The inexorable rise of Nubank in Brazil is beginning to have existential implications for the country’s incumbent banks. Of the largest private-sector banks in Brazil, Bradesco and Santander Brasil are facing the biggest dilemma: both have large exposures to lower-income retail clients, and these exposures have led to weaker financial results in the past couple of years.
Arguably, the poor management of this segment led to the exit of Bradesco’s previous chief executive, and, today, Santander Brasil is feeling the impact of intense competition for this client base.
Santander has just launched a new low-income fee-free account, with a new motto ('Start now!'). CEO Mario Leão is leading the bank’s PR offensive to convince potential customers that the bank is going through a cultural revolution that will turn the institution into a worthy competitor to Nubank.
The real challenge is that neobanks’ culture can’t be emulated by a forced re-engagement with a problematic credit segment
“Santander is marking a new and very special moment… one that defines our company, our culture, our brand,” Leão declared in a LinkedIn post.
This is simply too big a market for the incumbents to walk away from, hence Santander’s strategy of re-engagement.
This new fervour is, according to the bank, based on a survey of around 1,000 target – that is, young and low-income – customers who revealed – drumroll, please – they don’t want to pay for cards or accounts.
Real challenger
Nubank has shown that this segment can be served profitably.
But Santander’s problems aren’t constrained to matching Nubank’s digital cost base while maintaining its brick-and-mortar infrastructure.
The real challenge is that neobanks’ culture can’t be emulated by a forced re-engagement with a problematic credit segment.
As Nubank’s CFO, Guilherme Lago, recently told Euromoney, that bank was launched to extend credit to low-income retail: Nubank works on the foundational assumption that credit conditions will deteriorate in every coming year and that each credit cohort must still be profitable after assuming a doubling in defaults.
Nubank never tries to time the market or judge where the country is within a credit cycle – there is never any talk of anticipating a return to economic growth and therefore adding more risk appetite, or on the contrary, tightening underwriting standards in the face of deteriorating economic indicators.
Meanwhile, banks like Santander Brasil and Bradesco have long tried to time the credit cycles of its client segments – adding risk appetite when the outlook appears favourable and ratcheting up credit scoring when macro storms appear.
Changing this approach to credit risk will be a bigger institutional challenge than cutting its costs to the level of a digital bank.
Santander Brasil’s Start now! will be watched with interest. But simply announcing a cultural change doesn’t make one happen.
In short: don’t expect Nubank to stop eating Santander’s lunch– or Leão to feel any easing of the pressure – any time soon.