Undeniably, the recent ubiquity of digital technology and connectivity are having profound implications for the economy at large, and ultimately impacting the way organizations and governments around the world adapt and position themselves. One of the sectors that has been most affected by this new environment is banking, which is reshaping its business and operational models to cope with the pressures and significant changes imposed by digitalization.
According to McKinsey & Company, “while the last epoch in retail banking was defined by a boom-to-bust expansion of consumer credit, the current one will be defined by digital […] banks have three to five years at most to become digitally proficient. If they fail to take action, they risk entering a spiral of decline similar to laggards in other industries” .
In Brazil, many aspects of digitalization are impacting the banking industry. From 2000 to 2016, the estimated penetration of Internet went from 3% of the population to 66% (an increase of almost 2,200%), and the number of smartphone users in the country is expected to reach an incredible 57.8 million, representing almost 50% of the population between the ages of 20 and 70. This scenario calls for a new way of thinking about the role of banks in the digital era.
Itaú, South America’s largest private bank, with R$1.28 Trillion (approximately $400B) in total assets, is trying to be very effective on adapting to such major changes to remain competitive in the Brazilian banking landscape. In 2015, almost 70% of financial transactions within the bank were made through digital platforms, mainly through the internet banking and mobile phones. In 2008 this number was around 30%. In addition, the physical branches now only comprise 30% of the transactions of the bank, whereas in 2008, they responded for 69%.
This new landscape forced the bank to create a new business model, focused in playing a deeper role in the digital and commercial lives of their customers. Itaú invested heavily in developing its software platforms and the mobile and internet banking, the latter being now considered as one of the most advanced of the world, providing a best-in-class customer experience. From 2012 to 2015, the bank invested approximately $3.5 billion on its IT infrastructure, building data centers and all the necessary technology to maintain its strong position in the market. This new business model has generated solid results to the company and allowed the bank to overcome many of the challenges imposed by the digital era. “Folha de São Paulo”, one of Brazil´s most prominent newspapers, has an annual survey aimed at assessing customer´s opinions regarding the quality of online banking services. For the two last years, Itaú was top ranked, with a large margin over the second place.
Consequently, Itaú dramatically changed its operational model, and a great example relates to its strategy of physical branches. According to the Brazilian Central Bank, from October 2014 to October 2016, Itaú closed more than 10% of its branches and, according to some sector specialists, the Bank expects to reduce this number by an additional 15% in the next twelve months. On one hand, this measure prepares the bank for the digital era, on the other hand, by doing so, Itaú expects to fire approximately 30 thousand people, an initiative that has been largely discussed in Brazil due to its socioeconomic impacts. First, because by closing physical branches and firing thousands of people, Itaú is capturing a huge financial value, and as a private company, such a movement should not be criticized. However, since Brazil´s unemployment rate skyrocketed over the last three years, the effects of digitalization, which largely contribute to aggravating this situation – at least in the short run, are being perceived a villain.
The employees who worked for long years in the banking industry, and who acquired a deep expertise on the old banking model, are scare of not only seeing their jobs at jeopardy, but also in not seeing a clear alternative for their careers, especially in the economic turmoil the country is facing. However, Itaú is doing what needs to be done to survive and remain competitive. This scenario also creates a challenge for another actor, the Government, who now has an additional and huge problem to manage. How will the future look like?
In addition to that, the whole idea behind the credit risk assessment will change. A few years ago, the branches managers played a significant and active role on the credit decision process, due to their close contact to the customers. In the future, however, the weight of the statistical models on the credit analysis will be even more significant, and the banks will need to adapt very fast to this new world.
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