The need for speed and social distancing under Covid-19 accelerated bank digitalization and new product development.
During the Covid-19 pandemic, more than 40 million Latin Americans joined the banking system for the first time, driven in part by the pandemic but also due to the rise of fintechs and neobanks as well as the rapid expansion of e-commerce.
Digital banking sites reached 73% of the Brazilian population, the highest percentage in Latin America, according to a 2021 survey conducted by analytics firm Comscore. The adoption rate in Chile and Argentina came in second (66%) and third (61%), respectively. Other countries in the region have seen less adoption, such as in Colombia (46%), Mexico (45%) and Peru (45%), but no Latin American country has had an adoption rate below 40%.
One of the highlights of the study is the Brazilian leadership in this migration to digital banking, which has permeated Latin America’s banking industry.
“Brazil is leading this process, as historically its banking system has been ahead since 1980 so it could protect assets from hyperinflation,” says Sérgio Vale, chief and partner at macroeconomic consultancy MB Associates. Argentina’s proximity to Brazil is boosting fintech growth in the country, which is above the regional average, he adds.
The Brazilian banking sector increased its investment in banking technology by 8% in 2020 to a total of $25.7 billion Brazilian reals ($5 billion), according to a banking-technology study published by the Brazilian Federation of Banks (Febraban).
The study’s authors noted that pandemic and social isolation measures boosted the use of mobile banking as Brazilians’ favorite way to pay bills, make transfers and complete other banking tasks, reinforcing a trend already seen in recent years. Last year, for the first time, mobile banking transactions represented more than half (51%) of Brazil’s total banking transactions.
Estevão Lazanha, the IT director of the biggest Brazilian Bank, Itau Unibanco, confirmed this mobile trend. “We couldn´t expect people to leave their houses to go to a bank, so 54% of the bank accounts have been opened via an app in the second quarter,” he says. During the same period in 2019, the rate was only 20%.
Digital banking is quickly becoming the industry norm. Itau Unibanco develops approximately 58% of its new products and services this way. It aims to minimize face-to-face banking at its branches by the end of 2022—a little more than a year from now. “We are working hard to concentrate all banking transactions in the digital platform,” says Eduardo Mansur, the bank’s Digital Channels director.
In the past two years, the tech team at Itau Unibanco has grown by 83% in response to the high demand for new products and services, with the bank expecting to launch a new product every 60 days, on average.
The bank has also implemented biometric technology and security tokens into its digital banking offerings. When combined, the two technologies provide increased security for the users of its mobile app. Itau Unibanco launched facial recognition capabilities on its app, which lets users make transactions via their phones without needing to visit a branch. In less than a month, more than a million clients enabled the feature.
The Latin America Scenario
Although Brazil is close to many European countries in its adoption of digital banking, Latin America overall still lags, according to Luis Secco, director at economic analysis firm Perspectivas Económicas. “The informal economy in Latin America remains very high, estimated at 40%, and connectivity to the poorest part of the population remains difficult. Innovation and digital transformation could be faster if we hadn´t had this scenario,” he says.
While the pandemic accelerated innovation, other factors—such as fintech competition, the digital gap among the elderly and the need for central banks to regulate digital operations—also played a role, according to Secco. To survive in this environment, traditional banks are copying fintech’s agility to launch products and services.
The pandemic also provided additional fuel to preexisting trends, such as Argentine banks’ push to be a one-stop-shop for their clients by offering payment, savings and investment services via their mobile platforms.
Another example is the rise of electronic checks. Although Argentina started their use in July 2019, the use of eChecks skyrocketed during the pandemic when physical transactions became difficult.
In March 2020, only 9,200 electronic checks were issued for a total of $2.1 billion; in January 2021, the use of eChecks soared to 570,000, totaling $234 billion, according to electronic clearing house Coelsa. Simultaneously, the amount of paper checks issued dropped from 5,000,000 checks totaling $473 billion to 3,800,000 checks totaling $454 billion.
Chile is also playing a role in the digital environment. Investment bank LarrainVial started its 100% digital onboarding process in July 2020. The technology supported a business expansion and resulted in new investments, according to Gonzalo Córdova, general manager of Wealth Management at LarrainVial.
One example is the firm’s acquisition of 50% interest in Sherpa WMC (Wealth Management Community), the largest community of independent financial advisers in Chile, which led to the creation of Panama-based LVM Casa de Valores. The new entity allows LarrainVial to export its financial advisory model to the rest of Latin America, in alliance with private banks in the region, independent financial advisers and personal clients in Colombia and other countries.
More Credit for Low Income Customers
Each Latin American country found its means of innovation to keep clients active. With social distancing and lockdowns, mobile phones became the most important communications tool. “The need for remote transactions makes the mobile phone work as the ATM and it was particularly important for the expansion of the banking services’ net to include those in lower-income communities as part of a ‘bancarization,’” says MB Associates’ Vale. This action gives many more Brazilians access to financial institutions.
As technology increases the banking system’s accessibility and popularity, more services will become available to facilitate daily operations and credit, including ways to reliably assess buyers’ ability to pay.
In Central America, Nicaragua-based Banco Lafise found that digital platforms allowed it to grow the number of new accounts as well as speed up credit-line preapprovals. “The bank increased the number of clients, transactions, accounts and commissions,” says Justo Montenegro, the bank’s CFO.
Digitalization was already part of the bank’s plans to improve the user experience. The pandemic sped up the deployment of those plans, even though Nicaragua never faced an official lockdown. Before the pandemic, only 40% of Banco Lafise’s transactions were digital; that is now 70%, including corporate services such as factoring.
Salvadoran bank Banco Cuscatlán faced a similar experience with its digital transactions, which increased by 200% in the first half of 2021.
It wasn’t easy at the beginning of lockdown, as daily transactions in branches decreased from one million to 200,000 due to the travel limitations. Transaction rates now stand at 500,000, half of pre-2020 totals. However, as people became used to mobile banking, more transactions migrated to digital channels while the bank developed additional offerings.
As a result, last year Cuscatlán bought Scotiabank’s Salvadoran operations and became the second-largest bank in the country. The bank plans to invest $30 million in the next year and establish a partnership with global consultancy McKinsey to create a digital plan, where most services will become digital. “We want to be even more competitive to be the biggest bank of El Salvador,” says Eduardo Luna, executive director at Cuscatlán.