Brazilian banking: A positive credit story
The benefits of lower Brazilian interest rates are not reaching the bank customers who need them most. Only greater competition between banks will alter this.
The Brazilian government wants a lower interest rate environment. It has aggressively lowered its base rate, the Selic, which now stands at 7.25%.
But the banks aren’t responding – or at least in any meaningful way. Under direct pressure, state banks Banco do Brasil and Caixa have cut their rates. The privately owned banks have made some cosmetic changes, lowering rate ranges, but the premium clients that qualify for the lower rates wouldn’t require access to credit at these rates anyway – even at the lower end of the range. And the real story is at the high end of the range, and the credit cards that still charge annual interest rates of 200%.
If the government really wants to lower Brazilian interest rates it is right in its prescription of increasing competition, but using Banco do Brasil is not the best strategy to achieve this. Rather, the government needs to increase competition within the private sector.
There has been consolidation of the system into a few very large banks, a lack of transparency about the cost of these banks’ products, low levels of financial education and a system that prevents customer mobility – high current account fees prevent clients shopping around as does the time and level of bureaucracy required to open accounts in Brazil.
The major reason for this competitive landscape is the lack of a positive credit bureau. If a client of Itaú Unibanco walks into Bradesco to ask for a more competitive rate on a mortgage, the bank has no information on which to base that decision.
All of this makes Experian’s acquisition of the remainder of its Brazilian subsidiary, Serasa, very interesting. Experian entered the Brazilian market in 2007 but its latest move – at the end of October it bought the remaining 29.6% for $1.5 billion – values the company at more than double what it did five years ago. Does Experian know something we don’t? Is the central bank about to relax its prohibition on Serasa’s provision of data to third parties?
Such a move would have a genuinely revolutionary impact on the retail banking market in Brazil. The big banks would be forced to compete more among themselves, and with smaller banks. Intermediaries such as mortgage brokers and new online businesses such as BankFacil would be able to close the circle: presently they can identify best product rates for consumers but can’t sell prospects to the banks. This competition would also spur rapid improvements in the banks’ efficiency ratios and productivity. The banks that won the efficiency war – those that best adopted the opportunity that new technology brings for both cutting costs and raising revenues; those that challenged their new business acquisition strategies and costs; those that ensured their branch model was most productive – would have a huge competitive edge.