Brazil’s central bank aims to stimulate competition through open banking

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By:
Rob Dwyer
Published on:

New regulation would see top-12 banks adopt open banking second half of next year; central bank hopes better risk management will lower cost of credit, spur growth.

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The push to lower interest rates, begun under previous central bank president Ilan Goldfajn (left), is to continue under new president Roberto Campos Neto


The Brazilian central bank is making good on its push to increase competition in the country’s financial sector by publishing a directive on the governance of its open-banking initiative.

According to the document, released on April 24, the country’s 12 largest banks – which together account for 86% of the system’s loans and assets – will have to open their customers’ transactional account information to external parties, including new entrants such as fintechs.

The central bank expects these banks to begin open banking in the second half of next year.

The data will include product and service offerings, as well as information related to deposits, funds, loans and payment services.

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Ceres Lisboa,
Moody’s

According to Ceres Lisboa, senior vice-president in Moody’s financial institutions group in São Paulo, the new regulations will enable fintechs to develop applications based on banks’ application programme interfaces, increasing transparency and efficiency in Brazil’s financial system.

“As banks shift to an open-banking platform over the next two to three years, and consumers become aware of their options and embrace a more modular approach to banking services, competition will increase, particularly around lending spreads and banking services prices and fees,” she says.

The move shows that the push to lower interest rates in the country, begun under previous central bank president Ilan Goldfajn, is to continue under new president Roberto Campos Neto.

It is the latest in a series of measures taken by the bank to attack the country’s ‘spread bancário’, following reforms to the BNDES lending rate, the introduction of a positive credit bureau, a lighter regulatory environment for Brazilian fintechs, and a host of other micro-reforms governing specific products, such as credit card interest rates.

These reforms have been welcome, but haven’t, to date, been very effective: although Brazil’s policy interest rate (Selic) declined in 2017 and stabilized at 6.5% during the past 12 months, lending spreads remain very high, at close to three-times Selic and well above global averages.

The central bank has articulated its aim to the industry.

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Paulo Souza,
Brazil central bank

In April, it released a report in which Paulo Souza, deputy governor for supervision, said that while “nominal profits will increase, there is little space for the growth [in NIMs] to continue”.

The report used system-wide statistics: return on equity hit 14.8% in 2018 – the highest return since 2011’s 16.5% – and the inference is that the 20%-plus returns enjoyed by the most profitable banks should be seen as a cyclical peak.

The central bank also hopes that open banking will lower the cost of credit by reducing delinquency rates by providing lenders more detailed financial information about individuals and companies.

The related point is recovery rates, with banks recouping just 13 cents on delinquent dollars, compared with much higher rates elsewhere, and the current administration aims to introduce new insolvency laws to improve banks’ performance in this area, and thereby further reduce credit costs.

The central bank also hopes that reducing the cost of credit will lead to a growth in the loan portfolio and beyond – the country’s credit-to-GDP ratio has been steady at 47% since mid-2017.

Claudio Gallina, senior director and head of South American and Caribbean financial institutions at Fitch Ratings in São Paulo, believes the first impact of the regulations will be to increase IT costs.

He also wants to see more details about how the regulation will be implemented in practice: who will be responsible for collations and security, and how often data will be updated.

However, Gallina believes it should spur competition in the Brazilian financial sector – not just from fintechs but also from smaller banks looking to grow in certain credit sectors.

He also expects that the central bank will further spur the fintech sector by allowing them to issue debt to fund themselves in direct competition with the banks.

Payroll loans

While Gallina believes that Brazil’s move to open banking – which will be a landmark for the region – will help those seeking to compete with the large incumbent banks, he is keen to stress that those banks will remain dominant in the short- to medium-term.

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Claudio Gallina,
Fitch Ratings

“The big banks will remain very big and have shown in the past that they can respond to new models by adapting or acquiring the competition,” he says, providing the example of payroll loans.

He says that when the central bank created the possibility for the ‘consignado’ product, little more than a decade ago, there were forecasts it would lead the banks to respond by cannibalizing the revenues it was generating from higher-margin business: overdrafts, credit cards and unsecured loans.

Instead, payroll lending simply became another area of business – and a very profitable one.

And the big banks that didn’t build their own payroll loans portfolios could simply buy start-up operations: Santander bought Banco Bonsucesso (now BS2) and Itaú bought BMG’s payroll loans business.

More recently, Itaú responded to the development of digital competition from XP Investimentos by acquiring a stake in the company; it had been managing its IPO.

Even here, though, the central bank is acting by refusing to let the bank progress to a majority stake – as envisaged in the original deal – and by telling the bank it cannot make any more notable purchases in its domestic market.

The main difference this time around, for Gallina at Fitch, will be the speed of change.

“We don’t know how fast these changes will come – these days when it comes to technology, things happen very fast,” he says.