Fintech competition has disrupted the banking sector
fintech bank concentration

Fintech competition has disrupted the banking sector

Four banks dominate Brazil: Banco do Brasil, Bradesco, Caixa Econômica Federal and Itaú hold 73 percent of all active accounts and 80 percent of the country’s credit. For every 10 BRL deposited in the country, 7.67 BRL will end up in accounts held at one of these four. Even Brazil’s deepest recession has benefitted them, as the financial crisis toppled many emerging competitors.

This gives Brazil’s biggest banks a higher concentration of power than in the U.S., where, according to World Bank data, the top four hold just 42 percent of the market. They hold more power than those closer to home, as well: in both Mexico and Argentina, the five main banks hold approximately 70 percent of the market. However, domestic regulators assert that this is lower than other developed countries, such as Australia and Canada, where five banks cater to 93 and 83 percent respectively.

Numerous mergers and acquisitions in recent decades have led to Brazil’s current situation. When state-owned banks were privatized in the late 1990s, Bradesco, Itaú, and Santander all benefitted. Bank mergers between private companies are worth handsome sums: in 2008, the Itaú-Unibanco merger was valued at 575 billion BRL.

</p> <div class="infogram-embed" data-id="5c606d13-fcbf-403e-8764-91c7ca51b9ac" data-type="interactive"></div><script>!function(e,t,s,i){var n="InfogramEmbeds",o=e.getElementsByTagName("script"),d=o[0],r=/^http:/.test(e.location)?"http:":"https:";if(/^\/{2}/.test(i)&&(i=r+i),window[n]&&window[n].initialized)window[n].process&&window[n].process();else if(!e.getElementById(s)){var a=e.createElement("script");a.async=1,a.id=s,a.src=i,d.parentNode.insertBefore(a,d)}}(document,0,"infogram-async","//e.infogram.com/js/dist/embed-loader-min.js");</script> <p>But since 2014, fintech firms – corporations adopting the latest technology to provide new solutions to banking and finance – have been disrupting the sector, with approximately 300 currently authorized to operate. Covering everything from digital finance, investment apps, and payment systems to loan services and cryptocurrencies, this new wave of fintechs poses a threat to long-established financial institutions.</p> <p>Yet it is not solely the consumers who welcome the new range of services and offerings, which are seen as a way to disrupt the concentration of financial power. <a href="http://www.scielo.br/scielo.php?script=sci_arttext&amp;pid=S0034-75901985000400006">Research</a> shows that the Brazilian government has actively incentivized mergers like the Itaú-Unibanco deal as far back as the 1960s.</p> <p>These mergers have grown rapidly in recent years, causing concern within the modern industry. In a <a href="http://contec.org.br/attachments/article/12898/Boletim%20Econ%C3%B4mico%20da%20CONTEC%20n%C2%BA%2094.pdf">2015 statement</a>, the National Confederation of Credit Company Workers declared: “The increase in the level of banking concentration is a serious risk for the constitution of the banking monopoly in Brazil. The oligopoly already exists, when few banks dominate two-thirds of the financial market.”</p> <h3>Fintech competition</h3> <p>More than 80 percent of Brazilians live in cities, and while the Institute for Applied Economic Research (IPEA) found that as many as 55 million don’t have bank accounts, the population is eager to embrace technology. There are over 282.4 million activated mobile phones, according to a June 2015 statement released by national telecoms agency Anatel.</p> <p>Additionally, access to credit is restricted for an estimated 40 percent of the population. Consumer credit risks are stabilizing as the country’s economy continues to slowly recover, <a href="http://www.bcb.gov.br/htms/estabilidade/ref/ref.asp?idpai=economia">according to</a> Brazil’s <a href="https://brazilian.report/2017/12/28/focus-report-optimistic-brazil-2018/">Central Bank</a>, while credit deficits have decreased by 0.31 percent since 2013 to just 0.07 percent.</p> <p>For fintechs, this translates into a growing target market of tech-savvy users who want access to financial services that they are unable to currently obtain. Mobile is the primary channel for most services, such as those like market leader Nubank.</p> <p>Founded in 2013 by entrepreneur David Vélez, Nubank launched in Brazil with a ‘no-fee’ credit card as its first product, managed solely through a mobile app. Vélez, who remains Nubank’s CEO today, took advantage of two factors: a widespread distaste for upfront fees charged by traditional banks for using credit services, and diminished credit services from these banks as the financial crisis took hold in Brazil.</p> <p>For Nubank’s customers, as long as their balance is paid on time, they are not charged for using credit card services. It didn’t take investors long to recognise the idea’s potential, with some 100 million credit consumers making Brazil the region’s largest credit market. The firm raised $80 million in its first round of Series D funding, sparking the interest of venture firm DST global.</p> <p>“David and the team at Nubank are building a global leader in digital financial services that brings significant benefits to their customers in Brazil, including improved service levels, reduced ecommerce payment friction and lower cost,” said Tom Stafford, managing partner at DST Global, which has previously backed corporations including Facebook, Twitter and Spotify.</p> <p>“Nubank is establishing one of the leading technology teams in South America and we are excited to partner with them.”</p> <p>Banco Neon is another potential competitor. Founded in 2016, it offers customers one free transfer, deposit and withdrawal each month, and doesn’t charge for opening, maintaining or closing an account. By the end of 2017, it had more than 450,000 customers across the country. Like Nubank, Banco Neon’s CEO Alexandre Alvares believes that digital services are key to capturing the market.</p> <h3>Traditional banks adopting digital</h3> <p>Santander, too, is following in the steps of fintech firms. It hopes that its newest offering, Superdigital, will transform it into “the Amazon of banking”, according to Alexandre Zancani, Santander’s director of digital businesses. Branching out from traditional hires, Santander employed everyone from engineers and anthropologists to designers for its setup of Superdigital, hoping to better understand how the company can deliver to customers who don’t want to interact with banks in traditional ways.</p> <p>“The premise is that we understand the customer, and for that, we need cognitive intelligence, with the use of Customer Relationship Management,” explained Zancani, Santander’s director of digital businesses, in conversation with Brazilian media.</p> <p>Bradesco, too, has been using digital technology to transform its services and reach a wider range of users. In mid-2017, it launched Next, built by architects, anthropologists and psychologists, and uses artificial intelligence to offer customers a different experience.</p> <p>Its decision for this was simple: of its 26.1 million active current accounts, 14.5 million are digital. On a monthly basis, these digital accounts are responsible for the movement of approximately 1.3 billion BRL. With a younger and increasingly digitally adept client base, in addition to the fact that 95 percent of all the bank’s transactions are carried out digitally, Next was a logical step for Bradesco’s decision-makers.</p> <p>“We did not start to compete with anyone in the market, but to complement our portfolio,” said Luiz Carlos B. Cavalcanti Junior, the bank’s executive director, in conversation with the Brazilian media. “It is the part of Bradesco, within its way of acting, with strategies focused on the 100 percent digital public.”</p> <p>Nonetheless, Brazil’s banks remain threatened by fintech’s credit offerings, which are attracting swathes of the population. Risks remain for the wider economy, where the impacts of both fintech actors and growing banking monopolies remain unknown. But traditional banks’ digitalization plans also threaten fintechs.</p> <p>Specialists believe that activities of the country’s most prominent banks could ultimately undercut Brazilian fintechs in the same way that they undercut other banking competition in the first place. As a new market, banks may be some of the primary investors in fintechs. Marcelo Bradaschia, a consultant at fintech observatory Fintech Labs, <a href="http://www.gazetadopovo.com.br/economia/nova-economia/promessa-de-revolucao-financeira-fintechs-podem-acabar-nas-maos-dos-grandes-bancos-0lgbajapebpkve0apihj4oid8">said</a> last year that “more [fintech] companies are expected to be bought by banks” as this pattern continues.</p> <p>This is certainly the pattern with Santander, which bought São Paulo start-up Contasuper for 150 million BRL in 2017. Itaú has also followed a similar path, buying financial broker XP Investimentos last year. Bradaschia believes that without foreign investment, many fintechs could follow a similar path.</p> <p>“With the economy and politics calming down, and with the maturing of the entrepreneurial ecosystem, fintechs should receive more foreign contributions,” he explained. “From there, I think the game begins to change.”

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MoneyJan 17, 2018

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BY Ciara Long

Based in Rio de Janeiro, Ciara focuses on covering human rights, culture, and politics.