Brazil is the world's fourth largest smartphone market with an installed base of 70 million smartphones in 2014. According to a study by Brazilian banking association Febraban (Federação Brasileira de Bancos), Internet and mobile banking accounted for 52% of total Brazilian banking transactions in 2014.
"The digital-only banking space is heating up in Brazil," Lindsay Lehr, Senior Director at US-based Americas Market Intelligence, tells RBI. "This is highly relevant, since the top six Brazilian banks control about 70% of all bank assets, and the top four control 80% of deposits and credit cards issued."
"Digital banking is advancing in Latin America," says Juan Mazzini, a Senior Analyst, Financial Services, at US-based consultancy Celent.
"In a Latin American bank and FinTech survey Celent carried out recently, 100% of the participants recognised that a scenario where all financial products get digitised, needs to be addressed sometime in the next seven years, and 59% believe this scenario needs to be addressed immediately."
"There was also a general consensus among survey respondents that most Latin American banks are entering digital late, and over 70% of respondents believe the predominant threat of competition won't come from incumbent banks," says Mazzini.
Whereas Nubank only offers credit cards, Banco Original's vision is to be Latin America's first 100% digital universal bank, Mazzini notes. "Celent's view is that incumbent banks, particularly those which are direct competitors to Banco Original, will rethink their investments in digital, as the threat is now real," he says.
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"Banco Original isn't entering the market to play minor league, but to challenge the big players. Celent also expects to see other [incumbent] banks create separate digital institutions, as, for some of the larger banks, the rapid transformation required is a barrier too high to jump and they may be better off starting a new digital operation on the side."
Banco Original, a subsidiary of Brazilian holding company J&F Investimentos, launched Brazil's first digital-only consumer banking platform in March 2016 offering current accounts, credit cards earning cashback, and seven different investment products. Its publicity campaign features the Jamaican athlete Usain Bolt.
The bank, which targets customers with monthly income of over BRL7,000 ($1,996), has no branches, although it does operate a call centre.
"Our offer is intended to simplify customers' management of their finances," says Marcos Lacerda, Banco Original's Chief Marketing Officer. "Customers open their accounts using their smartphone, and are able to carry out transactions using voice commands and deposit cheques using their smartphones. They have access to a personal financial management (PFM) programme providing a timeline of their transactions grouped in different categories."
Banco Original is the result of a 2011 merger between Banco JBS, a J&F subsidiary providing loans to agribusinesses, and Brazilian retail lender Banco Matone. In 2013, Banco Original added corporate banking to its existing agribusiness.
Right from the start, it was Banco Original's vision to become a digital-only bank. Its digital banking project began in 2013 under the direction of Henrique Meirelles, chairman of J&F Investimentos and former president of Brazil's Central Bank "The total amount of our investment in our digital banking platform is around BRL600m m ($171m)," says Lacerda.
Banco Original has three approaches to innovation.
"Firstly, we partner with a technology start-up accelerator in the US" says Lacerda. "When we identify a project which meets our objectives, we make an investment in the technology so we can develop and use it. Secondly, we make acquisitions such as the 51 percent stake we took in PicPay, a mobile wallet similar to Apple Pay, last year. Thirdly, we develop products and services which add value to Banco Original and help improve its relationship with its clients."
Meirelles was quoted by Reuters in March 2016 as saying that Banco Original expects returns on its retail banking unit to match those at the bank's corporate and agribusiness segments within four years. He said he expected the retail division to post "acceptable" returns by 2018 and "attractive and very positive" ones by the end of the decade, according to Reuters.
Lacerda estimates that Banco Original will sign up 100,000 customers in its first year of operation and 250,000 in 2017. "We are targeting the growing demand among banked consumers to communicate with their banks through digital channels," he says.
In a December 2015, Fitch Ratings said that it views Banco Original's "plan to develop a retail bank focused on high-end individuals as an ambitious undertaking that will require disciplined risk management, given the challenging operating environment.
"The bank's revamped management team is composed of professionals with vast experience in leading local financial institutions, which will be essential for the successful implementation of the bank's plan to build a solid franchise and become a relevant mid-sized bank in the Brazilian market."
"Banco Original has an open API (applications programming interface) banking platform," says Mazzini. "This open platform enables FinTech companies to access Banco Original's APIs and datasets easily, and enables the bank to react to a changing and complex ecosystem."
Mazzini says that Banco Original is one of the rare cases where a 100% digital bank has obtained its platform from a vendor, US-based Technisys. Other digital-only banks around the world such as Mexico's Bankaool or Germany's Fidor opted to build their own platform instead of buying it from a third-party vendor.
São Paulo-based Nubank offers an international MasterCard-branded Platinum credit card without any fees and with lower than average interest rates, an attractive feature as Brazil has some of the highest credit card interest rates in the world.
"Average Brazilian annual credit card interest rates reached 99% in November 2015, with some charging rates as high as 415.3%," says Mazzini.
As of May 2016, Nubank's revolving credit interest rates ranged from 2.75% to 12% per month.
Americas Market Intelligence's Lehr says Nubank's offer is 'very interesting to Brazilians who are dealing with high debt levels, inflation, and unemployment. It also has the advantage of being an international card'.
Like Nubank's card, Banco Original's two MasterCard-branded credit cards, a Platinum card and a Black card, can be used internationally. Lehr says that 80% of credit cards issued in Brazil are enabled for domestic purchases only.
"The credit cards issued by Nubank and Banco Original are interesting, since Bradesco, Banco do Brasil and Caixa Econômica Federal have all become highly committed to issuing the Elo card, a domestic card scheme established in 2011," says Lehr. "Elo has been steadily cannibalising Visa cards as these issuers push out Elo cards, and new, digital-only banks could be interesting partners for Visa and MasterCard to defend their share."
Customers can only manage their Nubank card using a smartphone app. Nubank's app allows customers to apply for a card, and, once approved, activate, block and unblock their card, manage and pay their bills, increase and decrease their credit limits, and see all purchase information in real time.
"Nubank is hoping to provide better customer service than incumbent banks;" says Mazzini. "Brazilian banks are among the companies that generate the most customer complaints in Brazil. Nubank sees youth as an important demographic, and is currently targeting people who can afford smartphones and already have credit cards from Brazilian banks. Over time, it expects to expand its credit modelling to reach people with more varied credit profiles."
Nubank says that, between its app's launch in September 2014 and April 2016, around 2 million people had applied for its card (including rejected applicants, successful applicants and people on a waiting list for a card while their credit history is checked). As at January 2016, Nubank's cardholders had carried out over eight million transactions in 140 countries. Nubank's growth has occurred largely through recommendations by customers, the issuer says.
"The majority of our users are in the A and B social classes, although we don't require a minimum income," says a Nubank spokesperson. "Around 80% of our users are under 35 years old."
Nubank says it has developed an advanced data science infrastructure to enable it to process and make decisions about card applications. "We do all our own development internally," the spokesperson says. "Our team of 300 people includes over 10 data scientists and over 40 engineers."
In April 2016, Nubank signed an agreement with Goldman Sachs for loans totalling around $50m to finance its credit card receivables portfolio. The loans consist of a $25m Senior Secured Revolving Credit Facility and a BRL100m ($28m) Senior Secured Revolving Credit Facility through Nubank's proprietary securitisation vehicle.
Nubank had previously raised almost $100m in its four equity fund-raising rounds led by Sequoia Capital, Tiger Global, Founders Fund, Kaszek Ventures and QED Investors since its launch in 2013.
The most recent, $58m in January 2016, will be used to hire data scientists, design experts, engineers and customer experience experts and to invest in Nubank's technology and data science platform.