Ilan Goldfajn, president of Brazil’s central bank
Changes to Brazilian financial regulation to lower the cost of credit that were proposed by Ilan Goldfajn, president of Brazil’s central bank, are about to lead to the first tangible result.
The creation of Quod, a data-management fintech created in 2017 by Brazil’s five largest banks – Banco do Brasil, Bradesco, Caixa Econômica Federal, Itaú Unibanco and Santander – is the direct result of Goldfajn’s first notable reform upon assuming leadership of the central bank in June 2016.
Goldfajn quickly proposed changing the country’s positive credit bureau from being an ‘opt-in’ for individuals to an ‘opt-out’. Speaking to Euromoney in February 2017, he explained that the change was motivated by a desire to increase the coverage of registered individuals.
“We suggest that the opt-out is better,” he said at the time. “If you are a good debtor, you will be on the list unless there is some reason you don’t want to be, which makes the list more complete.”
The positive credit bureau was originally intended to include all individuals’ credit information as a default, with an option to opt-out. However, the large banks were rumoured to lobby to change the system to maintain the strategic advantage for those banks that had a lot of proprietary information.
The creation of Quod is an acknowledgment that the large banks will lose their competitive advantage in credit-pricing, while moving to retain economic interest in what will be the first fintech to market to provide the new detailed credit information.
Quod’s plans are due to be operational by November and will initially provide information for its shareholder banks.
Rodrigo Abreu, Quod
However, Rodrigo Abreu, chief executive officer of Quod, says the company plans to start full-scale commercial operations in early 2019, with the company initially providing a range of credit data to financial institutions, insurers, retailers, telecommunication operators and SMEs.
Abreu says the company has plans to expand rapidly its services beyond credit data and is targeting fraud-prevention services as the next broad product offering.
Goldfajn introduced the changes to the credit bureau regulation in an attempt to increase competition for the provision of credit and lower frictional costs that result in Brazil’s large ‘spread bancario’ – the very high credit spread over the country’s Selic base rate that Brazilian banks charge to their clients in the ‘free market’ credit segments.
This large credit spread is an enduring feature of Brazil’s credit markets and has been blamed by multiple studies for suppressing investment and consumption, and therefore economic growth.
Research by Santander Brasil, published in July, suggests the new opt-out credit bureau – and the provision of much richer credit data by companies such as Quod – will have a material impact on the Brazilian economy.
The report found that, in the medium term, the availability of this data would lower average interest rates charged to individuals by between 2.0 and 2.8 percentage points – roughly one-fifth of the spread bancario.
Abreu says he believes the information will enable Quod’s clients to better assess and price credit risk.
“Positive scoring means that the precision of credit analysis increases dramatically,” he says. “If you look at non-performing loan (NPL) numbers in Brazil [the latest central bank data put the system NPL at 4.3% in July 2018, down 160 basis points from the cyclical high 5.9% in May 2017], they are very high compared with the rest of the world. They are roughly double the level seen in the US.”
The Santander report, which uses central-bank data, says that delinquency costs make up 24% of the total cost of credit in Brazil. The bank expects that the improvements in credit performance derived by better data could lower defaults by 40%.
It also projects that it could lead to an 80% increase in pre-approved credit – an amount equal to 20% of GDP, although Santander notes that a more reasonable expectation would be for a 10% growth in credit-to-GDP.
Abreu also predicts the credit data will have the potential to bring in up to 25 million Brazilians into the formal banking sector from the unbanked population.
“There are a lot of people who don’t have a banking or credit relationship and at the moment there is no credit assessment because in many cases they don’t have a formal income,” he says.
“When you start working with a positive credit approach, then this brings in information such as payment of phone bills, electricity bills and rent – and this helps tremendously to price and bring people into the system.”
Abreu also cites another huge segment of potential credit customers: “Individuals who mainly have a credit history that isn’t perfect but is far from very high risk.
“Right now, these people are priced the same as those that are very high risk. So you lower rates for these people – you are able to discriminate better – and that helps to bring additional people into the system.”
He says the impact of the type of detailed credit information that Quod could provide will boost the country’s outstanding credit volume by R$1 trillion in the medium term.
Such rapid credit growth and greater inclusion of unbanked individuals would have a substantial impact on the economy, and Brazil’s banking industry would provide a rare positive example for other countries to follow.
Rick Trainor, CEO of Business Services for LexisNexis Risk Solutions – the company that Quod chose as technology provider – thinks that what is about to happen in Brazil will be a role model for other emerging markets.
“You are going to see a lot of innovation, particularly in a society that is highly mobile and web-orientated in terms of banking,” he says.
“These new platforms are going to help drive and accelerate growth. I think others around the world will look to that and say, ‘We would like to do something similar.’”