Brazilian investment bank BTG Pactual has launched an internet-only bank that aims to win a 10% share of the R$650 billion ($190 billion) market for managing the money of the affluent retail sector in the country.
The brand, BTG Pactual Digital, will offer 14 investment and three pension funds that are currently open to its wealth management business, which it classes as people with over R$5 million to invest. The bank says the fees applied to the management of the funds will be exactly the same as for its private banking clients – starting from as low as 0.2% for basic CDI-based funds.
Roberto Sallouti, CEO of BTG Pactual, says that he sees the growing number of Brazilian start-up fintech companies as the principal competition for BTG Pactual Digital rather than the country’s established retail banks.
“We established this online venture as a start-up within our bank,” he says. Sallouti argues the new venture won’t compete with leading retail banks as BTG Pactual Digital is not proposing to expand beyond investment funds into credit cards, bank accounts or insurance. Rather, the nascent fintech start-up industry is closer to BTG Pactual Digital’s business model. The bank is targeting people with around R$50,000 to invest, but it will allow individuals to open accounts with R$3,000 – the lowest minimum deposit of the funds offered through BTG Pactual.
Sallouti declines to provide the costs associated with the launch of the digital bank but says that the firm has technology expenses of R$200 million, including the development costs of the platform. The total associated headcount is currently 35. He says that the bank had been monitoring the potential of digital banking closely and began working on the project in January 2014 as the country’s digital infrastructure and adoption rates confirmed the viability of an internet-only bank.
Then, following a regulatory change at the central bank in April 2014 on the opening and closing of accounts, the project was able to target the mass affluent segment – a part of the market not previously targeted by the bank. In June this year the developed platform was offered to family and friends of employees of the bank. Marcelo Flora, head of BTG Pactual Digital, says accounts can be opened on smart phones in around 30 minutes. The bank will provide email and telephone support.
“The wealth of Brazilian families will gradually move from being managed by traditional retail banks and migrate to new digital investment channels – as we have seen happen in the US,” says Sallouti.
The banking market in Brazil is beginning to reflect the impact of new digital companies. Also, some argue that the impact of a recent industrial action by employees of the retail banks, which was one of the longest continuous strikes in the country at more than 30 days, accelerated the shift to online banking.
A report by Fitch notes: “The strike forced people to use new technologies due to a lack of alternatives. The experience was positive, and the advantages of these technologies are becoming evident in clients’ daily lives and are likely to reduce the operational costs of banks in the long run.”
Brazil’s large banks are beginning to embrace the technological opportunity that automation can have for improving efficiency and profitability.
Banco do Brasil’s CEO Paulo Cafferelli, who assumed his post earlier this year, has outlined a strategy to cut its large infrastructure as a means to boost his bank’s return on equity to levels seen in the private sector. Cafferelli announced that the bank will close 7.4% of its branches, citing growing client usage of digital services, and envisages saving R$750 million a year, which could increase long-term profitability by around 10%.
In addition, the bank will pursue a voluntary redundancy programme that could cover as many as 18,000 employees – or 16.5% of the workforce.
Marcello Telles, analyst for Credit Suisse in New York says the redundancy proposals could be three times the estimated cost savings, at around R$2.8 million, assuming an 80% acceptance rate. The realised savings could be even higher if it covers more senior long-serving employees with higher average wages.
According to Telles: “The corporate restructuring reinforces management’s commitment to capital optimization and long-term profitability, which has also been reflected in the pronounced re-pricing of the loan book and moderation in the level of credit renegotiations.”
The other large retail banks in Brazil are expected to follow Banco do Brasil’s example as the industry wrestles with the challenges of low-cost digital platforms. Brazil’s banks have a delicate balance to manage between maintaining a competitive product and preventing cannibalization of a retail client base that generates large net interest income and fees.
However, Fitch stresses that these pressures have the potential to only impact the industry’s fundamentals in the medium term and notes a lot of regulatory risk to the success of start-ups in Brazil.
“We do not believe the new wave of fintechs pose a threat to Brazilian banks at the moment,” says Fitch. “The regulation of this type of business in Brazil, which is still evolving, will play a fundamental role in determining the success of these companies, because it could significantly affect costs and imposes certain restrictions to operations.”