The need to provide financial services to unbanked consumers and small businesses is a declared goal for nearly every country in the world, but the opportunity to successfully achieve this goal is rarely as reachable as it is in Brazil. Brazil has, as some might say, the ‘perfect storm’ for improving financial inclusion, and successfully banking the unbanked.
First of all, Brazil has the largest and one of the most developed economies in Latin America. Therefore, the potential impact of providing new financial services is tremendous. Indeed, formal financial services are still out of reach for as many as 34 million unbanked Brazilians (roughly 1 in 5 adults), who handle an estimated R347 billion per year according to Locomotiva Institute. It is true that Brazil’s percentage of unbanked population has decreased from 45 million just a couple of years ago, but it is still significantly higher than many other developed markets such as the US, UK, and Spain, whose unbanked population is less than 10%
The unbanked phenomenon in the country can be explained in many ways. First, Brazil has one of the most profitable banking industries (twice that of the US!), where the top five banks control nearly 80% of the loan market. That has made banking is very expensive, with consumers often paying triple digit interest rates. On top of that, physical bank branches are available in few and distant locations, keeping limited hours and notoriously long lines, making them difficult and timely to access. Altogether, this makes financial services prohibitive for many people, and contributes further to the country’s ‘cash heavy’ economy.
Clearly, the banks have the first opportunity and the infrastructure to service the country’s unbanked population, and several are already making strides in this direction. Digital banking services are now being offered by Banco Pan and BV, for example, and great new investments in digitization by Santander in the region.
The current environment has also created an opportunity for financial providers, such as digital-only neobanks, who are lean and able to provide affordable and accessible services. This opportunity for digital banks relies on access to technology, but since Brazil has one of the highest internet and smartphone adoptions in the world, that is hardly a barrier. In addition, new government-led open banking initiatives provide non-bank providers access to important financial information about new customers that were once unavailable. And, of course, COVID-19, has made online financial transactions and ecommerce a mandatory reality, and no longer just a luxury.
For all of these reasons, financial services in Brazil are going digital, and many new fintechs are quickly leveraging these opportunities at lightening speed. Perhaps the most clear example of this is Nubank. Nubank attained 35 million Brazilian customers in less than a decade (48 million total customers, including Mexico and Colombia), and is currently valued at over $40bn, which surpasses the country’s longstanding retail banks. Moreover, Nubank has managed to achieve this status very efficiently, with just a small fraction of the number of employees compared to some of the traditional banks. And Nubank is not alone. Neon, C6, Inter, Will Bank, BizCapital, DMCard, and a host of neo-banks and credit lenders are all servicing the underbanked, and disrupting the financial industry by providing more access to financial services. Already today, 1 in 3 Brazilians are using app-only fintech banking services, and most actually prefer neo banks to their traditional banks. Things are changing.
The Future and Alternative Data
The accessibility and affordability of financial services that are provided by digital banking are fundamental for reaching previously underserved groups. But a necessary requirement that underlies these services is the same thing that is at the heart of any bank–credit model. And, at the heart of any credit model, is always data. Whereas traditional credit models rely on historical financial information, such as that provided by national credit bureaus, the unbanked, by definition, lack this information. Alternative types of data are therefore needed to assess creditworthiness among the unbanked.
Since digital banking, smartphones and the internet all go hand-in-hand, alternative credit data can be accessed in ways not previously possible, such as the information available in telco data, e-commerce data, utility or rental payment information, all of which can be indicators of good payment behaviors.
This type of data can supplement a credit bureau’s missing historical financial, but there is an additional dimension of information that is ‘positive data’ by nature, and can be additionally informative, particularly when either credit bureau or alternative data is not sufficient. This is character-based data. Character-based credit data can help show that a person is trustworthy and responsible, even without prior credit histories. Such data is complementary to other types of data, and can provide even more opportunities for an unbanked person to qualify.
Innovative Assessments, is an example of a company that uses psychometrics to help some of the biggest digital and traditional banks in Brazil approve more unbanked. Its risk models are based on ultra-brief online surveys, which can boost credit ratings among the unbanked. In some cases, this type of data has helped to increase approvals among the unbanked by nearly 20%, and reduce defaults by 30%.
Ideally, banks will utilize combinations of all of the available and relevant credit data in each case, in order to responsibly provide the best and most personalized services to their clients. As for the future, with the continued growth and adoption of digital and open banking, the use of alternative data is likely to only increase, and become more commonplace and acceptable.
While the same can be said for many countries around the world that are striving to adopt similar strategies, it is still interesting to consider the unique situation in Brazil. Due to the sheer size and proportion of the unbanked population in the country, Brazil’s financial inclusion initiatives will undoubtedly have a stronger overall impact on the country’s economic growth than many of the same initiatives being carried out in more developed economies, such as the US or UK. Indeed, given the current trends, it is very reasonable to expect that over the next few years, tens of millions of previously unbanked Brazilians will have access to affordable financial services that will enable them to improve their standards of living, grow their businesses, and become more financially secure for generations to come.