Here come the bots
November 3, 2018 |
Banks and fintech startups are racing to win a commanding
lead in technological innovation in Latin America. And 2019
could be a tipping point.
“How can I help you?” asks an animated red robot on the mobile phone as it waves both hands in the air. Prompted to select an option, each with an icon, such as a picture of a credit card, the user is quickly guided through a menu of choices. But first, the robot needs to gather some information. Does the user work or study? A leather briefcase pops up to indicate work. What does he look for in a credit card? No annual fees.
The robot avatar quickly suggests a solution: the Aeromexico airlines card, which comes with a welcome bonus and allows cardholders to accumulate points. The user touches the words “apply for it now” and is connected immediately to a bank privacy notice to complete the application. The whole interaction takes less than 15 seconds.
In an era where young consumers want what they want — when they want it — without having to speak with a human, the robotic sales person is a perfect solution. It also makes financial sense. Thousands of users interact with bots like this every month at a cost of one Mexican peso (5 U.S. cents) per interaction versus as much as 25 pesos per interactions with humans at call centers.
“Technology will obviously resolve more complex issues in five years,” says Eduardo Farina, chief executive of BlueMessaging, the company that built the bot for Santander. “It’s very difficult to impede the advance of technology — what’s important is how we prepare for this.”
That preparation is increasingly apparent as financial services companies across Latin America accelerate their plans to adopt technological innovation. And 2019 could be the tipping point.
Banks—nudged by nimble and deep-pocketed startups—are integrating more data sharing, open Application Programming Interfaces (APIs), biometrics and artificial intelligence. Meanwhile, countries like Brazil and Mexico are swiftly embracing fintech alternatives. The average use of fintech services across emerging markets, including the two Latin American giants, is 46% versus a global average of 33%, according to EY’s FinTech Adoption Index 2017.
They all share a common goal: to grab a share of the region’s vast underbanked population. High on the list of targets are techsavvy “digital natives” in the 25- to 34-year-old age bracket who are quite at home navigating an iPhone but have yet to develop strong relationships with any financial services provider. Brand loyalty across Latin America —historically wracked by bouts of financial crisis, severe mistrust of banks and high hurdles for credit— is thin regardless of age bracket. “Fintech firms excel at tapping into the techliterate, but financially underserved population, of which there are particularly high ratios in emerging countries,” explained consultant EY in its 2017 study of fintech use in 20 markets.
The rapid digital migration poses a challenge to brickand- mortar banks who must decide how to streamline their institutions and whether to partner or acquire digital firms that can make them more efficient, as Spanish banking giant BBVA did when it bought Mexican online payments startup Openpay in 2016.
The digital wave has also shined a harsh spotlight on expenses associated with extensive branch networks and large staffs, which raise the cost of financial services. Basically, the Amazon effect has come to banks.
Prepare for disruption
“The banks have already felt the threat of fintechs, as agile startups that better understood the needs of clients,” says Luis Loleo, Financial Services Sector Leader for Latin America at IBM, which works with numerous banks in the region. The banks’ best option, according to Loleo, is look for ways to transform from the inside while also considering the incorporation of services provided by agile and efficient third parties rather than trying to generate them internally.
Traditional banks are opening fewer physical branches and even closing branches in response to the rapid digital transformation. In Brazil, banks this year are expected to close more than 2,000 of the 20,000-plus branches spread across the country after having shuttered more than 1,000 in 2017.
Technology evangelists say it’s a matter of time before branch closures and layoffs come to Mexico. Mexico had 12,736 bank branches as of August to serve a population of 129 million. That’s potentially one branch for every 10,000 customers, indicating a big pool of possible customers. Half of Mexicans still don’t have access to bank products.
With digital interactions expected to accelerate financial inclusion across Latin America, banks are racing to realign their traditional business models. Banco Votorantim, for one, has expanded its technology budget to the equivalent of 7% of its revenue, according to Marcelo Clara, information technology director at Brazil’s ninthlargest bank by assets.
A priority has been to efficiently handle the flood of customer calls it receives. Votorantim has outsourced customer service to third party call centers that juggle 170,000 inquiries a day. It’s looking for ways to better manage that volume by deploying a Microsoft platform, named Verint, to convert voice to data to highlight customer problems that deserve greater attention, or identify opportunities to sell. The algorithm is steadily improving at isolating key words and then crunching the data.
The bank also implemented a big data program with IBM in June to analyze opportunities for products and reduce risk. And it’s in the middle of a pilot program to deploy chat bots that can guide customers through credit requirements. “Once we move forward to more digitalization, the people that were doing more manual functions will be redirected to attend the customer,” Clara says. “The customer is the most important asset that you have. You can’t let this asset be managed by third parties. It needs to be part of your strategy.”
The opportunity in Brazil is sizable, with 209 million consumers in a $2-trillioneconomy, roughly double the Mexican market. What’s more, as in many parts of the world, widespread adoption of smartphones and apps, combined with broad satisfaction with online retail, have inspired consumers to demand the same experience in finance. “People don’t want to visit the branches anymore. The millennial prefers to visit a dentist rather than a branch,” says Marcelo Flora, head of digital banking at BTG Pactual, Brazil’s sixth-largest bank.
The decision by banks to close branches and let go of managers who have cultivated deep client relationships has driven alienated customers closer to online platforms, which are offering a wider menu of products. Consider BTG Pactual, which has no physical branches. It offers Brazilians mutual funds with significantly lower fees than those available through Banco do Brasil or Itaú. And with the benchmark Selic rate at an all-time low of 6.5%, individual investors have an incentive to hunt down better returns. Historically interest rates in Brazil have been above 20%.
BTG offers a conservative fixed-income fund with a 20-year track record that charges a 30 basis-point fee, and a few months ago it launched a fund with a 10-basis-point annual fee. Brazil’s bigger banks, which dominate the 1.7-trillion-real ($458 billion) retail market, charge as much as 175 basis points a year for investment funds.
Surprisingly, most of the money funneled onto BTG’s online platforms comes from investors between the ages of 45 and 60, the same demographic that makes up the core of big bank customers. The most active account openers are between the ages of 35 and 45. “We see engineers, doctors, lawyers — we see everything,” says BTG’s Flora. “While the big retail banks are thinking now about what branches they have to close, we already know how to be a bank with no branches.”
BTG Pactual expects to capture 250 billion reais from retail investors in Brazil within the next five years, giving it well over 10% of the retail investment market. In the more sophisticated wealth management business, BTG has 110 billion reais in assets, or a 10% market share.
Regulation catches up
Just as banks are adjusting to the new tech realities, so are regulators. Mexico this year approved regulation for financial technology that is seen as a benchmark for other countries in Latin America. The Mexican fintech law gives more clarity to start-ups that were previously operating in a “gray space,” says Andrés Fontao, cofounder and managing partner of Finnovista, a startup accelerator.
First and foremost, bank regulator CNBV must authorize an entity to operate as a fintech. Fintechs themselves can then interact with other financial entities in a number of activities, such as exchanging information or opening accounts.
Argentina, Brazil, Chile and Colombia are all working toward new fintech regulation as well. Regulators want more inclusion, less market concentration and greater competition in financial services. At the same time, they must protect consumers from fraud and prevent entities from being used for illegal operations such as money laundering.
Countries such as the UK have regulatory sandboxes that give them tools to test the next big thing. Latin American countries can adopt regulations that allow financial services players to do the same, essentially testing new technology under a controlled environment with a limited number of people.
Ana Laura Villanueva, deputy minister for banks at Mexico’s Finance Ministry, likens the ideal regulatory mindset for fintech to how the pharmaceutical industry conducts drug trials before a drug is sold to the general market. Financial institutions can experiment with new tools via pilot programs, then propose necessary regulatory changes to make those projects scalable.
“What we are seeing right now around the world, as impressive as it is, is just the beginning of the interruption that new technologies will bring to the financial services industry,” warns Villanueva.
Fintech is hot
There were 334 fintech startups operating in Mexico as of September and 377 in Brazil as of June, according to Finnovista, which runs boot camps to nurture entrepreneurship in Mexico with support from financial services institutions such as HSBC, BanRegio and Visa.
In Brazil, a hot bed of activity, there were 45 fintech deals worth $497 million in the 18 months through June, according to the Latin American Private Equity & Venture Capital Association. Several fintechs in Brazil are so-called unicorns, companies with valuations above $1 billion. Brazilian payments company PagSeguro raised $2.7 billion via an initial public offering on the New York Stock Exchange in January. And fintech darling Nubank raised over $400 million this year and now has a valuation of more than $2 billion.
“Fintechs leverage much better technology. They are capturing some of the best human talent in the marketplace, and they have offerings that are well-suited for the target demographics that we have in Latin America,” says Luis Cervantes, a principal at private equity firm General Atlantic, which has stakes in Mexican consumer payments startup Clip and broker-dealer XP Investimentos, which has redefined wealth management in Brazil.
The technology revolution will require banks to repurpose, or reduce, their human capital. In August, BBVA Bancomer started employing artificial intelligence to interact with customers through a virtual assistant via WhatsApp. A month later, the largest bank in Mexico, said it will lay off 1,000 employees, reducing its workforce by 2.6% after years of expansion. The bank aims to reach 6.5 million digital clients in Mexico this year. It’s investing $300 million to strengthen platforms, redesign applications and develop new products and services.
Meanwhile, Citibanamex, Mexico’s third-largest bank, announced in October that it will let go of 2,000 employees, or 5.5% of its workforce, as it assembles a $1.3-billion-budget to drive technological transformation.
Several countries in Latin America —such as Colombia and Mexico— remain heavily dependent on cash, which could support branch and ATM networks for years to come. But that won’t stop the tech transformation. “There is a clear trend in self-service. Technology is not an end, but a means,” says Jorge Zenteno, executive director of the digital factory at Santander Mexico. This year, Santander Mexico opened 100,000 digital accounts.
Santander is determined to use technology to increase selfservice options and payment methods, as well as to improve client experience and sales. The bank has been using bots since 2017 to communicate with customers in Mexico 24/7, something a branch network can’t do. And the bank has several pilot programs underway with startups.
Zenteno doesn’t see the competition between banks and startups as a zero-sum game. “The fintechs have a competitive advantage in terms of their agility and focus on solving a specific client need,” he says. At the same time, he notes, the legacy banks appear keen to modernize and remain relevant. “I think the pie will grow. The banks will take some, but without a doubt new entrants will take some. We will compete in certain aspects and we can cooperate in others.”