|Marcello Flora, BTG Pactual Digital|
Flora says that the retail banks are in a tricky position: they are being forced to rationalize their branch network to generate more efficient structures but will still be unable to match the fees being charged by online-only banks.
“I think the brick and mortar banks are still trying to define the pace and equilibrium between driving customers online and retaining branches,” Flora tells Euromoney. “They can’t close all the branches because they would send all the clients to us, but they can’t keep all their branches if they are moving to online platforms. So they have to set the pace of branch closures very carefully.”
Crucially Flora says they will not be able to match the investment fees of BTG Pactual Digital, which offers fixed income funds for 0.3% a year and a minimum investment of R$3000 ($940). In comparison the large retail banks offer their mass affluent clients similar funds starting at 1.75% fees for clients investing a minimum of around R$10,000.
The fee falls with the size of the investment, but even with a R$1 million investment the average is still around 0.5% – still considerably above BTG. And Flora points out the fund that charges 0.3% also comes with a 20-year track record and only once generated less than the CDI rate (when it made 98.5%).
All the Brazilian banks have begun to close branches and Banco do Brasil has been at the forefront, announcing the closure of 402 branches (7.4% of the total) and the transformation of 379 into ‘points of service’.
Analysts have responded favourably to banks’ plans for branch rationalization as they see higher returns on equity through greater efficiencies. For example, UBS recently upgraded Banco do Brasil’s stock to neutral from sell based on the likely improvement in the bank’s return on equity due to its branch rationalization programme.
However, Flora argues that online platforms stand to gain even more in the longer term as turning clients into digital customers is the first step in those customers looking for pure online banks that can offer better fees. He says that last year was a tipping point in Brazil: for the first time the country had fewer branches at the end of the year than the start.
Flora also says many of the bank managers who are made redundant become independent financial advisers (IFAs, or agentes autônomos in Portuguese), who become potential referrers to BTG Pactual Digital. Although the bank launched to attract high-income customers directly to the platform, the model has been adapted to incorporate the referral business of the IFAs.
“We are going to have partnerships with IFAs,” says Flora. “When you look at the business model of other [online financial platforms] such as XP it is about 80% based on IFA.”
BTG Pactual will charge the same fees as clients going direct and will give referral fees to IFAs.
However, Flora says the bank’s focus and target remains the same: 10% of the mass affluent investment market in the next three to four years. Today that segment is worth R$750 billion incorporated into about 7 million accounts linked to between 2 million and 3 million people. BTG therefore aims to get between 200,000 and 300,000 new clients with assets under management of around R$75 billion by 2022.
Flora declines to provide any details of the bank’s progress to these early targets following its full launch to the Brazilian public in July last year.
“We still haven’t decided what we will report and how,” he says. “We’re debating that at the moment – whether to break out the digital numbers or report them within existing groups.”
BTG Pactual Digital offers its clients similar products and fees to its private banking clients. Brazil’s main retail banks are responding to the threat to its premium retail clients by building digital offerings that replicate their private banking services – online platforms with open architecture – to segments below the traditional wealth management sector. And Itau’s acquisition of XP Investimentos was driven by a desire to increase its digital offering to its premium retail clients.
Flora says the bank’s focus will be on growing assets under management from the premium retail clients but says the bank may consider launching other banking services, such as credit cards, in the future. “We started as an investment platform, but clients are opening a current account [to invest in the funds] and we have no restrictions in terms of adding credit cards or bill payment services. The reason we started with the investment products is because that is what our brand is built upon.”
BTG Pactual Digital may also target lower-income retail segments in the future.
“We have nothing against big retail,” says Flora. “The only thing is that you have to be prepared for many more people. The entire retail business in Brazil is worth R$1.5 trillion and around 70 million people, so that gives you an idea of the scale – and we can reach half that total capital by targeting just three million.”