OK, that might still be an exaggeration, just as we begin the decade. But the signs are clearly pointing to an end to Brazil’s famously high-cost banking system, and sooner rather than later.
At the end of 2019, the Central Bank of Brazil made headlines when it announced a ceiling on the 'cheque especial' product – or overdrafts, in English. Financial institutions will no longer be able to charge more than 8% a month (for clients with negative balances above R$500).
This is the first time that the regulator in Brazil has announced any cap on interest rates.
However, despite this unprecedented move by the central bank, it still leaves room for a significant margin given that the country’s base rate was 4.5% at the end of 2018.
And for those of you assuming that, by adopting so high an interest rate ceiling, this rule is targeted at the industry outliers – the payday loan companies living on the parasitic fringes of Brazilian’s population that, through no or bad credit history were forced to pay such exorbitant rates – well, you’d be wrong.
Brazil’s daily financial newspaper Valor included in its news story on the new ceiling a handy update of the banks' current charges: Itau’s monthly interest charge was 12.43%, Bradesco’s was 12.63% and Santander’s was 14.82%. Even the state bank Banco do Brasil charged 12.11% and Caixa Economica was above the new ceiling at 8%.
The introduction of the interest rate ceiling was also accompanied with new rules to encourage the portability of outstanding debts to other, lower-cost credit. It is a sign of the growing frustration at the banks’ reluctance to pass along the structurally lower interest rates in the financial system to consumers.
And while cheque especial is a small part of the banks’ business – at about 1% of all banks’ loan portfolios – it creates about 10% of the system’s net interest margin. As such this change isn’t just cosmetic; it will have an earnings impact.
Financial institutions analyst at investment bank Bradesco BBI, Victor Schabbel, says in a report that the “unprecedented move” might imply a reduction of between 30% and 44% in bank earnings from overdraft loans and a reduction of between 1% and 5% on 2020 earnings.
But beyond the financial impact on the banks it is another piece of evidence that the government and the central bank is growing impatient at the lag between the falling Selic and rates charged to consumers. Says Schabbel: “The message behind [the cap] is equally or more important, as it signals that the central bank is really pushing a tough agenda for the leading banks.”
The central bank reinforced the perception of coordinated pressure being applied to the banking system by announcing, the next day, a public consultation period (ending 31 January) for its proposal for bringing open banking to the country. The central bank intends to require the incumbent banks to provide customers' data (upon request) to competitors – including fintechs.
Perhaps more insidiously, digital technology is also changing the very nature of the game
It also shows the contrast between the different ends of the credit spectrum. Because at the same time that banks are having to be regulated away from charging sky-high interest rates to individuals with low credit quality, the market is having an even bigger impact on interest rates and fees charged to other segments of consumer banking.
The changing interest rate environment is unleashing unprecedented competitive forces in the affluent and super affluent segments. For example, all banks have now reduced to zero the charges for clients investing in Tesouro Direto (state-issued bonds for individuals).
Many are going further and are eliminating fees on stock exchange products – and are even reimbursing the stock exchange fees. The pressure is also on management fees of proprietorial funds. For example, Itau recently cut the management fee on its largest real estate fund and the banks seem to be caught in a cycle of proactive and reactive cuts to fees and rates.
Digitization is also hugely complicating the dynamics in the Brazilian banking system: on one side it is creating efficiencies and low-cost models – especially among the fintechs that are unencumbered by physical and legacy costs – that the incumbents are having to at least respond to, if not match.
But, perhaps more insidiously, digital technology is also changing the very nature of the game. They’re playing a game that is scored by growth in users and revenues. Profitability – that quaint scoring system of old-fashioned brick-and-mortar banks – is secondary (at best). Much better to build scale, build open platforms with a focus on owning “the last mile” (in tech talk) and worry about profitability after they have emerged as one of the dominant financial hubs.
This leaves the incumbents in a quandary, trapped between their long-standing instinct not to cut beyond positive margins and these new feelings of fear that by not acting they will be the losers in a one-time, mad dash to create Brazil’s platforms of the future.
Taken together, it seems customers of Brazilian banks at both ends of the credit risk spectrum will be paying lower rates and fees in the coming year – maybe even enough to give upside momentum for this year’s GDP forecasts.
It’s all just so unprecedented.