When WhatsApp announced it had picked Brazil to debut its digital payments service, it seemed a perfect fit to try out the new technology. Latin America’s largest economy is already home to 120m users of the messaging app, as well as millions of small retailers.
But not everyone was happy. Within days, Brazil’s biggest banks were signalling their displeasure. A week later, the central bank unexpectedly suspended the rollout by the Facebook-owned group, saying it could undermine “competition, efficiency and data privacy”.
“The private banks were very angry because they thought WhatsApp would not launch without them. They went to the central bank to try to stop the project,” said one person with knowledge of the negotiations.
For industry observers, the reaction was inevitable. Brazil’s big private banks are under threat from new online “fintech” competitors that are eating into their market share. Suddenly, a giant of the global tech scene was in the picture too.
For years, Brazil’s financial landscape has been dominated by a handful of banks, notably Itaú, Bradesco and Santander, which have earned soaring profits thanks to high fees and interest rates.
Itaú — Brazil’s biggest bank — last year reported net income of R$27.8bn ($5.2bn), up 8.5 per cent from the previous year. Banco do Brasil, a state-owned bank, reported a 41 per cent jump in net income to R$18bn last year.
Their margins, however, are increasingly being squeezed by the rise of fintechs, which offer credit cards, loans and accounts, typically at more competitive rates than the big banks and with zero fees.
With little bureaucracy and everything done by smartphone, these companies are an attractive proposition for Brazil’s 45m citizens who are still outside the banking system. In the final three months of last year, the central bank approved 13 new fintechs. At least a dozen more are on the block awaiting approval.
However the great strategic risk for banks is competition from big tech, said Rafael Schiozer, a professor of economics at the Getúlio Vargas Foundation in São Paulo, “because the level of information these companies have is incomparable to that of banks”.
“The arrival of WhatsApp is a game changer.”
Brazil’s central bank has framed the suspension of the WhatsApp service as a temporary measure while it “analyses risks to the system”. Cade, the antitrust regulator, also suspended WhatsApp’s partnership with Cielo, a transaction processor.
Analysts said it will be difficult to prohibit the group’s presence in the long run, as long as it can offer assurances that its payments platform will be an open system that will work with others.
The move has, nonetheless, raised eyebrows given that under the leadership of Roberto Campos Neto, the central bank has been a strong supporter of “open banking” and a deregulated environment for fintechs to thrive.
A week after WhatsApp announced its plans, the central bank itself unveiled Pix, a payment system to be launched in November that will allow instantaneous transactions. The current technology means payments in Brazil can take days.
“WhatsApp will change the way of doing business. They [the banks] know WhatsApp has a lot of potential because of the number of users in Brazil. For sure the dominance they have today will be reduced,” said Ceres Lisboa of rating agency Moody’s.
The sentiment was echoed in an official Moody’s note, which said the rollout of WhatsApp would be credit negative for banks and would weigh on profitability.
In particular, it highlighted that the proposed system — which would allow users to transfer money to one another, as well as to make retail purchases — would reduce the need for payment processing equipment and cut fee income for banks.
Ricardo Amorim, an economist, said over the past 18 months Brazil’s banks had been forced to “totally change their mentality” and make rapid investments in technology to try to maintain competitiveness.
“They basically realised if they were not able to make a move, they would eventually be dead.”
Leandro Miranda, executive director of Bradesco, said he did not fear the rise of fintechs because they do not have “the knowledge, the experience, the team and the models to understand clients’ needs and provide credit”.
“I doubt even Big Tech is able. But in five to 10 years from now we will see how industry has evolved. I am very comfortable.”
The financial sector in Brazil is also evolving because of plunging interest rates, which have reduced the cost of funding for fintechs and weighed down on big banks’ lending rates.
Mr Miranda said the solution was to use technology to grow and attract more customers. Ms Lisboa, however, believes the situation will spur banks to re-evaluate costs, such as maintaining branches and ATM machines, both of which require expensive security in Brazil.
“With low interest rates, there is no way things don’t change,” she said. “All this innovation in instant payments and competition is making the banks rethink their business.”
Additional reporting by Carolina Pulice