The Director of Inspection of the Central Bank, Paulo Sérgio Neves de Souza, says that the body has been striving to increase competition in the financial system. “The focus is on competition and on breaking down barriers to entry in the various segments.”
Souza says that, taking into account all the costs of banks, the spread (difference between the borrowing rate of banks and what they charge for loans) in Brazil is lower “than people imagine” — between 6% to 8%.
About annual interest rates above 300% on the revolving credit card, he states that only 10% of card operations take place in this modality, in which default is high.
What explains the high banking concentration in Brazil? In the past, banks needed to have large branch networks and operate in an inflationary environment, in which they ended up building customer loyalty. As a result, they launched their own products: CDBs, financing, consortia, insurance. The financial system mind was designed to focus on products, not customers. That’s how it worked until the beginning of the last decade.
As these people or companies were practically loyal to one institution, it was difficult to have accounts in three different institutions. All access to information and knowledge of financial history was held by a single financial institution.
But technology is changing that dynamic. Today, it is not necessary to have a branch network to conquer a customer base and there are several institutions doing this with more than 10 million people, who are outside the big banks.
We have several smaller institutions offering credit cards, prepaid and postpaid cards; and more and more companies entering the market. This has led banks, in recent years, to move away from this “product” view to a “customer” view. The barriers that previously existed for access to the financial system have been broken down since 2012.
What is being done to stimulate competition, make life easier and lower costs for customers? In terms of means of payment, which is how you, with your account, will communicate with the entire system, Pix is a reality that has surpassed all expectations.
On the competition side, we have a credit union agenda that is already a reality. In the South region, it is already the main “player” of the market, just as there are great advances in the Midwest, in the interior of Minas and São Paulo, where cooperatives compete for the market on equal terms with large institutions.
To improve credit operations, including the issue of spread, we have the positive register, which has been there for three years. We are also working on the issue of electronic duplicates. One of the great examples was consigned credit.
From the moment it was regulated and provided legal security to provide credit on payroll, it had a boom and today it is one of the main lines of credit, with one of the lowest spreads in the market.
The Central Bank’s focus is on competition and on breaking down barriers to entry in the various segments. Looking at World Bank data, we are neither worse nor better than the vast majority of countries. Apart from China and the United States, most are very concentrated.
Why does it happen? In the past, it was necessary to have scale, and this was not just a peculiarity of Brazil. Even after the 2008 financial crisis, we observed this, in the sense of concentration. Several banks ended up leaving Brazil and there were opportunities for mergers. This happened all over the world.
In the Brazilian case, there is even an advantage because we have, among the big ones, private banks [Itaú e Bradesco]public [Banco do Brasil e Caixa Econômica Federal] and foreign [Santander]. There are several countries where the entire financial system is concentrated in foreign banks.
Credit card interest rates in Brazil are among the highest in the world, and bank spreads are an eternal source of criticism. How to download them? The credit card represents less than 0.8% of the total credit in the financial system. Of the BRL 393 billion in this modality, BRL 350 billion are cash card transactions. What becomes financing, when interest is incurred, is a much smaller installment, of about R$ 40 billion.
People say that the spread of the financial system as a whole is very high. But what is accounted for as gross income in credit operations in the financial system is around 16% per year. When looking at the credit margin, which is the gross interest rate minus the cost of funding, the spread drops to 11%. And when I put the default, this margin is around 6% to 8%.
That is, in the total loan portfolio, depending on the level of default, the margin left over for banks varies between 6% and 8%. This is very different from what people imagine.
The BC increased the minimum capital requirement for fintechs. What justifies the change? The legal framework created the IP [instituição de pagamento] with a figure, which was practically being able to load your card and spend. And it was natural that, over time, they increased their business, which ended up looking more and more like a traditional financial institution. We identified some risks that were emerging.
Some operations that were being carried out began to generate prudential risks for which the due capital was not required. This even brought a reputational risk to the system, if any were to have problems.
Business models have evolved differently from what we conceived in 2013; and we need to make, for some types of business models, prudential regulation more adhering to the risk that institutions were running.
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