Digital banks and the evolution of banking in Latin America

Publicado em 1 de abril de 2022.

Tempo de leitura 8 minutos de leitura

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.

 

Today, there are over 400 digital banks (also called neobanks) operating around the world. Not only are they growing in number, but they’re getting bigger and more robust. This is particularly evident in Latin America, now home to several high-profile fintech companies.

Throughout the region, innovation and growth in financial services has been stimulated by changes in user needs, technology democratization and progress, and more flexible regulations.

Thanks to the growth of digital banking, these institutions have helped make the market less bureaucratic, foster financial inclusion, improve user experience, and accelerate the digital transformation in these countries.

 

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

A lot has changed in the financial environment and in society since the first neobanks appeared a few years back. They have started to grow, win over new customers, and introduce major innovations in the way banking is done all over the world. Here are the four factors that confirm their success:

 

1. Growing user numbers

The speed of growth of digital banks in recent years is reflected in their user numbers. According to a study conducted in 2021 by Instituto Locomotiva, 42% of all Brazilians have neobank accounts, which is not far short of the percentage of people who use traditional bank services (49%).

It is a percentage that rises as the age group gets younger: 51% of 18- to 29-year-olds have a digital bank account. A similar trend is being seen in other Latin American countries, where 43% of the adult population is under 35, which a study by BPC suggests is a great catalyst for innovation in the region.

It’s also worth noting that this growing body of neobank users, both individuals and corporate, are increasingly demanding. Today, they expect digital banks’ platforms to give just as good a user experience as they get from other types of apps.

 

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.

These players are bringing out a host of new products and services, and not just financial ones, in order to offer a more comprehensive service portfolio. Some are not just investing in the latest technology to enhance their digital payment solutions, but are also expanding their business model and offering other services, such as investments and insurance.

 

3. Growth of digital bank players

The number of digital banks in Latin America almost doubled between 2017 and 2021, according to the BPC survey mentioned above. Today, the region is home to more than 50 independent neobanks, with the top ten representing over 90% of all Latin American customers.

While the success of these institutions – the target of sizeable investments – has attracted the attention of the entire market, forcing it to rethink how to offer financial services, it also demonstrates the region’s enormous potential. And although there are some real stand-out players, like C6 Bank and Nubank, there’s room in the ecosystem for plenty of new players to gain a good foothold.

To cite just a few numbers from the Brazilian market, according to a report in Valor Econômico, Nubank’s customer base rose from 19.7 million in 2019 to 40 million in 2021. In the same period, C6 Bank grew its customer base from 1 million to 10 million, and Inter grew from 4.1 to 13 million users.

 

4. Market expansion

Another feature of the digital bank evolution is that it’s not just “pure” neobanks that are operating in this field: it’s being populated by other players, making it an increasingly multiple ecosystem.

These newcomers include retailers and marketplaces, which are expanding their financial services through the phenomenon of embedded finance, not to mention traditional financial institutions, which are creating digital banking platforms of their own to meet the new market demands.

 

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 trend behind the growth of digital banks is their adoption of niche strategies. The consolidation of the niche fintech business model makes a lot of sense, especially in regions like Latin America, where a large proportion of the population have trouble accessing physical banks or even their services because the fees are so high.

Digital banks have broken down some of these barriers and niche fintech companies are eroding some of the obstacles faced by certain user profiles. These institutions work with specific market segments and population groups who were often overlooked by traditional banks.

 

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 increasingly being targeted by these players, who are attracting new users by offering a variety of services, from banking transactions and working capital loans to advances against receivables.

This expanded focus of digital banks to business customers, particularly of this type, makes sense in the Brazilian scenario. According to the Business Map from the 2nd four-month period of 2021, Brazil has over 18.4 million active registered businesses, 57.4% of which are sole-proprietor micro-enterprises (MEIs). Furthermore, MEIs represented 77.7% of all the businesses opened in the period in question.

 

Instant payments and Open Banking

In Brazil, something else worth mentioning is Pix, the central bank’s instant payment system, which has also sparked interest in the use of digital banks for payments and receivables, as well as the introduction of 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 customized offers or develop new tech-dependent solutions, digital banks do not need to develop everything in-house. One of the factors behind their growth has been their ability to partner up with specialized companies.

These partnerships are very diverse, ranging from associations with companies from other sectors, like insurance firms, to collaborations with streaming platforms and marketplaces, to name a few.

 

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 can operations of this kind be scaled up? Dock is a pioneer in banking as a service in Brazil, and has a complete digital banking solution. Thanks to open APIs, any company can have its own digital bank under its own tradename and join in this exciting, fast-growing business ecosystem.

 

With Dock’s digital banking services, users can enjoy a complete digital account experience quickly and securely, including:

  • payment of bills;
  • instant payments;
  • wire transfers;
  • issuance of bills;
  • recharges and vouchers;
  • personal loans;
  • interest-earning accounts.

 

Dock not only provides the platform, but also takes responsibility for the treasury services involved. Essentially, this means it processes and tracks all the transactions and authorizes the settlements. So you don’t have to worry about opening accounts for payment, processing transactions, or meeting regulatory requirements – this is all part of the solution.

To assure the security of our operations, Dock offers digital customer onboarding (with KYC, biometrics, etc.), management of payment accounts (debit and credit ledger), and API gateways with complete, public documentation. Dock also has anti-fraud systems for each transaction. Our digital banking also includes financial reconciliation tools and provides total 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.

 

Interested in learning some more? Watch our video manifesto:

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.

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