How Three Banks Evolved Into FinTech to Excel in the Leading Financial Market in Latin America

Small banks have realized that digital accounts provide an opportunity to overcome barriers such as agency costs and physical distance from customers, allowing them to attract the previously unattainable share of consumers through technology.

Together, the digital accounts of Inter, Neon and Original count nearly 400,000 customers. The three came from smaller banks, and two of them did not even offer a digital account in early 2016.

For the big banks, free digital account opening is expensive. Since the Central Bank allowed banks to offer digital-only accounts in 2011, Itaú, Banco do Brasil and Bradesco have already launched and suspended their free digital account models. Two of them re-launched: Bradesco, which now charges for the service, and BB, which reshaped the model.

Why the free account came out expensive to the big banks

When digital accounts were authorized, it seemed like a big deal to large institutions. However, because of the structure they maintain – with their own branches and ATMs – free digital service does not seem to hold up. So much so that currently only Banco do Brasil still offers a free digital account (but a more limited version). Itaú closed the digital account offer this year. Bradesco discontinued the free account and recently launched a version for its digital account, called Next, which is paid.

BB is sought by more than 3.6 million consumers annually to open bank accounts. Its strategy was to migrate more than 50% of this contingent to digital accounts, i.e., to have 1.8 million digital account holders by the end of 2017. It currently has 815K.

According to the annual survey by Febraban (Brazilian Federation of Banks) released in May, one in three banking operations are already done by smartphone or tablet, and the operations carried out by smartphones grow geometrically year by year. That is, with or without the digital account, the accountant is becoming more and more digital. In this scenario, it would not be an advantage for banks to lose their own customers to their free accounts.

The key turn came with new strategies. Banco do Brasil (BB) placed limitations on the free digital account, called Conta Fácil, in November 2016. The maximum allowable transaction is R$ 5,000. And in addition to the free version, the bank has a paid option with a monthly fee of R$ 9.90. There are also Next (Bradesco) and Original (financial arm of the J&F Group), which are also fighting the space with other banks for customers who pay monthly

Digital accounts available today in Brazil

Inter (former Intermedium) Multiple bank with digital account since 2014. It has 165K digital account holders. It expects to have 350K by the end of 2017 and reach 1 million customers by the end of 2018. It does not charge a monthly fee. Neon Launched in July 2016 by the merger between Fintech Controly and Pottencial Bank. Neon has today more than 130K users. Received R$ 14 million in investment from angel investors and the bank Pottencial. Conta Fácil(Banco do Brasil) Launched in November 2016. There is a free option and a paid option (R$ 9.90). Has 815K digital account holders. Original (J&F) The bank's digital account was launched in March 2016 and has more than 100K customers. Between December 2016 and May 2017, its customer base grew by ~70%. It offers packages of R$ 9.90, R$ 24.90 and R$ 29.90. Next (Bradesco) Launched in June 2017 by Bradesco. The digital accounts have a monthly fee between R$ 19.95 and R$ 39.95.

Smaller banks take free account as growth opportunity

While big banks made way for customers to get acquainted with free digital accounts and then jumped off the boat, the technology opened new horizons for smaller traditional banks, such as Intermedium (now Inter) and Pottencial (which merged to Fintech Controly and became Neon).

They also offer other services to clients who open a free account. "We are bringing to the customer a large basket of products such as investment and credit," explains Alexandre Riccio de Oliveira, Executive Director of Banco Inter.

Inter is an example of how the digital account can be a good strategy for attracting customers. The institution began operating as an investment bank more than 20 years ago, became a multiple bank and opened a free digital account in 2014. Currently, the digital account is the company's best-known product.

Inter does not charge fees for the account, and, according to the Executive Director, seeks to create a product for everyone. "Today there is nothing more democratic than the smartphone," Alexandre explains that the bank does not depend on monthly fees for services because it has lower costs compared to traditional banks and for being more efficient. Then the free account serves as input to the other bank services. "Nobody pays to enter the supermarket, the remuneration is made by the consumption of the products."

The explanation is the same for Neon, which also does not charge monthly fees. "Today, in the chain of credit card, there is a fee of the machine that the shopkeeper pays. This rate is divided between the owner of the machine – like Elo; The flags – Visa and Master. And the issuers, in this case, the bank, this is one of our sources," explained Alexandre Alvares, CMO of Neon. "We do not want to exploit the user, we create a product that together creates a sustainable business," he concluded.

Let’s consider the Febraban data: while the number of transactions performed by computers gradually recedes, the operations performed by smartphones grow geometrically year by year. The transfers made by mobile rose from 269 million in 2015 to 516 million in 2016 (up 91.8%). But mobile transactions accounted for only 34% of the total in 2016, which indicates that there is still room for growth in this market. And it is the scenario where small banks now vie with the big ones.

This content was published in partnership with StartSe, the main Brazilian website about startups. The portal contains the StartSe Base, the largest database of startups in the country, with more than 5,000 registered companies.