If Bradesco’s purely digital bank, Next, is technically a hybrid operation – it relies on the ‘chassis’ of Bradesco’s existing financial products and many shared services – in spirit it is a standalone start-up.
It’s not just that Next looks very different (the brand’s use of green and black doesn’t echo the well-known red of Bradesco’s institutional brand) but it isn’t being integrated strategically within the rest of the bank’s operations.
Next is set up to compete against Brazil’s banking market – including Bradesco. And while cannibalization of Bradesco’s existing customers hasn’t been a dominant feature of Next’s rapid customer growth – it’s clear it wouldn’t be a problem if it were.
Mauricio Minas, member of Bradesco’s board
“It doesn’t matter – it’s better to win,” replies Mauricio Minas, member of Bradesco’s board responsible for the bank’s digital operations, to a question about whether the anticipated move to make Next more independent would make it more of a competitor to the main bank. “We’re in a race and we want to race more than one horse.”
Minas and Jeferson Honorato, director of Next, welcome Euromoney to Bradesco’s large headquarters on the outskirts of São Paulo. The bank was recently given the magazine’s award for Latin America’s best digital bank largely in recognition of the rapid growth it has been enjoying. The bank now has more than 1.1 million customers, with around 8,000 account openings daily – and that number is accelerating.
Most of those new accounts have not come from within Bradesco. Next says around 80% of new customers are completely new to Bradesco; and while the bank had expected to generate business from the country’s unbanked population, it has been surprised by the high levels of accounts being opened by people who had, or still have, accounts at other banks. The bank is now trying to convert these into primary accounts.
Honorato says that the roughly one fifth of Next customers who have come from the traditional Bradesco bank can’t be thought of in terms of pure cannibalization.
“Many of these customers would have left to other pure online digital banks had we not developed Next, so I think there would have been attrition to this segment [from the main bank] even if there were no Next,” he says.
Running its own race
The reason Bradesco is, as Minas puts it, “agnostic on the competition” is that Next is running its own race. It isn’t looking to compete with existing banks, it’s looking to where it believes the market is going and trying to get there first.
It is a competition that isn’t strong yet, though Minas and Honorato have a very keen sense of what the future marketplace for banking services will become.
Bradesco opted for the hybrid model to enable Next to take advantage of key Bradesco strengths (in, for example, products and credit and risk controls)while also starting from scratch in designing the user experience.
Early work saw the bank consult a wide range of specialists – including anthropologists – to define evolving human behaviour in digital activity.
The idea was to provide support for customer journeys rather than a sales platform for products. Many traditional banking products feature on the Next platform, but have been rebranded or hide behind broader concepts such as “objectives”, which bring together loans and savings products to deliver a user’s aims, rather than on a standalone basis.
The conclusion – and the basis of Next – is that the current proliferation of app-based services will reverse. The future of digital business will be for fewer, more universal providers of digital services.
As a provider of financial services, Next feels it is well set to position itself as a broader marketplace. One of the key features of Next is its offering of Mimos (roughly translated as treats), where the bank presents a wide range of products and services, from car services to restaurants and retail.
Access to these products and services, which third parties provide in return for flow, is retained within the app and there are discounts to incentivize users to remain in the Next ecosystem.
“It’s a seamless experience, as well providing economic benefits,” says Minas. “It also helps us with the concept of becoming a big super-app, because we have to be as holistic as possible because in the future the winners will be those platforms that provide complete solutions for customers.
“It’s not just about financial [services] but transport, food – the concept here is to create ecosystems that provide customers with the experiences that solve their problems.”
Traditional banking metrics aren’t valid for this company- Mauricio Minas
The aim is to be the ‘home screen’ – or one of a shrinking number of key apps on a smartphone. It is a vision of the market that is increasingly credible.
Once, the internet seemed to offer a future of plurality, transparency and efficiency; early winners were independent broking websites that provided detailed research on best-cost products. Now it’s increasingly plausible that fewer large platforms will dominate.
And if banks (or whoever ends up providing these ecosystems) can offer multiple savings through direct access of a third party, then the price sensitivity around the core financial products lessens. Also, for more sophisticated customers, the ecosystems will be open architecture, which will enable access to other types of financial services providers.
The behavioural aspects of this are fascinating. One private wealth banker tells Euromoney that his bank decided to open its platform to third-party providers and there was very little migration from clients.
“It was as if just being open to offer other products was enough for clients to feel satisfied that they weren’t being monopolized,” the banker says. “We retain the clients, we pretty much retained our direct revenues and the clients are happier as they see that they have greater flexibility, even if they then chose not to act on that flexibility.”
Next is clearly in its infancy, but early results look positive. Despite its growth strategy, its risk metrics are good. According to Minas, its non-performing loans are slightly better than when compared with a “similar harvest” within the main bank, and the volatility of performance score is better. Net interest margins are comparable, while lower fee generation is offset by a much-reduced cost base.
Minas says some metrics that banks in Latin America have been focusing on in recent years, such as products-per-customer, just aren’t relevant.
“Traditional banking metrics aren’t valid for this company,” he says. “The only metrics that count are around our ability to grow customers and our ability to retain them – the churn has to be very low.”
Jeferson Honorato, director of Next
Profitability, too, isn’t relevant yet. Minas says the date of profitability will depend on the growth rate. The good news here is that the customer acquisition ratio (that is, the cost of acquiring a customer and the value of that customer over the lifetime of the account) is improving quarter-on-quarter, to the point that Minas says it suggests: “There is a good possibility that Next is going to be one of the winners in this new economy – that’s what we are betting on.”
As well as an improving customer acquisition ratio, customer acquisition costs are lower than traditional banking.
“It is much, much lower. It’s about 1/10th of the cost for the traditional bank,” says Minas.
He says the bank only targets new customers online, apart from a few physical campaigns in areas concentrated with ‘hyper-connected’ individuals, such as universities.
However, running a loss-making, rapidly growing business inside the traditional bank may create some issues. Despite the potential, the operation ultimately jeopardizes Bradesco’s overall results.
“That’s one of the reasons we want to decouple,” says Minas.
The bank has been very open in the local press about its aims to move Next outside the existing organizational structure in the near future – maybe as soon as the end of the year.
Minas, and other senior management when commenting on this objective, appear to keep their strategic options open. It could be an IPO to realize the full tech-driven multiples for the parent group or it could be through a joint venture merger of equity.
This isn’t a unique challenge for Next and Bradesco by any means. A key part of BTG Pactual’s recent follow-on transaction was the Brazilian bank’s attempt to get a valuation ‘re-rating’ on the back of its fast-growing digital asset management for retail clients.
That got a partially successful result, but at a greater scale (and throw in the attempts to get similarly strong growth rates from Banco Pan), then BTG Pactual may need to spin off its digital businesses to obtain the valuation multiples they could realize as standalone operations.
Listening carefully to Minas it seems that a joint venture is by far the most likely outcome. Although he acknowledges the valuation advantages for Bradesco of listing Next, the main priority is growing the business and helping Next scale up sustainably. The logic is that the boost that a large tech partner could bring to the start-up bank would be more important from an operational perspective than the value from an IPO.
“It’s not a done deal yet, but there are strengths that a partner should bring,” says Minas. “One is governance; the understanding of the digital world. The second is the platform itself. The third is the customer base. And the fourth is capital – the ability to invest as [Next] will consume cash for years while we go for hyper-growth.”
Many of these customers would have left to other pure online digital banks had we not developed Next- Jeferson Honorato
An IPO would bring capital but not so much of the first three items on that list.
Does the partner need to be Brazilian?
“No,” says Minas. “And these strengths are present in every successful digital model. They have large customer bases – an abundance of capital and know-how in the business for governance and attracting talents. Bradesco has, if not all, then most of these elements. We are very strong and so it makes sense to partner with the best in the world.”
Also, taking Next outside the traditional bank will bring operational advantages. The first is regulatory.
Currently, Next is part of Bradesco and therefore the Brazilian central bank applies its strict regulatory regime to the bank. Minas says that Next is competing with fintechs that enjoy a much lighter regulatory burden, both in terms of compliance and regulatory capital requirements, which for now presents it with a competitive disadvantage – although he acknowledges the lower cost of capital available as part of Bradesco acts as a counterweight to that.
Honorato also points out that becoming more fully independent could help with recruitment and culture. Next has its own independent culture and ethos already, but sustaining this inside a traditional bank is a tougher proposition than if it were to become fully its own entity.
It is clear that there is a sense of urgency about Next in its aim to change its ownership structure and to build on the current pace of growth.
There are a several reasons for that – particularly the momentum and the speed of change in the digital marketplace – though perhaps the biggest driver is the proposed adoption of open banking in Brazil.
If open banking comes in the form and within the timetable that is expected, then digital banking is likely to be given an injection of growth hormones.
“We’re going to play offence mode with open banking,” says Minas. “It is going to change the whole way we behave.
“We are not seeing [open banking] as something that the regulators are asking us to do. There are huge opportunities for us to develop new business here. And the rationale behind open banking is data – the way you monetize data. We want Bradesco to become the marketplace of financial services in Brazil. We want everything to come through us, whatever the financial product, whether it’s Bradesco branded or third-party distribution. We are going to play both ways.”
Open banking will add to the richness of financial services data.
“Banks, as a matter of fact, have the richest data of all industries,” says Minas. “Unfortunately, we as an industry have been incompetent in using this data proactively, but that is something that has started to happen recently.”
He says Bradesco has spent $1.5 billion in the past 10 years to boost its IT operations and, with 72 million customers in Brazil, is still at an early stage of optimizing data-driven growth – although he says he feels the bank is “sophisticated” when compared with its peers.
Listen, we are going to be competing against ourselves, but that’s part of life- Mauricio Minas
While in theory open banking will level the playing field for data capture, which has traditionally been controlled by the dominant banks, the need for security and the costs of that security in an open banking environment could maintain certain barriers to entry.
“Security becomes more and more important,” says Minas, “and there is a need for experience.”
He also anticipates that the large tech companies will enter the market, so a tie-up with an established world-class tech company would have a defensive component.
Minas agrees that tech companies won’t want to get into the provision of financial services themselves – with the regulatory costs and the potential for lower pricing multiples – but he says where they will meet banks is in the provision of broad marketplaces.
“They are not willing to become a bank,” he says. “They are not going to load their balance sheets with loans for instance.”
But he believes they can and will seek to position their platforms as intermediaries by adding financial services to their portfolio for customers.
“This will be driven by one simple reason: the big techs base their whole strategy on acquiring new clients and retaining those clients over time,” says Minas.
Retaining clients will necessitate providing the fullest possible range of services that customers will want in their hubs.
“They will add financial services,” says Minas, “not because they are going to make a lot of money on that, but because it’s critical, it’s vital for their clients on a day-to-day basis.”
That’s the competition that Next is anticipating: tech company platforms moving into financial services for the same reason Next is offering car services: the move to retaining customers in broad ecosystems will require breadth not depth.
Those who win the race to create the dominant ecosystems will enjoy reinforcing dynamics from data domination and market concentration.
The move to this new world may bypass the traditional market.
At some point, “we will be competing for the guy who’s at the branches in Bradesco,” says Minas. “Listen, we are going to be competing against ourselves, but that’s part of life.”
The more interesting question is, in five to 10 years, not will Next be competing with its traditional parent bank, but will it be competing with new Brazilian fintechs? Or Itaú or Santander’s digital operations? Or all of the above?
Or will it perhaps be in a joint venture with a big tech firm such as Amazon? And how many genuine winners of this new banking marketplace can emerge?
The answer to that – and Next’s chances of emerging in the top tier – could well be formulated in the coming months.