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Fintech proliferation, evolving clients compel bank branch closures in Brazil

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Fintech proliferation, evolving clients compel bank branch closures in Brazil

A rapidly evolving customer profile and stiff competition from a booming financial technology sector have spurred some of Brazil's largest banks to rethink their brick-and-mortar offerings, or risk losing market share in what is one of the world's most profitable banking industries.

The number of bank branches in Brazil, amid an economy that recently emerged from its worst recession in history, has been steadily declining during the last few years. The trend became more pronounced in 2017 when the country's bank branch count fell 6.59% from the previous year.

According to central bank data, there were 21,062 bank branches in Brazil at the end of 2017, down from 22,547 a year earlier and 23,126 in 2014.

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Fintech competition in a digital age

The branch closings come amid a proliferation of fintech firms looking to take market share from Brazil's consolidated banking industry. Nubank, for example, a Brazilian credit card operator which launched in 2013 and now claims to have more than 1 million cardholders, has been seeking a banking license to compete with traditional lenders in other financial product offerings.

In a report released in 2017, Goldman Sachs estimated that Brazilian fintechs could generate a revenue pool of $24 billion over the next 10 years, which will likely push incumbent banks to invest heavily in information technology. The report also said that a burgeoning fintech sector should lead to lower loan spreads and bank fees in Brazil, which currently rank among the highest in the world.

The same technological advancements that are driving Brazil's fintech boom are also transforming consumer behavior. As banking association Febraban noted in its 2017 technology survey: "The percentage use of available channels in the Brazilian banking network to conduct transactions points to a consistent migration to digital channels." It said Brazilians banks invested 18.6 billion reais in technology in 2016.

Bank investment shifting toward digital branches

Itaú Unibanco Holding SA, one Brazil's largest banks and the first to introduce ATMs to the country in 1983, has been paring back its local branch network for at least the past four consecutive years, falling to 3,339 branches in 2017 from more than 3,900 in 2013. At the same time, it has turned its attention increasingly toward so-called digital branches, which operate for extended hours and aim to meet all banking requirements for customers remotely, eliminating the need for them to visit a physical branch.

The bank had a total of 94 digital branches at the end of 2015, but grew that number to 160 by the end of 2017, according to presentation materials. In 2016, roughly 73% of Itaú client transactions took place through digital avenues, with more than 50% of those on mobile phones.

The digital trend is similar for other Brazilian institutions, such as Banco Santander (Brasil) SA, where non-branch channels currently represent 89% of total transactions.

Despite that percentage, Santander Brasil stressed that it still sees value in physical banking locations.

"Banking agencies will continue to play a very important role, but they will surely undergo transformations in both service models and their purpose," Humberto Siqueira, a Santander Brasil spokesman, told S&P Global Market Intelligence. "The role of the agencies in the future will be very focused on the personal relationship with our managers, business service point, needs resolution, and other issues."

Unlike some of its counterparts, Santander Brasil's branch network has remained relatively stable during the past five years, and the bank has even announced plans to open 100 new locations focused on the agribusiness sector.

Banco Bradesco SA, meanwhile, has more aggressively shuttered its branch network of late. While the company inherited roughly 850 branches in 2016 as part of its acquisition of HSBC's Brazilian unit, it moved quickly in 2017 to combine or eliminate more than 500 branches.

In a statement, Bradesco's press office attributed the branch closures partly to the overlap generated by the HSBC deal, but also pointed to an "increasing change in clients' habits, particularly the growing use of digital channels."

"The bank will continue to make gradual adjustments to its network," Bradesco said, noting that these changes are "important in terms of reducing costs and bringing efficiency gains." It added that "some branches are also being converted into smaller models and becoming attendance posts." CEO Octavio Lazari recently said Bradesco is evaluating the possible closure of up to 200 additional branches in 2018.

Bradesco also has launched a new digital bank called Next, partnering with the likes of Apple and Microsoft to offer interest rates lower than those quoted at its physical branches. The bank currently offers more than 600 products and services online, according to its website.

The state-run Banco do Brasil SA, meanwhile, also reduced its branch network significantly in 2017, shrinking it to less than 4,800 from almost 5,500 in 2016. The bank recently announced a new initiative allowing customers to perform banking transactions directly through Facebook's messaging service.

However, as more and more Brazilians grow accustomed to the convenience of digital banking, it is not just large lenders who must keep tabs on the ensuing risks and opportunities.

A recent study by consulting firm Roland Berger forecasts a new wave of consolidation among medium-sized banks in Brazil, and concludes that banks who embrace a digital model will have a far better chance of surviving.

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As of March 13, US$1 was equivalent to 3.26 Brazilian reais.

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To see branch data for a company of your choice, search the company in the top search box and go to the "Branch List" section on the left-hand panel, housed under the "Market Analysis" dropdown. Here is an example for Banco do Brasil.
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