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The global banking industry has been undergoing major overhauls over the past few decades and it will continue to reinvent itself in the coming years to serve increasingly demanding clients who want faster, more reliable, and more seamless transactions with their banks. Established banks and their FinTech challengers are defining the digital transformation of the financial sector. In emerging markets, like Brazil, new developments in IT capabilities — most notably, data analytics, advances in mobile technology, and the growing use of artificial intelligence — continue to level off the playing field. FinTech startups are leveraging on new technologies to give the market increased service efficiency whereas traditional banks are mostly playing catch up on new technologies but are using their size and experience to stay ahead. Brazil, like other emerging markets stand to benefit from improvements but, there may also be risks. In any case, timing is everything.
Despite the existence of a tough competition, there is plenty of room for both banks and FinTech firms to thrive. The World Bank estimates that 1.7 billion adults worldwide do not own a bank account (The World Bank, 2017). In Brazil, account ownership is pegged at 70 per cent which has remained the same as in 2014, according to the same report. The Internet allows for new means to reach out to prospective and existing clients. Brazil enjoys an 85 per cent Internet penetration rate and a 68 per cent mobile penetration rate (We Are Social, 2018).
Threats or Opportunities?
The banking sector in Brazil consists of a mature mix of private as well as state-owned banks. Nevertheless, the banking institutions remain unable to reach some 30 per cent of the population. Simultaneously, prospective clients belonging to the younger age groups are demanding a radical change in the quality and efficiency of available services. Traditional banks are experimenting on new ways to serve the unserved and underserved but are, at the same time, preoccupied with determining new strategies and tools to bring banking services right at the fingertips of the younger market segment. Whether or not the imminent change will turn out to be either threats or opportunities will largely depend on how the banking sector in Brazil will respond or, take the first act.
Privatization, Deregulation and Entry of New Players
Privatization of banks in Brazil peaked in 2000 (Hawkins and Milhajek). The arrival of foreign and global players have significantly and positively influenced the local banks. Along with the new entrants came improvements in banking processes and available technologies. The new players also brought with them an in-depth knowledge of new financial instruments, opened the gateway for cheaper infrastructures, and provided easier access to global markets.
Industry analysts are warning against excessive buy-outs and mergers which could jeopardize industry diversity, drown out competition, and increase the vulnerability of the sector to adopt to future changes and unforeseen threats (Dwyer, 2018). Maintaining a relaxed environment will support stronger market competition while easing out cumbersome and expensive regulations for FinTech companies will help bring more options to reach the unserved and underserved.
Increasing Client Demands
From determining prospective customers, to client on-boarding, to relationship building tactics, information technology is changing the way banks are communicating with their relevant markets. The growing sophistication of Know-Your-Customer (KYC) strategies have made the process of acquiring more clients, up-selling to them, and retaining loyalty much less costly (Saal, et.al., 2017) and yet better personalized to satisfy individual preferences.
Banco Original has expanded its traditional banking services menu to include travel, transportation and lodging reservations (EY, 2016). These are designed to gather more information about prospective and existing bank clients which gives Banco Original a better understanding of their wants and needs, and know when it is best to offer products and services that serve client preferences.
IT and Digital Transformation
“Multiple disruptive forces” will force players in the banking industry to rethink conventional financial facilities, modes of payment, service delivery, and even branding (Deloitte, 2016).
New IT capabilities coupled with novel partnerships are recreating the conventional roles and functions of banks. Banco Bradesco, apart from having set up a 100% digital bank that specifically caters to the banking needs of young adults, is also collaborating with Ford Motor Company. Banco Bradesco is plugging in its banking application to automatically come with every Ford purchase (EY, 2016).
Caixa, another local bank in Brazil, is also fast-tracking its digital transformation. It has been aggressively collaborating with startups who are proposing tech-based solutions to the bank’s limitations. Three of such collaborations involve data analytics that help track customers and their preferences, chatbot that addresses mortgage inquiries, and a WhatsApp based tool that automates messaging frontliners about ongoing sales and marketing programs (Mari, 2018).
AI use in banking operations are becoming common. It has been argued to decrease spending, increase ROI, and improve efficiencies. Despite delivering faster response to increasingly demanding clients, there has yet to be proof that customers prefer these human-less transactions. Nevertheless, in a survey conducted by PWC concerning the future of retail banking (PWC, 2014), AI and similar innovations are viewed by 87% of respondents as vital but, only 11% are actually doing something about it.
While banks had the luxury to put off changes in the not-so-distant past, rapid technological breakthroughs and the emergence of dark horses — embodied by FinTechs and crowdfunding entities, perhaps — are forcing traditional banks to bend to the wishes of the publics they serve. That entails adopting new technologies but, more importantly, implementing new ways of doing business in an increasingly smaller world. Stiff competition will benefit consumers in Brazil, and even the unserved and underserved may finally obtain access to services that are responsive to their needs.
At least, Brazil already has the enabling policies in place to support banks to thrive well into the next decade. However, individual entities must either rapidly adopt and implement massive changes to their infrastructure and manner of doing business or, seek out partnerships with each other, with startups or, with companies native to other industries such as telcos. The imminent changes may either become threats or opportunities depending on how the banking industry in Brazil reimagines its role and make it happen. Other than tech and innovation, however, organizational change must also happen so that banks may properly adopt its structure and culture (Mari, 2018). Only then can the benefits of tech and innovation be optimized and sustained well into the future.
Banking Industry Outlook: Banking reimagined (2016). Deloitte. Available at: https://www2.deloitte.com/pg/en/pages/financial-services/articles/banking-industry-outlook-future-banking.html Accessed: 6 March 2019.
Dwyer, Rob (2018). “Brazil banking: Too much, too late.” EUROMONEY. Available at: https://www.euromoney.com/article/b1bb0bxdm6xm1x/brazil-banking-too-much-too-late Accessed: 6 March 2019
Hawkins, John and Milhajek, Dubravko. The banking industry in the emerging market economies: competition, consolidation and systemic stability — An Overview. Available at: https://www.bis.org/publ/bppdf/bispap04a.pdf Accessed: 6 March 2019
Leading through innovation: The future of banking in emerging markets (2016). EY. Available at: https://www.ey.com/Publication/vwLUAssets/ey-leading-through-innovation-the-future-of-banking-in-emerging-markets/%24FILE/ey-leading-through-innovation-the-future-of-banking-in-emerging-markets.pdf Accessed: 6 March 2019
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Mari, Angelica (2018). Creating An Innovation Culture At Brazil’s Banking Giant Itaú. Forbes. Available at: https://www.forbes.com/sites/angelicamarideoliveira/2018/06/21/creating-an-innovation-culture-at-brazils-banking-giant-itau/#70d8f7662a66 Accessed: 6 March 2019
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Saal, Matthew, Starnes, Susan, and Rehernmann, Thomas (2017). Digital Financial Services: Challenges and Opportunities for Emerging Market Banks. EM Compass. Available at: https://www.ifc.org/wps/wcm/connect/8bebad84-941c-4e96-b73b-5adeafabfde3/EMCompass+Note+42+DFS+Challenges+and+Opportunities.pdf?MOD=AJPERES Accessed: 6 March 2019
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