Digital banks and the evolution of banking in Latin America

Published on Apr 01 2022.

18 minutes reading

It’s hard to miss: digital banks are on the rise across Latin America, and attracting increasing numbers of users. It’s a development that was clearly accelerated by the Covid-19 pandemic, but that’s not the only or even the most important factor behind the rise of this new form of banking.

Currently, there are more than 400 digital banks (or neobanks) around the world and, in addition to this number growing every day, they are also becoming bigger and more robust. This evolution is quite evident above all in Latin America, where many fintech that have stood out in recent years.

Across the region, the development and innovation in financial services were spurred by changes in user needs, advancement and democratization of technology, and flexibilization of regulations.

Thanks to the evolution of digital banking, today, these institutions have helped to reduce bureaucracy in the market, encourage Financial inclusion, improve consumer experience and accelerate digital transformation in these countries.

4 factors that confirm the consolidation of digital banks in Latin America

Since neobanks began to emerge a few years ago, evidently a lot has changed in the financial environment and also in society. Over time, these entities gained space, winning over consumers and bringing relevant innovations to the way of doing business. banking.

And these are the 4 factors that help prove the success of digital banks in the world:

1. Growing user numbers

The significant increase in users demonstrates the breadth of evolution of digital banking in recent years. according to a research carried out in 2021 by the Locomotive Institute, 42% of Brazilians have accounts in neobanks, a number very close to the people who use the services of traditional banks (49%).

Among the younger age group of the population, this percentage increases: among people aged between 18 and 29, 51% have a digital bank account. This is a trend that is also confirmed in the rest of Latin America, where 43% of the adult population is under 35 years old, which is, according to a BPC study, a major catalyst for innovation in the region.

Added to this, it is worth noting that, in addition to increasing numbers, consumers, whether individuals or companies, are also more demanding. Today, users are looking for experiences on digital banking platforms similar to those they have with other types of applications.

2. Expanded service portfolio

At a time of increasingly fierce competition, there’s a movement that could greatly enhance the sector and its users: an expanded offer of services by the players keen to grow their market share in a bid to further monetize their ever-growing customer bases.

So many players are adding new products and services – not just financial ones – in order to make their platforms more and more complete. In this sense, in addition to investing in state-of-the-art digital payment solutions, some digital banks are also expanding their business and offering, for example, investment and insurance services.

3. Growth of digital bank players

The number of digital banks in Latin America almost doubled from 2017 to 2021, according to the same BPC study that we already mentioned. Today, the region is home to more than 50 independent neobanks, with the top ten representing more than 90% of all Latin American customers.

The success of these institutions, which have been receiving high fintech investments, not only alerted the entire market, which had to rethink the way it offers financial services, but also demonstrates the region's enormous potential. Therefore, although some stand out, many new players also manage to capture a good share of the ecosystem.

Just to cite a Brazilian case of growth, according to a report by Valor Econômico, C6 Bank went from 1 million in 2019 to 10 million in 2021.

4. Market expansion

Another characteristic that has marked the evolution of digital banks in the world is that it is not just the “pure” neobanks that are operating in this area. Other players are increasingly present, making this ecosystem more and more multiple.

Among them are Retailers and marketplaces that advance in financial services through the phenomenon of embedded finance, in addition to traditional institutions that are creating digital banking platforms to respond to new market demands.

Understand better the impact of digital banks for the population in this article from TV Brasil:

What’s behind the growth of digital banks

Alongside the upsurge in demand for digital financial services during the pandemic lockdowns, there are other factors directly involved in the growth of the digital bank market and the size it has already reached:

Niche fintech companies

One of the trends that have been driving the growth of digital banks is the performance focused on niches. The consolidation of the model of niche fintechs makes perfect sense, especially in a context like Latin America, in which a large part of the population faces challenges in accessing bank branches or even their services, as they have very high fees.

The advancement of digital banks has minimized some of these challenges and niche fintechs are overcoming some barriers inherent to certain user profiles. These institutions work with specific market segments and reach audiences that, until then, had not been given this closer look by traditional banks, for example.

Digital banks in the business segment

Something that has driven the evolution of digital banks is the fact that neobanks and fintech companies conceived as service providers for individuals have started expanding their business model to target the corporate sector.

Small and medium-sized companies are in the sights of these players, which try to attract attention by offering different solutions: from banking transactions and credit for working capital to prepayment of receivables.

Enlarging the focus of digital banks for PJ, mainly for this type of business, makes perfect sense in the Brazilian scenario. According toMap of Companies for the 2nd quarter of 2021, the country has more than 18,4 million active CNPJs, of which 57,4% are Individual Microentrepreneurs. In addition, the MEI represents 77,7% of the deals opened in the period in question.

Instant payments and Open Banking

In Brazil, we cannot fail to mention that the adoption of the Pix, the Central Bank's instant payment system, also boosted the option for digital banks for payments and receivables by part of the population, as well as the beginning of the implementation of the Open Banking.

The movement of money to digital channels has clearly encouraged more individuals and businesses to open digital accounts and therefore to look for institutions that offer mostly digital solutions – neobanks and fintech companies.

Partners

To provide tailored offers or develop technological solutions, digital banks do not need to develop everything in-house. The possibility of finding partners to grow was also one of the factors that contributed to the advancement of digital banking.

Those partnership ecosystems. They are quite diversified and range from, as we have already mentioned, association with companies from other sectors – such as insurance companies –, to collaboration with streaming platforms and marketplace offerings, among other types.

Digital banks: how to get started in this market?

If digital banks do not need to develop everything in-house, and if even players from other sectors can offer financial solutions, then what is the way to go? create its own digital bank?

Well, here are some key steps in this process:

Understand how your business will operate

When thinking about how to create a digital bank, it is necessary to define what services will be offered to users. It is worth mentioning that, in a market in which there are already well-established players, it is necessary to go beyond the obvious – that is, to develop solutions that are truly innovative or to serve an audience that has not yet reached its full potential by the companies that already exist.

To illustrate this scenario, we can mention C6, a digital bank built from scratch, with a strong aspirational appeal and that seeks to attract audiences of different profiles, from young people who do not want to pay for financial services to account holders with more resources.

Fintech Bitz, on the other hand, was created by a traditional financial group (Bradesco), which operates in the customization of financial services and delivers a more specific product for a specific niche: the unbanked.

Among the industries that advance in financial services, we can mention Natura – which created a fintech focused on services and financial management for consultants and representatives.

And, in retail, a good example is Bemol – the largest retailer in the North of the country that created its digital account without diverting its focus from its main business model.

Find the perfect provider Banking as a Service (BaaS)

The Banking as a Service allows any company offer financial services quickly and affordably without having to become a financial institution. This is possible thanks to open source APIs. Thus, finding the ideal BaaS provider is one of the essential steps of creating a digital bank.

A Dock, for example, by solving Banking, takes care of the company's entire treasury, including opening accounts, processing and monitoring transactions, from authorization to settlement, valuing the quality and security of operations.

Have knowledge on regulatory issues

It is necessary to have knowledge on requirements from regulatory agencies and understand if the BaaS provider is able to ensure accountability and the equipment required to comply with regulations.

In short, through the adoption of Banking as a Service (BaaS), digital banks can establish themselves by creating a fintech from scratch or incorporating financial services into their business model.

Trends for digital banking in Latin America

As the arrival of digital banks in the market is accelerated, and the adoption of innovations and technologies happens more quickly, it is natural for neobanks topostin differentials to stand out.

Here are some trends that promise to guide the financial ecosystem in this scenario:

credit offer

Consumers are increasingly guided by their values, and financial services need to transform to serve them. An essential pillar for this evolution is the provision of responsible credit that contributes to a new stage of financial inclusion.

Understand better in this video of the CEO's speech Dock, Antonio Soares, in FEBRABAN Tech 2022:

5G

The fifth generation of the mobile internet is one of the investment focuses of financial institutions, as well as the cloud and artificial intelligence. These technologies are fundamental to the implementation of Open Finance, for example.

DeFi

while the cryptocurrencies were created to allow the free transfer and safekeeping of digital assets, DeFi – Decentralized Finance – intends to do the same with financial services.

ESG

Research world retail Banking Report 2021 highlighted that, on average, 65% of customers want their banks to reduce their carbon footprint by following paperless processes, consuming renewable energy and offering biodegradable cards.

Do you want to know how to apply actions focused on ESG in the payments market and banking? Know the ESG initiatives from Dock

Financial education

One of the main ways to make the financial system more inclusive is the financial education content, which ranges from traditional actions such as courses and training, to more sophisticated methods, now possible with Open Finance, such as credit counseling and offering personalized content.

Technology as a key to competing in the digital bank market

While technology is what enabled the creation of neobanks in the first place, technological progress is undoubtedly one of the factors that has contributed most to their evolution.

Innovation is key in this scenario, not only to mitigate barriers to the entry of new players, but also to enhance the user experience. The fact is that the ability to compete successfully on this market depends on having advanced technology and staying ahead of the game.

And how to scale these operations? A Dock is a pioneer in Banking as a Service in Brazil and has a complete banking solution. Through open APIs, any company can have its own digital bank with its brand and, thus, be part of this ecosystem that is in full swing.

With the solution of Banking da Dock, you can quickly and securely offer users a complete digital account experience, including:

Bill payment;
Instant Payment;
Instant payment;
Instant payment;
Transfers;
Invoice generation;
Recharges and vouchers;
Personal loans;
Remunerated accounts.

Apart from enabling the platform, Dock is also responsible for handling all treasury issues involved, which means we process and track transactions and authorize settlements. So you don’t need to worry about opening accounts for payments, processing transactions or regulatory compliance—it is all included in the solution.

To ensure the safety of operations, in addition to delivering the onboarding customer digital (with KYC, biometrics etc), the management of payment accounts (debit and credit ledger) and API gateways with public and complete documentation, the Dock also has anti systemsfraude in each transaction. Still, the solution Banking it also includes financial reconciliation tools and provides full regulatory and accounting support.

With this complete solution, which is already being used by a variety of clients, Dock has helped drive the growth of digital banks in Brazil and elsewhere in Latin America.

Want to know more? Watch our manifest video:

FAQ: Top questions about digital banking

What are digital banks?

As the name implies, a digital bank is one in which all operations are digitized, allowing customers to carry out all activities 100% online, without having to go to a physical branch.

According to Central Bank of Brazil, the digital banking category is self-styled, both as an operational and marketing strategy. The common point between these institutions is the exclusively remote and differentiated relationship with customers, normally linked to advantages and better experiences in terms of service costs, ease of access and integration with other conveniences and public demands.

Another additional element for the identification of digital banks is the characteristic of having internal data processing and storage systems adapted to new technologies, such as shared infrastructures and the use of cloud databases.

What is the difference between fintechs and digital banks?

Fintechs are startups that offer solutions in the financial area. Thus, we can say that digital banking is one of the existing categories among fintechs.

It is worth remembering, however, that although most digital banks are fintechs, not all fintechs are digital banks. This is because fintechs can operate in several areas of the financial sector, while digital banking is restricted to certain types of activities and needs to meet an even more complex series of regulations.

Therefore, what will differentiate a digital bank from a fintech is the regulation of financial institution registered as a bank with the Central Bank and the range of services offered.

How do digital banks work?

As we said, digital banking allows all operations to be carried out online. Everything is done through the bank's website or application, from opening to closing accounts, in addition to card requests, access to credit and other services. Other service channels of these institutions are usually e-mail and telephone.

As they do not have physical branches, digital banks usually have a lower operating cost and are therefore able to offer services at more attractive rates compared to traditional banks.

Among the main services that a digital bank offers are:

current account;
credit card;
investments;
insurance;
consortia;
loans.

What are the best digital banks?

One of the consequences of the evolution of banking in Latin America is that today we have dozens of digital banking options.

When choosing between one or another institution, it is clear that the best digital bank will be the one that offers the service that meets the specific needs of each user. In this sense, the following criteria usually weigh heavily in consumer choice:

Service package: no-fee account and no-annual-fee credit card is almost unanimous among digital banks. Thus, institutions that offer vending machines acquiring and other products tend to come out ahead;
Partnerships: many digital banks have partnerships with stores to offer cashback. This is also a well-regarded benefit;
Waiters the reputation in serving the public, as well as the available channels, is an important point for many customers;
Application: user experience with the bank's application and website is another key factor when it comes to digital banking;
Investments: digital accounts with a balance that yields more than savings, for example, and a robust investment portfolio are also impact differentials.

Digital banks: key takeaways from this article

The digital bank market has evolved significantly in recent years and is growing fast in Brazil and Latin America.
The expansion of digital banks is marked by increased user numbers, expanded service portfolios, growth of the players, and expansion of the market.
Behind the development of digital banking are factors such as niche strategies, corporate banking, partnerships with other businesses, and technology development.
Dock is part of the neobank phenomenon with its comprehensive digital banking solution, which allows any business to have a digital bank under its own tradename.
Many digital banks are fintechs, but not all fintechs are digital banks.

Digital banks and the evolution of banking in Latin America