Mercado Pago application (image: Emerson Alecrim/Tecnoblog)

Mercado Pago application (image: Emerson Alecrim/Tecnoblog)

However, these platforms started to offer other financial services over time. This evolution, so to speak, makes them be included in the category of payment bills (which is not to say that naming them “digital wallets” is wrong).

According to the Central Bank, a payment account is one that can be used for withdrawals, credit or debit card transactions, transfers and, of course, bill payment (including in physical establishments, via QR Code, for example).

Looks like a checking account, right? Right. But a payment account usually has a simpler opening process, it cannot have its resources allocated to credit operations (the bank can use the money from checking accounts in loans) and most importantly: it does not need to be managed by a bank.

digital account, in turn, is a general expression. It can reference both digital banking services and wallets or payment accounts.

Digital accounts everywhere

As has already become clear, the Central Bank has adopted measures to facilitate the performance of fintechs in favor of greater competitiveness in the sector. Note, for example, that Pix was designed to include various types of institutions in the system, not just banks.

Add this to other elements, with the fact that a large part of the Brazilian population has a cell phone, and we have a scenario that favors the growth of platforms that offer digital accounts.

2020 was an exceptional year in this regard, but for an unwanted reason: the COVID-19 pandemic. Social isolation actions led many people to resort to online financial services, especially in the period between March and April of that year.

According to an analysis by Comscore, Brazil registered a jump of almost 200% in access to digital banks in April 2020. Caixa Econômica Federal was the most accessed bank via digital media last year thanks to the search for emergency aid (application Caixa Tem) and the FGTS.

Okay, the pandemic served as an anomalous booster, but before that, the use of digital accounts was already on the rise in Brazil and continues to gain adherents.

Proof of this is that, in conversation with the Techblog, Eduardo Carneiro, general director of Comscore in Brazil, highlighted that, of the 20 most accessed online financial services in March 2021 in the country, more than half correspond to fintechs or digital banks — most accesses were made via cell phone or tablet.

Access to financial services websites in Brazil as of March 2021  — source: Comscore
Institution Total** (in millions) Desktop (in millions) Mobile devices (in millions)
1 Box 73,472 5,724 70,754
two Nubank 37,314 1,081 36,733
3 Itaú 33,053 2944 31,225
4 Santander 30,709 2,344 29,263
5 PicPay 27,532 369 27,341
6 paid market 25,661 1,581 24,657
7 Bradesco 25,573 2,528 23,897
8 Bank of Brazil 24,866 2,475 23,333
9 PaySeguro 24,795 5,267 21,116
10 Serasa 21,132 1,718 20,024
11 PayPal 15,779 865 15,205
12 Digital Love* 14,011 14,011
13 Inter 11,497 553 11,123
14 PAN Bank* 10,127 10,127
15 Recharge Pay 8,531 22 8,522
16 iti 7,380 14 7,374
17 allele 7,029 112 6969
18 Neon 6,273 49 6,256
19 C6 Bank* 6,237 6,237
20 Next 5,920 124 5,848
* Only via application ** There may be an overlap (users who access in both modes)

Note, in the table above, that Nubank is a phenomenon. With 37 million accesses in March 2021, fintech was behind Caixa, but appeared ahead of Itaú, Santander, Bradesco and Banco do Brasil. But that doesn’t mean the banks are defeated. These institutions have reacted to the new reality.

I think the growth of digital banks will continue to be strong and I think that traditional banks are regaining space with digital initiatives and improvements in their products, which will generate a maintenance guarantee or even a possible organic growth of the base. [de clientes] that they have today.

(…) There is a great effort by traditional banks to follow the digital players. (…) These banks are chasing facilities that for Generation Z [nascidos entre 1995 e 2010] and the millennials [nascidos entre 1980 e 1995], have very great value.

Eduardo Carneiro, General Director of ComScore

The reaction of the “banks” is not only due to the modernization of their platforms, but also to the creation of businesses aimed specifically at digital accounts. Did you notice that Next (Bradesco) and Iti (Itaú) also appear in the ComScore rankings?

The example of Grão

The digital accounts segment is so hot that it has given way to initiatives focused on specific audiences. The Black Account, for example, was created with a focus on unbanked (a public that does not have a bank account) — the business arose from the frustration that the entrepreneur Sérgio All felt after being denied credit at a traditional bank.

Pride Bank is aimed at the LGBTI+ community, while Ekko Bank aims to serve the small or medium retailer.

Let’s also take into account that many fintechs start their trajectory with targeted services and, later, start offering digital accounts. This is the case of Grão, which emerged focused on microinvestments, but since February 2021, it offers a digital account that includes a debit card.

Fintech was created by the hands of former Rico Investimentos partners. Among them is Monica Saccarelli. In addition to being a co-founder, she is the CEO of Grão. To the Techblog, the businesswoman said that the company’s proposal is to help the client to form an emergency reserve, even if investing small amounts, or to achieve a goal, such as giving down payment on the purchase of an apartment.

Monica Saccarelli, CEO of Grão (image: disclosure/Grão)

Monica Saccarelli, CEO of Grão (image: disclosure/Grão)

At Grão, the digital account did not detract from the platform. On the contrary. This modality allows fintech to serve a larger audience through the possibility of including those who do not have a bank account, but does so without disentailing the service from the purpose of the investment or the formation of a financial reserve:

The digital account was in our plans from the beginning to facilitate this saving. If I receive a salary or an income only to invest later, in that time I can end up spending [esse dinheiro] or forgetting [de investir]. The priority is sometimes not that.

With our digital account you keep [dinheiro] automatically. When you receive an amount in your Grão account, we suggest a percentage to invest.

(…) We are also an alternative for those who want to have a digital savings account: you don’t pay [para ter a conta] and still saves.

Monica Saccarelli, CEO of Grão

Banking as a Service (or “a bank to call your own”)

Saccarelli also revealed that Grão’s digital account is based on a platform for Banking as a Service (BaaS). In this operating model, a company offers financial services through a structure provided by a specialized company.

There are several platforms of this type in Brazil, such as Dock, Zipdin and Banking in a Box. These services have been gaining ground because we have reached a stage where digital accounts are no longer limited to banks, finance companies and fintechs.

Some companies, such as Grão, use BaaS to optimize their products. As this type of platform is ready, fintech can devote efforts and resources to customer service and improving the experience of using your application, for example.

But BaaS has mainly fulfilled the function of helping non-financial companies to enter this medium. The company’s brand is there, but behind the scenes, a specialized platform makes the gears turn.

The effect of this is the emergence of digital accounts such as Magalu, Vivo Pay, BanQi (Casas Bahia), iFood Digital Account (MovilePay), Trucker Pay (Volkswagen Trucks and Buses) and many others – it is not possible to say that they are all based on BaaS, but the concept is behind much of this type of business.

Bruno Diniz, leader of the Financial Data & Technology Association (FDATA) in Latin America, comments in Tecnocast 194 that he sees the movement around BaaS as a form of democratization in the provision of financial services, after all, these platforms remove barriers to entry into the sector:

Bank as a Service is yet another instrument that removes this difficulty in accessing market entrants. Many institutions, today, run this way and probably should continue running like that without interest in taking a license to be a regulated institution or having to bear all the operational part, which ends up not becoming core [negócio principal].

Bruno Diniz, FDATA leader in Latin America

Will we have a “bubble” of banks or digital wallets?

If before we had to resort to traditional banks to store or move money, today, it seems that there are still digital options for that. This situation activates the distrust: with so many companies creating digital accounts, won’t we see a “bubble” emerge in this medium?

Of course, the risk is never zero, but, in general, there is optimism in the market about the growth of this segment due to the perception that there is still a lot of space to be explored.

Monica Saccarelli, from Grão, highlights that, if we analyze the balance sheets of traditional banks, we will see that the sector remains very centralized in these institutions. The executive also recalls that Brazil still has a large number of people debanked.

Eduardo Carneiro, from ComScore, sees the risk as low due to several factors, such as the practicality of “white label” services (which fit the BaaS concept).

The executive understands that it is difficult to establish a bank in Brazil (due to regulatory requirements), but that, on the other hand, a company can offer financial services maintained by other institutions and find a range of opportunities there without having to maintain a technological structure complex for that.

There is another important point. Bruno Diniz notes that a company that creates a bank or digital wallet focused on its field of activity (such as the iFood account, aimed at restaurants) will have good chances of making this business prosper, after all, the company knows the details of that segment and can offer matching financial products.

Given these aspects, it is difficult to think of a bubble. The fact is, the financial market is changing. Traditional institutions continue to dominate the scene, but they are no longer the only protagonists. And this is just the beginning: you can be sure that open banking will make this transformation much more intense.

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