Economy

Digital banks look to expand despite Argentine crisis

28th November 2019

By Ignacio Pereyra

Digital banks look to expand despite Argentine crisis

While 2019 was a year of exploration for digital banks in Argentina, with three local firms taking their first steps in the market, 2020 could be a year of expansion for the sector, with foreign companies also arriving and looking to serve a country in which half the population works outside of the banking system.

</p> <p>“The amount of players offering digital banking will grow because there is a big opportunity. The market has a lot to develop not only in Argentina but in the whole region and in the world too,” Stefano Angeli, CEO of <a href="https://rebanking.com/">Rebanking</a>, told <em>The Essential</em>. In five months of operations, the Argentine firm Rebanking can boast 30,000 savings accounts, and it expects 200,000 customers by 2020.</p> <h2><strong>Banking the unbanked</strong></h2> <p>The <a href="https://globalfindex.worldbank.org/sites/globalfindex/files/2018-04/2017%20Findex%20full%20report_0.pdf">World Bank</a> noted that in 2017 only 49% of Argentina&#8217;s economically active population was banked. This is much lower compared to neighbors Chile and Brazil, where the percentage climbs to 74% and 70% respectively. In turn, only 24% of the Argentine population has access to credit cards, and formal credit within the private sector represents only 15% of GDP.</p> <p>“Non-banking is partly a result of the informal economy, but it is also partly due to the fact that banks have mainly focused on customers that they consider business-worthy,” Guillermo Francos, president of <a href="https://www.wilobank.com/">Wilobank</a>, Argentina’s first digital bank, told <em>The Essential</em>. Wilobank started operating in June 2018 and has 80,000 clients, half of whom did not previously have a bank account. They expect to end the year with 100,000 clients and reach 300,000 by 2020.</p> <p>“We were born to create access for people who have been left out before, and to provide a platform that is easy to use,” said Francos, who served as president of the state-owned Provincia Bank between 2007 and 2011.</p> <h2><strong>Legacy competitors</strong></h2> <p>“Banks made a lot of money with a transactional business model that is profitable, but bad for the health of the financial system,” said Juan Bruchou, former CEO of Citi in Argentina and founder of <a href="https://www.brubank.com/">Brubank</a>, Argentina’s third digital bank. “Traditional banks are not currently providing the service that retail needs, but they are still making money, so it is difficult for them to change. The reality is that people demand a different experience and traditional banks, with all their legacy in tow, have it more complicated. If the world changes, you have to adapt,” Bruchou told <a href="https://www.infotechnology.com/negocios/Revolucion-fintech-la-apuesta-del-BCRA-para-mejorar-el-sistema-financiero-20180406-0004.html">Infotechnology</a> magazine.</p> <p>Brubank, which in the first seven months of operation reached 40,000 customers, sold <a href="https://www.bloomberg.com/news/articles/2019-08-02/billionaire-thomson-to-buy-15-stake-in-argentine-digital-bank">15%</a> of the company in August to Canadian billionaire David Thomson. The company looks to use the funds from the deal to grow in Argentina, and is considering further expansion into Mexico, Colombia or Peru, Bruchou said.</p> <p>One of the most common criticisms of traditional banks, which focus on big customers that generate the largest profits, is the high entry barrier and the poor and expensive services they offer to small businesses and other end users. The main private banks will charge an average of 750 pesos per month for a checking account, 1,500 pesos per month for a package (accounts, card and checkbook), 3,500 pesos for the renewal of an international credit card and from 250 pesos per month for the card’s maintenance. In a context of high exchange rate instability, they also have a spread of up to 5 pesos between the price to buy US dollars and the price to sell it.</p> <p>Given this scenario, digital banks are sharpening their strategies and using aggressive offers: better rates for fixed term deposits, interest of up to 25% per year for savings accounts (traditional banks offer around 1% per year) and currency exchange with near-zero spreads.</p> <p>Digital banks receive a license from Argentina’s Central Bank (BCRA), which regulates them according to the same requirements that 62 traditional public and private banks must also meet. The big difference is that they work 100% online, do not have physical branches, have less staff and offer a large number of products and services at no cost. Basic products are free and anyone who wants to upgrade can pay for it.</p> <p>It is similar to the logic of low-cost airlines, with the difference that to get on a plane you have to pay, while the basic services these banks offer are free. Rebanking, for example, offers the American Express card for free in its basic version but the users can pay to upgrade their memberships to Gold, Platinum or Black.</p> <h2><strong>The case of Argentina</strong></h2> <p>With an Argentine ID, a new client can open up an account in a few minutes from the cell phone – even from abroad – and start operating. Within a few days, debit and credit cards will arrive at your home, for now without issuance, renewal or maintenance costs. Most of the clients of Argentina’s digital banks are under 50 years old.</p> <p>Digital banks may still seem novel in Argentina, but they have been operating for several years worldwide. In Brazil, Banco Original was born in 2015, while Germany’s N26 was already operating in 2013 across Europe, where Monese and Revolut are also going strong, among many others. Broadly speaking, these banks make their business thanks to the spread in exchange operations, financial intermediation, loans and credit and debit card operations (in these cases fees are charged to businesses and not clients).</p> <p>In comparison to the rest of the world, Argentina is a tougher market to break into because of its recent history. Many lost their savings during the 2001 crisis, amid a strong devaluation of the peso and the conversion of savings in dollars to pesos. So, how can a digital bank gain the trust of people?</p> <p>“We have an advantage: people compare us to digital applications and not to financial institutions or traditional banks. That gives you another standing,” Angeli said. “The trust is based on the fact that you click on a button and the whole thing works. People ask us for an experience similar to that of a social network or a food delivery or transportation app.”</p> <p>The trend towards digital seems irreversible. Argentines only go once or twice a year to a bank branch, according to data gathered by <a href="https://drive.google.com/file/d/1Bmo9seq68aYGGma5zR2BFNSzEoxMhHmT/view">Google</a> that also shows that digital transactions are becoming more frequent, as people access their banking platforms through mobile devices between 20 and 30 times a month.</p> <p>“Consumers have changed and there are new competitors trying to give customers the best possible experience. This new normal represents a challenge and also an opportunity,” said Carolina Battista, commercial director for the Finance Industry at Google Argentina.</p> <h2><strong>Effects of competition</strong></h2> <p>Digital banks still lag behind traditional banks when it comes to the number of customers or the value of the transactions, but they are starting to shake things up. Just looking at comments on social networks, many users demand that traditional banks offer products and services similar to those of digital banks.</p> <p>“Traditional banking is huge and I think we are far from upstaging them, but our presence does raise an alert that will drive them to speed up innovation. FinTech companies have also pushed banks in digitizing their experience. I think that this favors the market and the final customer,” said Angeli of Rebanking.</p> <p>Wilobank’s president is convinced that digital products will grow and there will be fewer people in the banks. “That is the future. I do not know how much time it will take. Traditional banks do not change so fast. They have very large structures, decisions go through many management layers. If we have to change a rate, we do it right away. We get together with the team and decide. Big structures are going to have to adapt to those changes, and that is not easy,” said Francos.</p> <p>Given the rise of FinTech – there are already 223 companies, 110% more than in 2018, according to data from the <a href="https://camarafintech.com.ar/">Argentine Chamber of FinTech</a> – and the potential development of digital banks, large banks have begun to adapt their portfolios or even to buy or launch FinTech companies. The point is to accelerate digital transformation. Thus, Naranja, the main credit card issuer in the country, launched Naranja X: a FinTech that belongs 50% to Banco Galicia and will require an investment of <a href="https://www.ambito.com/tarjeta-naranja-lanzo-app-financiera-competir-mercado-pago-n5055217">US$50 million</a>.</p> <h2><strong>User experience</strong></h2> <p>Although digital transformation is underway, traditional banking as a whole still has a way to go. Issues such as credit card theft can be solved through a simple click in digital banking (customers can “pause” the card through their app), while it takes several interactions by phone or even in person in traditional banking.</p> <p>“Customer demand is based upon convenience and speed, and services are expected to be available on-demand and in real time, seamlessly integrating with the consumer’s day-to-day life,” said a <a href="https://www.redhat.com/cms/managed-files/ve-fsi-de-brief-f14700wg-201811-en_0_0.pdf">report by Red Hat</a>, a US software multinational that provides open-source business solutions. “Banks must develop agile infrastructure to offer these new, ever-evolving services without interruption. Banks must provide complete digital experiences, which involves seamless back-office system integrations, with robust end-user interfaces for delivery of end-to-end customer experiences,” added the Red Hat report, which said banks should be prepared to change their talent acquisition strategies: “Fewer tellers (ATMs) and more software developers.”</p> <h2><strong>New players</strong></h2> <p>Meanwhile, the scene is expected to expand even further with the arrival of Openbank and Nubank. “Competition will be bigger and bigger. That is very positive to develop and educate the market,” said Angeli. Along the same lines, Francos said that Nubank &#8220;is going to be a fundamental player because they are very well anchored&#8221; and &#8220;know that in Argentina there is a field to develop.&#8221;</p> <p>In June 2019, Nubank CEO David Vélez visited Argentina to announce that, as part of Nubank’s regional expansion plan, the company would be arriving in the country under the name “Nu”. Around the same time, he made the announcement of the launch of Nu México. Since then, the arrival of Nubank, the Brazilian giant listed as &#8220;the largest FinTech in the West&#8221;, was expected for this year, although it was postponed to 2020.</p> <p>Thanks to its alliance with Mastercard, Nubank already carries more than 10 million cards issued in its country of origin. The company confirmed to <em>The Essential</em> that it will start operations in Argentina, although it did not disclose the date. “There is yet no official launch date for the first product in the country, but we are actively hiring to build a strong and diverse team to accomplish our mission of fighting complexity and empowering people to take control of their finances. We want to achieve this by offering financial products that make Argentines feel safe and in control of their money,” Nubank&#8217;s press office in Buenos Aires told <em>The Essential</em>.</p> <h2><strong>New government</strong></h2> <p>Santander, the main private bank in Argentina, also announced that its digital bank will launch in the country in 2020: Openbank, which is already operating in Germany, and will soon be in The Netherlands and Portugal. During her stay in Buenos Aires, the president of Santander <a href="https://twitter.com/AnaBotin/status/1194747652082163713">Ana Botín announced</a> a plan of US$500 million in lines of credit to boost the business of exporting SMEs. But there is a lot of speculation behind the firms’ new investments. The restructuring of the debt that Alberto Fernández’s new administration will have to face, with the multimillion-dollar-worth commissions that this will generate, are very much on the radar of international banks. Santander is one of those who looks closely at those movements, <a href="https://www.lapoliticaonline.com/nota/122960-exclusivo-que-hay-detras-de-la-apuesta-de-la-duena-del-santander-por-alberto/">LPO</a> newspaper pointed out.</p> <p>After a year of political and economic turmoil, all eyes are focused on what the beginning of the new government will bring for digital banks, which have taken their first steps in the midst of the crisis. Francos recalled that the economic period in which Wilobank developed &#8220;was very critical&#8221;, after the launch in June 2018. “The crisis exploded and it was not easy. We started with an euro being worth 17 pesos, and now it is worth 70 pesos. I am optimistic about what is coming,” said the president of Wilobank, which was backed by a US$21 million investment by Argentine businessman Eduardo Eurnekian.</p> <p>For his part, the CEO of Rebanking said he hopes the Fernández government &#8220;can lay the foundations for economic stability so that the market can grow.&#8221; But he said he was not worried about the situation. &#8220;Market volatility and the economic crisis make you focus on one product more than another, but there is always a demand for financial services because they always have the right product to offer,&#8221; Angeli said.</p> <p>

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Ignacio Pereyra

Ignacio Pereyra is a freelance reporter and photographer. For close to a decade, he was the Argentina correspondent for the Spanish-language service of dpa news agency. He also reported out of Buenos Aires for Río Negro, Patagonia's largest newspaper.