FEBRABAN 2015 Banking Technology Survey by FEBRABAN

FEBRABAN 2015 Banking Technology Survey CONDUCTED BY

FEBRABAN The Brazilian Federation of Banks (FEBRABAN) is the chief entity representing the Brazilian banking sector. It was founded in 1967 in the city of São Paulo for the purpose of strengthening the financial system and its relations with society and contributing to the economic, social and sustainable development of the country. The Federation’s goal is to represent its associates at all levels – the Executive, Legislative and Judicial branches and entities representing the society – for improvement of the regulatory system, continued improvement of production and reduction of risk levels. It also seeks to concentrate efforts that promote the public’s growing access to financial products and services.

Deloitte Deloitte offers consulting services in the areas of Auditing, Business, Risk Management, Tax, as well as Financial Advisory and Outsourcing to clients in the most diverse sectors. With a global network of member-firms in more than 150 countries, Deloitte combines exceptional skills and deep local knowledge to help its clients achieve their best performance, regardless of their segment or region of operation. In Brazil, where it has been operating since 1911, it is a market leader, with 5,500 professionals and operations throughout the national territory, through 12 offices.

FEBRABAN 2015 Banking Technology Survey

CONDUCTED BY

Introduction

Introduction In its 24th edition, the FEBRABAN Banking Technology Survey continues to shine light on transformations in the sector – and on how they have affected Brazil.

he impacts caused by technological advances in markets, translated into new behaviors and socio-economical dynamics, are an essential phenomenon for understanding what is happening today in the business world. A crucial point in this regard is the speed at which certain activities move from trends to established practices, revolutionizing sectors. With respect to the Brazilian banking industry, the country has a strong and mature ecosystem of wide scope that is always connected to new trends in the most diverse fields.

“The 17 banks that answered the survey questionnaires represent 93% of industrial assets in the country. To enrich the approach, banking professionals were consulted, for whose assistance we are grateful, and Deloitte’s accumulated knowledge was also inserted.”

This is the basis of an industry in which new revolutions, when taking shape, are vigorously supported by broad analyses and intensive investments. The Brazilian banking industry is not, however, in the global technology vanguard by chance. The recognized competence of management, the maturity of the market and regulations, the use of international best practices – with Brazilian banks even serving as benchmarks for the entire world – and the entrepreneurial stance of leadership place them at the forefront of innovations in the sector. In its 24th edition, the FEBRABAN Banking Technology Survey continues to shine light on transformations in the sector – and on how they have affected Brazil. The results profile the change in volume of transactions by service channels and how each of them has been reconfigured – highlighting the digital channels that, in 2015, accounted for more than 50% of total transactions, adding the Internet and Mobile Banking shares. Furthermore, they show how technology affects the expansion and capillarity of access to banking services and the amounts spent on investments and expenses for acquisition, maintenance and development of information technology by the banks. In this edition, the survey was conducted for the first time by Deloitte – the beginning of a partnership that marks some points of revitalization – with the goal of further strengthening the survey so that it continues to provide new ideas and strategies for the market, just like longer than the recent two decades. The 17 banks that answered the survey questionnaires represent 93% of the industrial assets in the country. To enrich the approach, banking professionals were consulted, for whose assistance we are grateful, and Deloitte’s accumulated knowledge was also inserted by means of its division dedicated to the financial industry, as well as the studies conducted by the firm on the theme, in Brazil and around the world.

FEBRABAN 2015 Banking Technology Survey

The results are detailed on the following pages. Among the highlights, the more than 100% growth in number of transactions made by Mobile Banking since 2011 plays up to 11.2 billion in 2015 – a number 138% higher than in 2014. This is a strong indication that efforts to promote digitalization and mobility as important strategic fronts in channel diversification have achieved great results – once again, positioning banks as promoters of major transformations, highly connected to new demands of society as a consequence of the advance of digital inclusion and access to new devices. The report also shows that, despite the advance of digital channels, the physical and traditional relationship fronts, such as branches and correspondent banks, continue to be important for consumer service. The survey further reveals that technology investments by banking institutions in Brazil were R$19 billion in 2015. This and other data make it clear that Brazilian banking institutions have, year after year, continued their efforts to maintain their leadership position. A trajectory that has strengthened with the swift automation of processes based on the advancing computerization of banking networks, the impressive integration of information that is universal today for services throughout the national territory and the extensive diversity of products offered to tens of millions of consumers. It is the continuity of this development proposal that ensures an exceptional level of performance throughout the country’s financial sector – a model of excellence that, for the next years, should sustain the strategic position of anticipating transformations to turn them into great opportunities. After consolidation of the strategies executed so far, there will be much to come. Based on recent history, the Brazilian banking sector will be ready to navigate the coming opportunities. Gustavo Fosse Director of the Technology and Banking Automation Sector of FEBRABAN

Paschoal Pipolo Baptista Deloitte Financial Services Industry Partner

Index

Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Digital channels in real expansion, far ahead of the trend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Physical and traditional channels: Maintaining importance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 A sector in the forefront of technology investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Bancarization: Access to essential services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40 Banks and consumers in the digital world: Consolidation â&#x20AC;&#x201C; and what lies ahead . . . . . . . . . . . . . . . . . . 43

Executive summary

Digital transformation consolidates Banking institutions are at the forefront of a major course of transformation that encompasses consumption habits and greater access to digital and mobile technologies. The growing use of digital channels (Internet and Mobile Banking), which appeared as a trend in prior years, is consolidating, with transactions in these mediums surpassing more than 50% of the total. One of the survey highlights is the strong expansion of Mobile Banking: transactions by this channel increased 138% between 2014 and 2015, reaching 11.2 billion. The volume is more than 100 times higher than in 2011. A number of factors are responsible for this advance: increased public access to the internet, growing use of smartphones, the insertion of mobility in habits and the greater sophistication of services available through applications for digital devices.

Physical mediums remain important In the universe of branches, banking service points (BSPs), automatic teller machines (ATMs) and correspondent banks, there was a decline in 2015, influenced by factors such as the economic environment, strategic decisions related to channel diversification and consumer preference. Nevertheless, the physical mediums are still important, mainly in relation to the preference of Brazilians to make more complex transactions and financial activity. Despite the decline, the distribution of channels in the regions of the country has remained stable.

FEBRABAN 2015 Banking Technology Survey

Brazil is still the BRIC that invests most in IT Of the ten largest global economies, the country is in seventh place in absolute IT spending in the banking sector, in comparison with the proportion of Gross Domestic Product (GDP). It is also in first place among the BRICs (group of emerging countries made up of Brazil, Russia, India and China) in the same comparison. To remain in the forefront of the sector, R$ 19 billion were invested by financial institutions in technology in 2015 in Brazil. There was an inversion in distribution shares, a trend already apparent three years ago, with software changing places with hardware and receiving the larger share of resources. Of all investment and spending on technology in 2015, 44% was destined for software, 35% hardware and 20% telecommunications.

Bancarization continues to grow The relationship of the Brazilian population with banking institutions continues to advance, following a trend indicated by data from the Central Bank of Brazil (BC) and the Brazilian Institute of Geography and Statistics (IBGE). In 2015, Brazilian bank access reached 89.6% - compared to 87% in the prior year. This is a result of the sophistication of strategies to expand banking services channels, with gains in capillarity, whether by physical or digital means, as well as greater compliance with BC regulations.

Sampling and Methodology Seventeen Brazilian banks operating in Brazil, representing 93% of banking industry assets in the country, participated in the survey, The survey was conducted by using an online form sent to these financial institutions, as well as interviews with experts, consolidation of public data and Deloitteâ&#x20AC;&#x2122;s research.

Digital channels in real expansion, far beyond the trend

Digital channels in real expansion, far ahead of the trend

he changing relationship between banks and consumers in Brazil over the last three decades provides a clear profile of how technology has helped to transform the sector. The strategies of banking institutions to expand and improve channels increasingly incorporate the use of new automation and communication technologies, in a continuous effort to keep service in line with consumers’ ever greater expectations in relation to speed, quality and security. New channels were developed, such as Internet and Mobile Banking – and the more traditional, such as branch, automatic teller machine (ATM) and contact center service – improved in terms of speed and multiplicity of functions, resulting in an integrated ecosystem increasingly in line with user preferences. The evolution of digital channels, especially over the last decade, was not a one way process. As a consequence – and, more recently, as a cause – the way Brazilians take care of their finances and interact with the institutions of their choice has also changed, as technology has become more accessible and confidence in virtual environments has increased, leading to greater demands and new expectations.

The way Brazilians conduct their banking activities has changed as technology

By redesigning strategies for relationship channels over the last years, banks have worked to strengthen a decisive aspect for success in the sector: opening new service fronts in order to bring consumers closer and make them independent and, most importantly, satisfied. Broadly speaking, this movement, strongly based on massive investments in technology, has lead to advances in the relationship between banks and consumers that have only increased in speed in recent years.

has become more accessible and confidence in virtual environments has grown.

Until the mid-1990s, consumers relied, basically, on branches, ATMs and the telephone to conduct bank operations. Simpler transactions, such as bill payments, deposits and transfers, were made directly with tellers at branches. This reality is increasingly distant and, since then, consumers have become more familiar with making transactions without the help of a present and visible professional, mainly as they became accustomed to using ATMs, a pioneering driver of the change. This process has opened the way for the revolution that followed – and the current scenario. The use of digital channels, mainly Internet Banking, began to gain adherents as they offered new features and became easier to use in terms of user experience and access speed, taking the lead in preferences at a constant rate of growth, year after year. In retrospect, the progress was not surprising. Brazilians are one of the most connected peoples on the planet, both in use of social networks and in readiness to incorporate technological innovations into their daily routine. To have an idea of this high capacity for adherence, Deloitte’s Global Mobile Consumer Survey shows that 57% of Brazilians check messages on social networks or other channels on their smartphones during the first five minutes after they wake up. The same occurs five minutes before going to sleep, for 53% of them. The need to constantly be connected is very present.

FEBRABAN 2015 Banking Technology Survey

All this scenario led to diversification of channels to attain a new phase, of great impact. Now, with greater access to mobile devices, and when the name of the game is mobility, it was Mobile Bankingâ&#x20AC;&#x2122;s turn to occupy a position of importance among the relationship channels offered.

Mobile Banking, the newest channel, already standing out In 2015, Mobile Banking recorded 11.2 billion bank transactions. This is quite significant growth, of 138% in relation to the prior year, when 4.7 billion operations were made by this channel. Consequently, Mobile Banking became the second channel most preferred by Brazilians for bank transactions. This is an important milestone that reflects not only the advance of a new channel, but the start of a new type of relationship between consumers and their banking institutions. Internet Banking is still in the lead with 17.7 billion transactions made in 2015, a number well ahead of the second in place â&#x20AC;&#x201C; and slightly less than the 18 million recorded the prior year. The other channels rank behind in order of preference from third to seventh place: ATMs, points of sale (POS), branches, correspondent banks and contact centers. All, with the exception of POS, recorded declines in the total number of transactions in 2015 compared to the results of the prior year.

138% is how much the volume of Mobile Banking transactions grew in 2015, to 11.2 billion bank transactions compared to 4.7 billion the prior year

NUMBER OF TRANSACTION MADE BY SERVICE CHANNEL Correspondents 2014: 1.5 billion 2015: 1.4 billion

ATM 2014: 10.2 billion 2015: 10 billion

Branches 2014: 4.9 billion 2015: 4.4 billion

POS 2014: 7.2 billion 2015: 7.8 billion

Mobile Banking 2014: 4.7 billion 2015: 11.2 billion

Contact Centers 2014: 1.5 billion 2015: 1.4 billion Internet Banking 2014: 18 billion 2015: 17.7 billion

2015 FEBRABAN BANKING TECHNOLOGY SURVEY

Digital channels in real expansion, far ahead of the trend

Digital channels: In the beat of consolidation After years of diversification and establishment of new relationship channels and adhesions to the virtual world being considered trends, what is now seen is consolidation – with numbers continuing high for digital channels, especially Mobile Banking. In share of total transactions and served customers, the Mobile Banking rose 10% in 2014 to 21% last year. This is a significant jump. It is more than 100 times the total recorded for this channel in 2011, of approximately 100 million operations. To have an idea of the size of the variation, Internet Banking followed a curving trajectory over the same period – from a 38% share in 2011, it reached 41% two years later, falling back to 33% in 2015. Inserted in a quite timid manner – based on what the technology of the time allowed – in the lives of consumers beginning in the mid-1990s, Internet Banking followed a slower evolutionary and maturation curve over several years, as it became more viable and the internet became more accessible and present in the habits of the public. This is the opposite of what occurred with Mobile Banking, already inserted in the daily lives of users at a new time, resulting in a fast growth among the channels offered. All this activity occurred within a very favorable scenario for development of the new channels potentiality. The total universe of transactions maintained a rising curve in the period, reaching a volume of 54 billion in 2015 – 70% higher than four years ago. EVOLUTION OF CHANNEL SHARE OVER THE YEARS (in billions of transactions)

48 32

36 0%

2011

16% 11% 4%

2012

2015 FEBRABAN BANKING TECHNOLOGY SURVEY

21%

10%

Mobile Banking Internet Banking

4% 37%

33%

21%

19%

Bank Branches

15%

14%

Correspondents in the Country

11% 3%

8% 2%

Contact Centers

41%

ATM - Self service Points of Sale (POS)

23%

25%

26%

1% 39%

38%

16% 12% 4%

16% 9% 4%

2013

2014

2015

FEBRABAN 2015 Banking Technology Survey

Growing numbers of consumers seek virtualization Many factors explain why the total number of transactions by digital channels increased. To begin with the most basic ones, Mobile Banking grows as consumers have more features and options available and, equally important, as increasingly more users enter the virtual environments of Internet Banking and Mobile Banking when dealing with their finances. In terms of base growth, the two digital channel modalities show impressive numbers. In the case of Internet Banking, total growth of bank accounts with access to this channel almost doubled between 2011 and 2015 – reaching a total of 62 million. In the share between individuals and legal entities, the first group grew 94% in the period, reaching 55 million accounts, while the second advanced 75%, to 7 million. In the same period, the total number of checking accounts in Brazil grew 13%, to 155 million in 2015.

The number of

This is little, however, when compared to the expansion pace of Mobile Banking. The number of accounts able to use this channel grew more than 16 times between 2011 and 2015, from 2 million to 33 million accounts. This is growth in leaps and bounds, year to year – the 2015 volume is 32% higher than that recorded in the prior year. This is an important milestone in changing user behavior.

between 2011

accounts able to use Mobile Banking grew more than 16 times and 2015.

If only the data referring to the five largest banks participating in the survey are analyzed, a scenario even more revealing of this activity appears. In this selection, it is possible to see that 40.7% of all checking accounts in 2015 had Internet Banking – a total of 57.6 million checking accounts. This proportion was 19.5% in 2011. In the case of Mobile Banking, there is another example of the jump: in 2015, 22% of the bank accounts of the five main banks in the country were able to use this channel, totaling 31.1 million accounts, compared to only 1.1% in 2011. NUMBER OF BANK ACCOUNTS WITH INTERNET BANKING (in millions)

Business accounts Personal accounts

37 32

42 5

4 28

2011

2012

2013

2014

2015

2015 FEBRABAN BANKING TECHNOLOGY SURVEY

Digital channels in real expansion, far ahead of the trend

NUMBER OF BANK ACCOUNTS WITH MOBILE BANKING (in millions)

33 25 12 2 2011

6 2012

2013

2014

2015

155

156

155

2013

2014

2015

2015 FEBRABAN BANKING TECHNOLOGY SURVEY

TOTAL CHECKING ACCOUNTS (in millions)

137

2011

147

2012

2015 FEBRABAN BANKING TECHNOLOGY SURVEY

CHECKING ACCOUNTS OF THE FIVE LARGEST BANKS ABLE TO USE DIGITAL CHANNELS

36.6%

Internet Banking

Mobile Banking

19.5%

1.1%

2011

22.1%

22% 16.7%

3.9%

2012

2015 FEBRABAN BANKING TECHNOLOGY SURVEY

25.9%

57.6 million 40.7%

31.1 million

7.8%

2013

2014

2015

FEBRABAN 2015 Banking Technology Survey

The turning point for digital and remote channels In 2015, transactions made by Internet Banking and Mobile Banking, combined, exceeded more than half the total, reaching 54%. This is a milestone of great importance. In the prior year, this share was 47% - the largest portion, by far, in an analysis that included the other channels separately, but still slightly less than a direct comparison with the total of all other service fronts. The turning point, however, has arrived – and an environment of larger transformations caused by the scale of this rise in the next years can be expected. The situation has gained new contours from other angles. By expanding the definition of digital channels to also include POS (after all, although points of sale are mechanisms under the final consumer’s control, they are channels that make transactions of digital nature), the share rises to 69%. Thus, the group exceeds two thirds of total transactions, clearly establishing this category as the one most used. The other share would correspond to a group made up of branches, ATMs, correspondents and contact centers.

In 2015, transactions made by Internet Banking and Mobile Banking, combined, exceeded

Furthermore, it is possible to look at the situation under new perspectives, adopting a different conceptual point of view. If, for example, the group that includes digital channels is now redefined as remote channels - including ATMs and contact centers with Internet and Mobile Banking – there is a significant jump. Considering only the four largest banks among all those in the sample, the share of active checking accounts (individuals and businesses) in which more than 80% of transactions are made by means of these channels, grew from 26% in 2013 to 73% in 2015.

more than half the total, reaching 54%.

This is a 172% increase in only twelve years, clearly demonstrating that Brazilian consumers are increasingly less dependent on physical structures or personal contact to make their daily transactions. Among the transactions most made through remote channels, checking balances is in the lead with 4.7 billion transactions in 2015 – a 213% jump in two years. Next, still in 2015, comes bill payments, with 1.1 billion transactions, and bank transfers, including the DOC and TED modalities, with 0.4 billion transactions.

Digital channels in real expansion, far ahead of the trend

EVOLUTION OF DIGITAL CHANNELS

54% Branches, ATMs, Correspondents and Contact Centers Internet Banking and Mobile Banking

46%

44%

45%

47%

38%

40%

39%

38% 31%

POS

16%

2011 Total transactions by channel 32 billion

16%

15%

2012 36 billion

2013 40 billion

2014 48 billion

2015 54 billion

2015 FEBRABAN BANKING TECHNOLOGY SURVEY

EVOLUTION OF DIGITAL CHANNELS, INCLUDING POS

69% Internet Banking and Mobile Banking and POS Branches, ATMs, Correspondents and Contact Centers

54%

56%

46%

44%

61%

62%

39%

38% 31%

Total transactions by channel 2015 FEBRABAN BANKING TECHNOLOGY SURVEY

2011 32 billion

2012 36 billion

2013 40 billion

2014 48 billion

2015 54 billion

FEBRABAN 2015 Banking Technology Survey

CHECKING ACCOUNTS WITH MORE THAN 80% OF TRANSACTIONS MADE BY REMOTE CHANNELS FOR THE FOUR LARGEST BANKS CONSULTED*

2013

2014

2015

Number of active checking accounts (personal and business)

119 million

116.3 million

116.8 million

Number of checking accounts with more than 80% of transactions made by remote channels

31.3 million

77.6 million

85.1 million

Number of checking accounts that use remote channels / number of active accounts

26%

67%

73%

* Remote channels: Internet and Mobile Banking, ATMs and Contact Centers 2015 FEBRABAN BANKING TECHNOLOGY SURVEY

TRANSACTIONS MADE BY REMOTE CHANNELS FOR THE FOUR LARGEST BANKS CONSULTED* (in billions)

4.7 4.2

1.5 1.3

Balance checking

0.3 Bill payment Transfer / DOC / TED

0.1 2013

1.1

0.4

2014

2015

* For checking accounts with more than 80% of transactions made by remote channels (Internet and Mobile Banking, ATMs and Contact Centers) 2015 FEBRABAN BANKING TECHNOLOGY SURVEY

Digital channels in real expansion, far ahead of the trend

An important addendum: POS transactions An detached look at POS – the third element making up the expanded concept of digital channels together with Internet and Mobile Banking – clarifies some tendencies noted earlier. The first point, in this regard, is the total transactions made with debit and credit cards in 2015 – 11.4 billion according to numbers of the Brazilian Association of Credit Card and Services Companies (ABECS). This volume is 63% higher than that of 2011, with sales made with debit cards accounting for practically the same volume as those made with credit cards: 53%. The increase helps to understand Brazilians decreasing preference for use of paper money. In relation to e-commerce, sales also showed significant growth, more than doubling in five years to 41.3 billion reals in 2015 – a 120% increase – according to E-bit data. This number makes POS a significant channel in the digital advance, since e-commerce sale transactions also involve this relationship front. TOTAL CREDIT AND DEBIT CARD TRANSACTIONS (in billions of operations) Debit card Credit card

9.2

8.1

7.0

11.4

10.2

3.5

4.1

4.8

5.4

6.1

3.5

4.0

4.4

4.8

5.3

2011

2012

2013

2014

2015

SOURCE: ABECS

EVOLUTION OF E-COMMERCE SALES (in R$ billions)

41.3 35.8

28.8 18.7

2011 SOURCE: E-BIT

22.5

2012

2013

2014

2015

FEBRABAN 2015 Banking Technology Survey

The advance of non-financial transactions An indication that relationship channel strategies defined and implemented by banks have been considering consumer expectations is the increased volume of non-financial operations through digital channels. This is a very clear indication that digital inclusion in the country has grown side by side with the virtualization of bank services. This category jumped 16 percentage points over four years, from 60% to 76% of total share in 2015. On the other hand, the number of operations with financial transactions through these two channels maintained a slower pace of growth, rising four percentage points in the period, from 16% to 20% – in particular, service through branches, POS, ATMs, correspondents and contact centers. Clear factors explain the difference. The Internet and Mobile Banking channels are more favored for making non-financial transactions, in terms of channel convenience and easy access – the consumer chooses the place, time and device preferred for performing these operations. Improvement of websites and applications made by banks in recent years, adding new features, more suitable design for usability and greater integration of channels (the use of tokens, for example, by means of a mobile application on smartphones), has made access to digital channels even more attractive and interlinked. There is also the cost factor, since the majority of these operations are free of charge. Available in the palm of the hand, at a few touches on a smartphone, non-financial transactions become more accessible, which ends up encouraging users to make them more often than usual. A beneficial effect is that, due to the speed and lack of charge, consumers tend to be more active and adhere to these channels, making more transactions than before, becoming more present in their relationships with banks. This is the type of behavior that provides a double opportunity: to understand consumer habits even more and, at the same time, execute more objective strategies to bring them even closer and make them more loyal to the institutional brand.

The increase in number of non‑financial transactions in digital channels is a clear reflection of digital inclusion and

By means of comparison, this situation also changes when POS is added to the same Internet and Mobile Banking group. Expanding the reach of the digital channel group, one can more consistently see the increase in number of transactions made this way – in this case, there is also an increase in the share of non-financial transactions from 47% in 2011 to 56% in 2015.

virtualization of bank services.

Digital channels in real expansion, far ahead of the trend

EVOLUTION OF DIGITAL CHANNELS IN TERMS OF FINANCIAL AND NON-FINANCIAL TRANSACTIONS FINANCIAL TRANSACTIONS

53%

50%

NON-FINANCIAL TRANSACTIONS

47%

36%

31%

32%

16%

18%

19%

20%

2012 18 billion

2013 19 billion

2014 21 billion

2015 22 billion

Branches, ATMs, Correspondents and Contact Centers

POS

62%

40%

38%

68%

32%

30%

44%

34%

2011 16 billion

34%

60%

76% 70%

24%

2011 16 billion

2012 18 billion

Internet Banking and Mobile Banking

2013 21 billion

2014 27 billion

2015 32 billion

Total transactions by channel

2015 FEBRABAN BANKING TECHNOLOGY SURVEY

EVOLUTION OF DIGITAL CHANNELS, INCLUDING POS, IN TERMS OF FINANCIAL AND NON-FINANCIAL TRANSACTIONS FINANCIAL TRANSACTIONS

53% 47%

50% 50%

NON-FINANCIAL TRANSACTIONS

53%

47%

56%

44%

60%

62%

40%

38%

76%

68%

70%

32%

30% 24%

2011 16 billion

2012 18 billion

2013 19 billion

Branches, ATMs, Correspondents and Contact Centers 2015 FEBRABAN BANKING TECHNOLOGY SURVEY

2014 21 billion

2015 22 billion

Internet Banking, Mobile Banking and POS

2011 16 billion

2012 18 billion

2013 21 billion

2014 27 billion

Total transactions by channel

2015 32 billion

FEBRABAN 2015 Banking Technology Survey

Preferences for digital channels Comparing the share of financial and non-financial transactions through digital channels, one can see that the profile changed in 2015 compared to the prior year. It is important to note that, if the difference between these two types of activities is already relatively significant for Internet Banking – with 21% of the volume related to financial transactions –, it stands out even more for Mobile Banking: 5% of the volume recorded involves financial activity. This percentage, however, requires more detailed observation. Although the proportion did not increase much (or very significantly) from 2011 to 2015, the actual significant growth in transaction volume makes this portion even more significant now – 5 million transactions in 2015, compared to 2 million transactions recorded in the prior year. There is little mystery in relation to the reasons that still inhibit consumers from making financial transactions with their smartphones. Among them are cultural issues related to habits of use, as well as generational ones; and the perception of insecurity, both cybernetic, related to information theft by hackers or malicious software, and public security, relative to theft of the very devices.

The volume of

Another reason that stands out in this scenario has less to do with impediments and more with the very nature of the evolution of these numbers. This is the sharp and natural increase in non-financial transactions by Mobile Banking – caused by the ease of the channel – that ends up shifting the spotlight from any increase observed in financial transactions. Using their mobile devices, consumers tend to check balances and statements more frequently. An estimate based on the survey results and numbers of the Central Bank of Brazil show that, when using Internet Banking, the most common activity of consumers is checking balances and statements – with a 41% share of the transaction type breakdown. This share is 72% for Mobile Banking. In other words, these are channels in which the factors mentioned naturally contribute to an increase in the absolute number of non-financial transactions.

100 times

transactions made by Mobile Banking in 2015 grew

compared to the 100 million recorded in 2011

This means that there is a tendency to reverse the first factors that affect use of Mobile Banking in financial transactions. The same occurs with Internet Banking, which, even accounting for a smaller share of financial operations in total volume, has shown a modest pace of growth over the years.

Digital channels in real expansion, far ahead of the trend

To the extent the consumer feels less affected by issues of security, cybernetic or public, user resistance should slowly cool, mainly as new features are more regularly used by consumers, such as bill payment via Mobile Banking with barcode scanning by means of smartphone cameras, for example. This is a practical example of how it is possible to transform the user banking experience and encourage him/her to see how some tasks can be fully made using mobile devices.

EVOLUTION OF INTERNET AND MOBILE BANKING BY TYPE OF TRANSACTION (in billions of transactions) INTERNET BANKING

MOBILE BANKING

18.0

16.5 12.0 2.6 9.4

13.8 3.4

3.8

17.7 3.7

Growth + 100 times

3.2

0.5

10.6

13.1

14.2

14.0

4.7 0.2 0.0 0.1

2011

2012

Financial

2013

2014

2015

0.1 2011

0,0 0.5

0.5 2012

0.1 1.5

1.6 2013

10.7

4.5

2014

Non-financial

2015 FEBRABAN BANKING TECHNOLOGY SURVEY

BREAKDOWN OF DIGITAL CHANNELS BY TYPE OF TRANSACTION

Transaction type

Internet, Home and Office Banking

Mobile Banking (smartphones and tablets)

Checking statements or balances

41%

72%

Bank payment slips

11%

Credit transfer orders

Loans and financing

Other financial transactions

35%

23%

Other non-financial transactions

SOURCE: ESTIMATE BASED ON 2015 FEBRABAN BANKING TECHNOLOGY SURVEY AND CENTRAL BANK OF BRAZIL DATA

11.2

2015

Physical and traditional channels: Maintaining importance

espite the frank growth of digital channels, physical points and other more traditional service channels, such as branches, ATMs, contact centers, correspondents and service points, continue to play an important role. The numbers noted by the survey show an undeniable decline in this group’s share of total transaction volume. It is necessary, however, to put this situation into context within an overall scenario, in which service channels offered by banks to their consumers, seen as a complex and integrated system, move in the direction of adjusting themselves to the market reality and behavioral changes. To a certain degree, seeing how transactions are distributed within this system currently, what one has is a profile of how banks have redirected and re-managed the strategy in accordance with new behavioral trends. In a scenario in which increasing numbers of checking accounts, both personal and business, are able to navigate the virtualization of services – especially those related to non-financial transactions – the more traditional channels end up exercising their vocations more clearly. The most emblematic case, certainly, is that of branches. It is in these environments that consumers satisfy their needs for the security offered by the presence of a professional at the time of requesting or executing more complex credit or investment transactions, for example. The figure of the manager and tellers continues to be important when consumer issues involve more trivial and long term financial decisions.

Despite digital expansion, physical points and other more traditional channels

Out-of-the-ordinary questions in relation to account activity, for example, often depend on the presence of a reliable mediator for the consumer to feel more satisfied. The same logic applies to situations involving different transactions related to some need connected to the spatial location of the consumer, in addition to available time and funds, when it is more practical to rely on correspondents, ATMs, contact centers and service points.

still play an important role in serving consumers.

A new configuration: More adapted to current reality Total transactions made in branches, POS, ATMs and correspondents was 23.6 billion in 20156, representing 44% of the total. This is a significant share, of great importance within the overall service channel system. There is, however, a pace of adjustment or consolidation – and it is clearer when the movement between 2011 and 2015 is examined. When stability is absent, there was a decline. The largest reductions, in percentage points, refer to ATMs, from 26% to 19%, and bank branches, from 12% to 8%. What probably occurred was a strong migration of non-financial transactions to digital channels. At the end of the line of user preferences, contact centers probably appear as channels with considerable likelihood to be absorbed by digital channels, due to the advancing virtualization of services, the convenience of Internet and Mobile Banking in the user

FEBRABAN 2015 Banking Technology Survey

experience and, also, regulatory pressures on their operation. This channel’s share declined one percentage point since 2011, from 4% to 3% – an apparently small change seen literally, but one that gains greater importance when a universe of major expansion in total transaction volume is considered. EVOLUTION OF CHANNEL SHARE OVER THE YEARS (in billions of transactions)

48 32

36 0.1

1.3

2011

4.7

11.2

18.0

17.7

1.6

0.5 13.7 8.8 5.7 4.0 1.5

1.4

2012

9.2

1,3

2013

Internet Banking

10.2

10.0

7.2

7.8

4.9 1.5

4.4 1.4

Points of Sale (POS) Bank Branches

6.4 3.8 1.5

Mobile Banking ATM - Self service

16.5

12.1 8.3 5.1 3.9 1.4

1,6

2014

1,4

Correspondents in the Country Contact Centers

2015

2015 FEBRABAN BANKING TECHNOLOGY SURVEY

Traditional channels: Decline, yes, but with stability In 2015, the universe of physical branches, correspondents, BSPs and ATMs declined after recording an equally timid, but continuous, pace of growth since 2011 – with the exception of correspondents, which had already shown a small decline in 2014. In the case of branches, there were 22,900 establishments in 2015, compared to 23,100 the prior year. There was a total of 45,500 BSPs and ATMs in 2015, compared to 51,000 in 2014. Correspondents dropped from 346,500 in 2014 to 293,800 in 2015. The data are from the Central Bank of Brazil. The reduction affected all these channels, but had no impact on geographical distribution – the distribution remained stable in each region of the country. This is an important factor to consider, mainly when considering regional disparities in income generation and internet penetration – historically, lower outside the South and Southeast. Branches, BSPs, ATMs and correspondents will continue to be of great importance in regions where digital inclusion is still restricted. Several factors can be listed to justify this scenario of decline. The four most important are the economic situation of the country, which culminated with the closing of a number of establishments; the operational efficiency policy of some banks that chose to make a review to solve overlaps of existing service points; market consolidation movements by means of mergers and acquisitions; and the very diversification of service channels.

Physical and traditional channels: Maintaining importance

GEOGRAPHIC DISTRIBUTION OF BRANCHES, CORRESPONDENTS AND BSPS AND ATMS (in regional share of the total)

NORTHEAST Branches BSPs and ATMs Correspondents

NORTH Branches BSPs and ATMs Correspondents

2014 2015 5% 5% 7% 7% 5% 5%

2014 16% 19% 18%

2015 16% 19% 19%

SOUTHEAST Branches BSPs and ATMs Correspondents

CENTRAL-WEST Branches BSPs and ATMs Correspondents

2014 2015 8% 8% 9% 9% 8% 8%

2014 52% 47% 48%

2015 52% 47% 47%

SOUTH Branches BSPs and ATMs Correspondents

2014 19% 18% 21%

2015 19% 18% 21%

SOURCE: CENTRAL BANK OF BRAZIL

BRANCHES: REGIONAL EVOLUTION AND DISTRIBUTION (in thousands)

22.9

23.1

11.6

12.0

12.1

22.2

22.9

21.3

Brazil

Southeast

South Northeast Central-west North

19.5

10.7

11.4

3.7 2.8

4.1 3.2

4.3 3.5

4.4 3.6

4.4 3.7

1.5

1.6

1.7

1.8

1.1

0.8

2010 SOURCE: CENTRAL BANK OF BRAZIL

1.0

2011

2012

2013

2014

12.0

4.3 3.7 1.8 1.1

2015

FEBRABAN 2015 Banking Technology Survey

BSPS AND ATMS: REGIONAL EVOLUTION AND DISTRIBUTION (in thousands)

Brazil

Southeast

Northeast South Central-west North

46.4

44.3

48.2

49.4

51.0 45.5

23.3

23.8

21.9

22.5

23.1

8.1

8.7

9.2

9.3

7.9 3.7

8.3 3.9

8.6 4.1

9.0 4.4

9.7 9.2 4.7

2.8

3.1

3.2

3.4

3.6

2011

2012

2013

2010

20.9

2014

8.7 8.3 4.2 3.3

2015

SOURCE: CENTRAL BANK OF BRAZIL

CORRESPONDENTS: REGIONAL EVOLUTION AND DISTRIBUTION (in thousands) 375.3 354.9

346.5 293.8

Brazil

165.2

160.9 170.2

177.7

167.6 138.4

Southeast South Northeast Central-west North

73.6 36.3 35.1 13.0 7.1

2010

72.5 34.8 33.7 12.8 7.1

2011

73.7

79.4

66.5

70.7

29.5 15.0

31.0 16.6

2012

2013

74.2 60.7

61.8 54.9

28.2 15.8

24.9 13.8

2014

2015

SOURCE: CENTRAL BANK OF BRAZIL

Physical and traditional channels: Maintaining importance

ATMs: A stable presence, but with a slight reduction ATMs were major factors in the change in consumer behavior in recent decades – helping build a culture of more practicality and automation in performing banking tasks. They are an important channel for users, regardless of the type of transaction – whether financial or non-financial. The total number of ATMs in Brazil increased from 174,000 to 181,000 from 2011 to 2014, according to data of the Central Bank of Brazil. According to an estimate based on the results of the FEBRABAN Banking Technology Survey, this number was 178,000 in 2015, a slight fall, close to 2013 levels. With regard to regional distribution, there was also stability, just as occurred with other physical or traditional channels, with slight reductions in share seen only in the Southeast and Center-West.

TOTAL ATMS IN BRAZIL (in thousands)

174

175

179

181

1781

2011

2012

2013

2014

2015

NOTE (1): ESTIMATE BASED ON THE 2015 FEBRABAN BANKING TECHNOLOGY SURVEY SOURCE: CENTRAL BANK OF BRAZIL

ATM DISTRIBUTION BY REGION

2014

2015

16%

18% 52%

Southeast Central-west Northeast

51% 6%

North South

17%

18% 8%

2015 FEBRABAN BANKING TECHNOLOGY SURVEY

FEBRABAN 2015 Banking Technology Survey

Financial transactions stand out Correspondents and branches – as well as POS, by their very nature – account for the largest individual shares of financial transactions among all the channels, with 83% and 66%, respectively, in 2015, compared to 86% and 65% the prior year. These results clearly show how, in general, consumers still associate factors like security and reliability to the presence of a professional.

23.6 billion transactions were made at POS, correspondents,

Next come ATMs, which by nature are well divided in their vocation: in 2015, they accounted for 46% of non-financial transactions and 54% of financial transactions, a well balanced position, identical to that recorded in the last year’s survey. As part of an integrated strategy, these differences profile how consumers prefer to behave in each of the channels, according to the level of comfort in making a particular transaction. Cash withdrawals are an important factor that ensures the predominance of these physical channels in financial movement. By their nature, these mediums will continue to stand out based on use of paper currency transactions.

branches and ATMs in 2015, representing 44% of the total

BREAKDOWN OF EACH CHANNEL BY TYPE OF TRANSACTION Number of transactions in billions

100%

Number of transactions in billions

100%

7.2

POS

14%

7.8 17%

86%

Correspondents in the Country

83%

1.6

1.4 34% 66%

35% 65% Bank Branches

4.9

4.4 46% 54%

46% 54%

10.2

ATM

10.0 79% 21%

79% 21%

18.0

Internet Banking

17.7 95% 5%

95% 5%

4.7

Mobile Banking

11.2 97% 3%

97% 3% Contact Centers

1.5 2014 Non-financial activity

1.4 2015

Financial activity

2015 FEBRABAN BANKING TECHNOLOGY SURVEY

A sector in the forefront of technology investments

he banking industry is at the forefront in adopting new technologies. And it’s no wonder. In business, there are general demands for efficiency in each sector, exercised by the most diverse market participants. Banks, however, are subject to even greater pressure, either due to their intrinsic relationship with good operation of entire chains in various other sectors – on the companies’ side and, also, their clients – or due to the position of their own clients, who see banks as suppliers of a service essential to their daily lives and long-term plans. Innovation, practicality, soundness, speed and guaranteed continuity are not just some of the characteristics that every consumer expects – but the components sought by the efforts of all banks when they develop their technology investment strategies.

Efforts to keep the sector in the vanguard To keep the sector in this position, Brazilian banks set aside R$ 19 billion in 2015 for technology, between investments and spending. Even with a challenging economic scenario, the volume of funds directed to information technology (IT) continue to be massive, although less than the prior year when they totaled R$ 21 billion. The reduction is due to some factors beyond the current situation of the economy, such as price reductions of some products in the technology market and the efficiency and maturity that banks have gained over the years – which, according to business rationale, leads to a lower need for new investments. Of all investment and spending on technology in 2015, 44% was destined for software, 35% hardware and 20% telecommunications. Current distribution reflects a reversal of shares that already began to appear three years ago and became clearer in 2014 when hardware consumed 40% of total investments and spending and software, 39%. One reading of this increased participation of software shows, for example, that there was increased demand by banks to offer features to consumers by means of Internet and Mobile Banking (considering that investments and spending on mainframe software are included in the volume allocated for hardware). It is also an indication that efforts have been directed toward extracting the maximum from infrastructures already constructed – instead of adding capacity, banks are working to take more advantage of what was already installed. By distributing the amounts between investments and spending, the larger share of software in the sums allocated for the two categories is clear. In terms of share, software rose from 42% to 54% of total investments and from 38% to 41% of spending recorded in 2014 and 2015 – a real increase in the amount in the case of spending. Looking at the data separately, one can clearly see the reversal of positions, specifically in investments. In 2014, for example, the larger part of investments, 49%, were made for hardware

FEBRABAN 2015 Banking Technology Survey

(compared to 42% for software). In 2015, hardware accounted for 40% of the total (compared to 54% for software). It can also be seen that there was a decline in the total volume of investments in 2015, from R$ 8 billion to R$ 5 billion, and an increase of R$ 1 billion in spending during the same period, which reached R$ 14 billion. This is a lower volume of investments, but still robust given the current scenario, while spending remained at a similar level, slightly higher. This reflects the cyclical nature of technology funding: after high investments, it is natural for spending to continue high while the volume allocated for acquisition and technology development declines, as a means of evening out the balance. In addition, technology purchases as provision of services, which makes up for spending, instead of license acquisition, which is considered expenditure, end up influencing the difference between allocation of resources.

EVOLUTION OF TECHNOLOGY INVESTMENTS AND SPENDING Total hardware investments and spending Total software investments and spending Total telecommunications investments and spending

42%

40%

39%

18%

20%

2012 19 billion

2013 21 billion

2014 21 billion

2015 19 billion

33% 37% 22%

Total investments and spending on other technologies

2011 Total investments and spending 18 billion

44%

41%

40%

21%

35%

2015 FEBRABAN BANKING TECHNOLOGY SURVEY

Banks spent

19 billion

After high investments, it is natural for spending to continue high while the

on technology in Brazil in

volume allocated for acquisition and

2015, between investments

technology development declines, as a

and spending

means of evening out the balance.

A sector in the forefront of technology investments

INVESTMENTS AND SPENDING ON SEPARATE PATHS* TOTAL INVESTMENTS (in R$ billions)

48%

56%

50%

42%

54%

46%

40%

44%

49%

40%

2011

2012

2013

2014

2015

Software Hardware Telecommunications

TOTAL SPENDING (in R$ billions)

12 26%

26%

42%

35%

38%

41%

40%

35%

33%

25%

27%

26%

Software Hardware

32%

2011

32%

2012

2013

2014

Telecommunications

2015

*Mainframe software investments and spending are included in hardware 2015 FEBRABAN BANKING TECHNOLOGY SURVEY

A panorama of technological capacity The banking sector is recognized around the world as a large processor of data: the volumes are huge and they demand great attention in technology investments and spending, as an essential part of growth strategy. The survey results show that, with regard to the data of the five largest banks, storage was considerably expanded – in other words, the volume of hardware necessary to store information. The capacity, in terabytes, rose from 275,000 in 2014 to 357,000 in 2015 – also an indicator that even with lower levels of investment, the decline in the market price of these technologies allowed continued advances in storage capacity. The survey results also show that information transmission capacity, measured in MIPS (million instructions per second), rose from 1.44 billion in 2014 to 1.68 billion in 2015. Meanwhile, desktop, smartphone and tablet assets of this portion of the sample dropped from 622,000 in 2011 to 560,000 in 2015 – with the share of mobile devices in the total volume rising from 5% to 9% in the period.

FEBRABAN 2015 Banking Technology Survey

STORAGE VOLUME OF THE FIVE LARGEST BANKS (in thousands)

357 275 192

53%

148

55%

115

55% 59%

62%

47%

45%

41%

38%

2011

2012

2013

2014

2015

Storage excluding mainframes (in TB) Storage for mainframes (in TB) 2015 FEBRABAN BANKING TECHNOLOGY SURVEY

MIPS (MILLION INSTRUCTIONS PER SECOND) FOR THE FIVE LARGEST BANKS (in thousands)

1.680 1.448

1.284 1.045

892

2011

2012

2013

2014

2015

2015 FEBRABAN BANKING TECHNOLOGY SURVEY

FIXED TECHNOLOGY ASSETS OF THE FIVE LARGEST BANKS

2011

2015

9% 95%

91%

Desktops Smartphones and tablets

thousand 622 number of pieces of equipment

thousand 560 number of pieces of equipment

2015 FEBRABAN BANKING TECHNOLOGY SURVEY

A sector in the forefront of technology investments

Investments in Brazil and globally: the same trend In comparison to the global average, the numbers referring to technology investments made by Brazilian banks are at the same level. Both in Brazil and in other countries, on average, the banking sector is the second highest in terms of technology investment – both holding a 13% share of the total amount. Banks are only second to the government and public sector in Brazil and around the world, with shares of 14% and 16% respectively. Right behind come the sectors of telecommunications, water, electricity and gas, and commerce.

The banking sector accounts for

13% of total technology investment in Brazil, second only to the government

The trajectory in recent years is also aligned with the global reality. Around the world, there has been a rise in volume destined for this area between 2011 and 2014. The expansion was 11% in all, reaching US$ 362 billion in 2014. One year later, there was a decline – and, in 2015, it reached US$ 351 billion. These data place the fall in the amount of investments made by Brazilian banks in line with what has occurred with the banking sector around the world. Even so, Brazil maintains its position in the forefront of this area. Comparing total spending on technology in the entire world, Brazil would be in 9th place in 2015, tied with India, with 7 billion dollars according to Gartner data. However, when spending on information technology in the banking sector as a proportion of GDP, the country comes in 7th place among the ten largest global economies. It is a higher result than that of any of the other BRIC countries – ahead of India and China, which are in 8th and 9th place, respectively. Those ahead of Brazil are the quite developed economies: Germany, France, Japan, Canada and the United States, with the United Kingdom leading the ranking.

TOTAL GLOBAL SPENDING ON BANKING TECHNOLOGY (in US$ billions)

326

339

354

362

351

2011

2012

2013

2014

2015

SOURCE: GARTNER, 2015

FEBRABAN 2015 Banking Technology Survey

Brazil

World

14%

9% 3% 3% 4% 4%

13% 7%

4% 4% 5%

7% 5%

5% 6%

16%

10%

2% 4% 3% 4% 5% 3% 5%

13% 6% 5% 7% 5% 6%

US$ 51 billion

Government

Mining

Banking sector

Non-durable goods

Telecommunications

Securities

Water, electricity and gas

Health services

Commerce

Civil construction and real estate

Other IT services

Heavy industry

Transportation

Automotive

Insurance

Other segments*

* Other segments â&#x20AC;&#x201C; Education; radio broadcasting; pharmaceuticals, advertising, information peripherals, entertainment

US$ 7.7 trillion

SOURCE: GARTNER, 2015

SPENDING ON INFORMATION TECHNOLOGY AS A SHARE OF THE ECONOMY (Spending/GDP X 1,0001)

8.2

7.2

6.9

6.9 4.4

United Kingdom U.S.

Canada

Japan

France

4.0

3.7

Germany

Brazil

3.2

2.9

India

Italy

2.2

China

Note (1): For a better comparison of the position of the countries analyzed, fractions were multiplied by 1,000; however, a better way of presenting the data might be to use the data strictly in ordinal terms, making the analysis a ranking. SOURCE: GARTNER, 2015

THE TEN LARGEST IN TOTAL SPENDING (in US$ billions)

130

124

2014 2015 28 31

U.S.

Japan

25 24

23 24

13 15

11 12

9 10

7 9

China United Kingdom Germany Canada

France

Australia

Brazil

India

SOURCE: GARTNER, 2015

Digital channels in real expansion, far ahead of the trend

FEBRABAN 2015 Banking Technology Survey

Bancarization: Access to essential services 41

Bancarization: Access to essential services

he growth of Bancarization in a country is a clear indicator of the greater sophistication of its banking industry in expanding the reach of its service channels, achieving greater capillarity, either by physical means or accompanied by expansion of digital inclusion. Furthermore, it is a sign of a mature market in which competition results not only in increasing the reach of products and services, but in their quality and greater compliance with monetary authority regulations. In 2015, the rate of bank access in Brazil reached 89.6%, considering the relationship of the public with banks based on access to essential services, defined by Resolution 3.518/2007 of the Central Bank of Brazil and whose dimension is given by the National Financial System Clients Registry (CCS). These services encompass, for checking accounts, an initial card with at least debit, withdrawal and monthly statement functions. In this context, the bank access rate has been growing in a relatively stable manner in recent years. The numbers were calculated adopting the concept and methodology of the monetary authority in the country, the Central Bank of Brazil. Thus, it is possible to have a more objective view of the real scenario, since census data is used, covering the entire population.

BANCARIZATION IN BRAZIL

200

72.4%

74.7%

77.8%

79.9%

82.8%

2008

2009

2010

2011

2012

85.4%

2013

87.0%

89.6%

2014

2015

180 160 140 120 100 80 60 40 20 0

Bancarization rate

Population (over 15)

Active Individual Taxpayers (CPFs)

SOURCES: ACTIVE CPFS OF THE BRAZILIAN CENTRAL BANK (INDIVIDUAL TAXPAYER REGISTRY OF PEOPLE OVER 15); BRAZILIAN POPULATION OVER 15 BASED ON IBGEâ&#x20AC;&#x2122;S PNAD AND POPULATION PROJECTION SURVEY; CCS DOES NOT RECORD TRANSACTION DATA OR BANK BALANCES.

FEBRABAN 2015 Banking Technology Survey

Banks and consumers in the digital world: consolidation â&#x20AC;&#x201C; and what more is to come 43

Banks and consumers in the digital world: Consolidation – and what lies ahead

A great deal of the main changes instigators will continue to be what is already known today: Social networks, mobility, quasi-absolute connectivity, sense of sharing, Internet of things and technological innovations

he balance between risks and opportunities is a classic in strategy. In any market, new players, new technologies and new behaviors alter dynamics in a way that threatens businesses that, until today, have led the sector. Faced with these fronts, some people can only see threats – and there are those who can identify opportunities to innovate, follow the new trends in the horizon or even anticipate them, leading the transformation. Historically, the banking sector has anticipated several issues it should pay attention to: advances in technology and, more recently, digital culture emancipating users and encouraging new businesses, to name a few. As a result of this attitude, some factors were converted into opportunities even before they were perceived as very serious risks – digital and mobile behaviors, for example. Because they understood that access to the Internet and to electronic devices, the change in user profiles and more people demanding practicality and mobility would lead to the constitution of a new scenario, banks invested heavily in technology – resulting in today’s unprecedented advance of Mobile Banking in Brazil. Much has been done, and there is still a lot to do. The advance of technologies and new disruptions to the marked, caused by the revolution in several business models, should direct the banking sector towards other challenges in the next few years, impacting the whole chain. In terms of anticipating this future, there are several very clear ideas about what is coming – based on what is already consolidated. A great deal of the main change instigators will continue to be what is already known today: social networks, mobility, quasi-absolute connectivity, sense of sharing, Internet of things, apart from other technological innovations. And the directions that many projections point to are the establishment of 100% virtual banks, customized products and services with intensive use of analytics technologies, the end of paper money – and, further into the future, even “plastic”. Virtualization is moving to the center of the business model. In terms of disruption, the main players will be the fintechs – as the emerging companies in the financial sector are being called. In the current market dynamics, they can be seen as new players, competitors – but they are also targets of acquisition or even partnerships in a market in which competition concepts are also being redesigned. And in terms of logical business evolution, it is expected that new technologies, such as blockchain, virtual wallets and new practices – like lending marketplace, which reconfigures financing logic – bring more transparency and efficiency both to consumers

FEBRABAN 2015 Banking Technology Survey

and to companies. A brave (and inspiring, for those who can see the opportunities) new world is emerging for the banking sector.

Consolidation in a still fertile scenario The growth pace of the number of current accounts allowing to use Internet and Mobile Banking has made clear that clients are increasingly interested in interacting with banks through digital channels. In the Brazilian scenario, this factor is also related to the advance in digital inclusion. In 2015, the rate of access to the Internet among the population in Brazil reached 56%, compared with 48% in 2014. It is below many developed countries and, in a closer comparison, within the BRICs countries, it is very low compared to China, where the rate has reached 85% in 2015. Among the ten largest economies in the world, Brazil only beats India, with a rate of 29% in 2015 – two percentage points below the previous year.

Historically, the banking sector has anticipated several issues it should draw attention to: advances in technology and, more recently, digital

Brazil’s position in this ranking makes it clear that there is still a lot of room to grow – a considerable part of the population is still waiting to be part of the digital world. When we consider that, among the population already digitally included, the use of mobile devices does not cease to grow, we can expect substantial growth potential for Mobile Banking as these two scenarios expand together, the first feeding the second. Brazil, after all, already has a smartphone penetration level in its population higher than the world average. According to IBGE data from 2014, for the population aged over 10, 40% of Brazilians have a smartphone. In the world average, this share is 37%, considering data from The Mobile Economic Report 2015. The market estimate is that both rates will increase to 65% in 2020.

culture emancipating users and encouraging new businesses.

Broken down into regions of Brazil, the data show more incisively how much potential there still is for expansion. The regions with the greatest smartphone penetration in the population are the Center-West, with 47%, and the Southeast, with 45%. They are followed by the South (39%), the North (38%) and the Northeast (31%). Considering the high rate of bancarization already achieved in the country (based on access to basic services), of 89.6% according to data from Central Bank of Brazil, what is seen is a latent opportunity – which justifies the position of banks among the main Brazilian investors in technology. There are too many growth opportunities at stake to not be in a good position.

Banks and consumers in the digital world: Consolidation – and what lies ahead

DIGITAL INCLUSION IN BRAZIL AND WORLDWIDE (internet access rate of the population) 86% 85%

82% 84%

82% 83%

82% 81%

79%

75%

80%

75% 73%

70%

2014 2015

73% 56% 48%

29% 27%

Japan

Canada

Germany United KingdomU.S.*

France

Italy

China

Brazil

India

SOURCES: “CONNECTED CONSUMER SURVEY”, BY ANALYSIS MASON, MADE IN OVER 150 COUNTRIES *THE U.S. DID NOT PARTICIPATE IN THE 2015 EDITION OF THE SURVEY

SMARTPHONE PENETRATION IN BRAZIL AND WORLDWIDE

47%

45%

40%

39%

37%

38% 31%

Brazil1 Center-West1 Southeast1

South1

North1

Northeast1

World2

SOURCES: (1) IBGE. POPULATION OVER 10 YEARS OF AGE. (2) THE MOBILE ECONOMY REPORT 2015 (DATA IN THIS REPORT ARE ESTIMATES AND ARE HISTORICALLY REVIEWED EVERY YEAR

FEBRABAN 2015 Banking Technology Survey

Digital consumers and their new habits Technology has the power to change habits – in a constant and permanent transformation. It is not an instantaneous process: its power is not so apparent at the moment when consumers start to adopt it. It is necessary that repetition, as in a custom, becomes part of the routine for the new behavior to arise. Today, the big issue is that the power of connection and mobility technologies to consolidate this behavior more rapidly, does not come in one-way, but it is a process affected by multiple directions. Firstly, because when a solution emerges, it often does to address common problems of a large number of people: lengthy processes and slow-moving and uncomfortable situations. Sometimes, society only realizes it needs a new model when testing it: and, then, there is no way back. On the contrary, what happens is that there is pressure for more and more improvements. Digital channels, especially Mobile Banking, already act in a way that transforms habits – and the settlement of a new behavior should be clearer as of now. Deloitte’s “Global Mobile Consumer Survey”, carried out in over 20 countries, including Brazil, brought to light the type of behaviors that more specifically have started to be part of Brazilians routine. In a universe of 2 thousand people interviewed only in Brazil, 89% said they had a smartphone. Also within this universe, 86% said they had bank accounts, against 2% who responded negatively (the rest chose not to answer the question). When asked about their banking habits in the devices, 41% said they check their accounts balance at least once a week and 17% do so every day. The result is in line with the current vocation of Mobile Banking as a preferred channel for transactions without financial activity. A considerable number of respondents (22%), however, said they pay at least one bill a week on Mobile Banking. Similarly, 19% said they make at least one money transfer every week. These results are higher than those related to the use of electronic commerce on smartphone: 18% said they shop online at least once a week on the device. The numbers make it clear, once again, that it is not about continuing to talk about trends for digital channels, but it is actually the consolidation of a scenario where there is still a lot of room to grow.

A trend under consolidation Digital media as the main driver of increasing the number of transactions

41% check their bank balance at least once a week – 17% check it at least once a day

19% make at least one money transfer a week – 9% make at least one transfer a day

22% pay at least one bill on Mobile Banking a week – 7% pay at least one bill on Mobile Banking every day

18% shop online on the smartphone at least once a week – 7% shop online on the smartphone at least once a day SOURCE: GLOBAL MOBILE CONSUMER SURVEY (DELOITTE, 2015)

Analytics and the next impacts on the finance sector Many technological trends projected in recent years were not only confirmed as useful for businesses, but also unfolded into a kind of micro-trend, smaller revolutions within a large transformation. The use of analytics is one of them. At first, it was acclaimed as the most accurate way to understand and anticipate consumer behavior. In the banking sector, it represents an ongoing shift. From this perspective, analytics made banks focus on better use of the information available – enabling the advancement of important

Banks and consumers in the digital world: Consolidation – and what lies ahead

matters, such as service customization and the development of strategies for digital channels, for example. As a technological front, however, analytics has been delivering new types of employment. In its third edition, the “Analytics Trends 2016 – The Next Evolution” report prepared by Deloitte, identified six major trends already in place, related to the cohesion between analytics, science, data, and pondering within the decision-making process. Of the six trends identified, three should affect the finance industry directly: the wide expansion of the use of analytics in all business fronts; the use of analytics in information security practices; and the intensive use of science in building new analytics practices.

Analytics made

Analytics: expansion through the departments – Advancing the use of

banks focus on

analytics is already in the agenda of several companies, abandoning its use to drive decision-making to specific business areas and adopting an integrated vision in order to feed the great strategic decisions, whether in the short or long term, to build what is being called the insight-driven organization – freely said, a company aligned with new ideas and perspectives.

better use of the information – enabling the advancement of matters such as service customization or the design of strategies for digital channels.

The possibility to leverage the use of analytics at this level has made many leaders consider the decision to build new data processing centers or more robust infrastructures of big data analysis. It is the type of decision that can help banks, for example, to rapidly design new products and services in a customized way and understand every type of impact that implementing them or not can bring to the business.

Aggressive information security – Protecting clients’ data and preventing frauds are concerns at the top of banks’ strategies, historically. In more sophisticated sectors to this respect, such as the banking sector, information security practices now go beyond responsive protection, entering the realm of predictive approaches. According to the “Analytics Trends 2016” study by Deloitte, practices can include automated scanning of conversations and interactions spread on the internet, promoted by groups or individuals, that may indicate any initial or slight intention of fraud. This strategy’s approach would encompass the entire world, since globalization and the digital revolution have eliminated barriers also in the field of security. Another analytics application in this area would be the deep analysis of the history of attacks and frauds in the company itself and in the sector, to create highly advanced, predictive models. The study also points to systematic and continuous probing of the bank’s own defenses, in order to find possible faults before hackers or malicious programs do. Implementing these tools should mean more than investing in technology - but especially in personnel, training specialized information security professionals in new analytics applications.

FEBRABAN 2015 Banking Technology Survey

Doors open to science – If the analysis of large volumes of data in search of conclusions, methodologies and new directions is no novelty in the business sector, in the world of academia and the sciences, it is practically routine. For this reason, it is seen a large effort by companies to generate synergies between these two fields, in the use of analytics tools, techniques and procedures. An example cited by the “Analytics Trends 2016” study presents a company in the finance sector having difficulty to analyze the millions of contacts received from consumers every year, in search of actually relevant information – counting on only a few hundred professionals to deal with the task. After all, in general, with the service via chat, online forms or even emails exchanged between the professionals in a branch and their clients, the volume of communication via text alone can reach gigantic proportions. To tackle this issue, the entity mentioned incremented their text analytics techniques, reaching a new level of sophistication. To this, bioinformatics tools were employed. These are commonly used by scientists to codify DNA chains. This is no exaggeration. DNA is represented by a series of letters of non-random occurrence – not too far from words and sentences that form a text. As a result, the company acquired a mechanism able to classify, forward and prioritize messages automatically. CHARACTERISTICS OF THE NEW ANALYTICS TRENDS

Expansion of the use of analytics to all business fronts

Use of analytics in predictive information security

Science support in building new analytics practices

Impact on society

Average

High

Impact on business

High

Adoption intensification

Within three years

Within five years

Most affected sectors

Financial services, retail, and telecom

Financial services, government, and retail

Financial services, health, consumption, retail, telecom, tourism

Leading areas

IT, marketing and production

IT and information security

Customer service, finance, marketing, and supply chain

SOURCE: “ANALYTICS TRENDS 2016 – THE NEXT EVOLUTION” STUDY (DELOITTE)

Banks and consumers in the digital world: Consolidation – and what lies ahead

Scenarios for the next ten years What will the banking sector of the next decade be like? Which new technological trends should be worked on, as of now, to be consolidated in the next few years – likewise with the digital channels? What needs attention as of now? There are many stimuli to change, and they come from several directions. For example, the “Banking Reimagined – How Disruptive Forces Will Radically Transform the Industry in the Decade Ahead” study by Deloitte shows a mapping of which trends – whether opportunities or risks (sides of the same coin, as tipped off at the beginning of this chapter) – are on the way to banks. Based on a study that involved consultation with a number of sources and specialists from Deloitte as well as the market, the authors attempted to foresee what the banking sector will be like in the future, following the already predictable paths and those still hard to conceive. After crossing the projections, they identified five specific scenarios. All of them are part of an already announced context. According to the survey conclusions, what is ahead is a very different competitive environment. As a result of the fintechs arrival and the reestablishment of strategies by some traditional companies, a fragmented industry will emerge, with traditional market frontiers overlapping with one another – with more non-banking companies starting to offer financial services. The report still points to larger gains in efficiency to all players as a result of even greater advances in automation, apart from an accelerated pace of improvements to consumers’ digital experience. The study shows that to navigate well in this scenario, traditional institutions will have to boost the collaboration experience with its entire network in the sector: suppliers, partners, external talents, and regulators. The five projections indicated by the study as points of attention are as follows.

To navigate well throughout the next ten years, traditional banking institutions will have to boost the collaboration experience with its entire network in the sector: suppliers, partners, external talents, and regulators.

FEBRABAN 2015 Banking Technology Survey

A new organizational paradigm: Agility, collaboration and exposure

The pressure related to costs and simplicity of structures and processes will be even greater. In order to cope with it, a common phenomenon will be to use more outsourced services for infrastructure matters that are neither related to the main business nor to the talent field. Banks will become intensely connected by means of a complex network of suppliers and outsourced service providers. This network, in addition to offering various benefits, should also be an important point for new operational risks.

future of brands: digital competence and a clear 2. The focus on users’ experience Brands are a critical point for several sectors, and highly strategic for the banking sector. Maintaining its sustainable value in an increasingly digital economy will be vital. There are some apparently trivial issues, although of importance, to deal with. For example: in the pace of transformation of the universe of payments, in which even cards tend to disappear, banks can be deprived of an important means of displaying their brands in the routine of consumers and the market. An increasingly smaller number of branches displaying the flags on city streets can have the same effect. Among the components that should help reversing this situation are indeed the partnerships to be established with other participants in the future banking ecosystem – and how they are presented to the market. Differentiation in the product and service portfolio and great concern for users’ experience will be key factors in building valuable brands.

Differentiation in the product and service portfolio and great concern for users’ experience will be key factors in building new valuable brands.

Banks and consumers in the digital world: Consolidation – and what lies ahead

Payment revolution: on blockchain, direct and perfectly integrated

Around 2020, private payments made through authorization by means of blockchain‑based systems will reach a significant transaction volume, the Deloitte study indicates. Digital currencies tend to evolve and be more widely accepted, even within traditional sectors, as its use grows and its nature becomes more inter‑operational with ordinary cash. More important than its monetary function, however, is the revolution blockchain brings to the nature of transactions, as an important transparency driver. This technology allows the entire trajectory of the asset being moved to be recorded and digitally protected. Roughly, it works as follows: Two parties – whether people or entities – make a transaction data: which can represent money, contracts, bonds, medical records, personal records or any other “asset” that can be described in a digital form. Until this asset is moved forward by the receiver in the previous transaction, regardless of the purpose (if sold, used as currency or liquidated), the entire process is codified, verified, approved – or not – and recorded, according to a pre-established set of rules. All of this building a type of incorruptible chain of data blocks within a digital environment. It involves more transparency – but also, it fosters more autonomy between the parties. As direct payments made by blockchain are more common, the need for intermediaries – the role of banks in this process – can be reduced. At the same time, in an increasingly digital environment, transaction fee margins may tend to be lower – which, however, according to the study, should not threaten the leadership of traditional banks in the sector. The result will be more focused on transforming users’ experience, which will be more automated and transparent, as digital payment technology and the Internet of things advances further.

More important than its monetary function, however, is the revolution blockchain brings to the nature of transactions, as an important transparency driver.

FEBRABAN 2015 Banking Technology Survey

Seamless deals: Technology and the search for relevance at the forefront

The cycles of bond sales should become more dependent on automation, with blockchain playing an important role in this trend. Clearance and liquidation cycles will become faster and more automatic, bringing more efficiency to the capital market – but eliminating a lot of space for product and service differentiation. A lot, but not all of it. Strategic advisory and the perspectives and analyses carried out by specialized professionals will become even more important for customer services, in model creation and support to investment decisions.

Marketplace lending: the evolution of lending by non-banking companies

Marketplace lending shall consolidate, as anticipated by the Deloitte study, driven by the nature of the traditional environment of credit and interest rates. According to a definition by the Marketplace Lending Association, an entity created by companies that bloomed in the U.S. and the U.K. by offering this financial practice, the objective of marketplace lending is to connect consumers and small companies in need of credit to individuals and legal entities interested in investing resources by lending – the intermediary companies being responsible for the processes as to guarantees and fees adjustment, among others. According to the study, as this new funding modality grows stronger, three possible scenarios should unfold. In the first, a few of these new companies, those that do obtain scale, will survive, acquiring smaller competitors and establishing joint ventures with large banks or partnerships with small banks. In the second, large banks start acquiring marketplace lending companies, as well as other technology and data businesses related to this type of service, to strengthen or reformulate many aspects of their own operations. Finally, some marketplace lending companies should choose to serve banks using the white-label model – that is, as suppliers, developing market solutions that will be presented by the banks under their brands. Again, a transformation that initially resembles a risk – but that, with a strategic vision, turns to be a great opportunity for the banking sector.

Strategic advisory and the perspectives and analyses made by specialized professionals will become even more important to customer services, in model creation and investment decisions support.

FEBRABAN 2015 Banking Technology Survey Research project leader: Brazilian Federation of Banks (FEBRABAN) FEBRABAN professionals directly involved in the initiative: Gustavo Fosse (Director of the Technology and Banking Automation Sector of FEBRABAN), Sergio Leo (Director of Image and Communication Policies), Cleide Sanchez Rodriguez (Communication Manager), and Nilton GratĂŁo (Director of Business and Operations).

Preparation of this edition of the survey, including this report: Deloitte Deloitte professionals directly involved in the initiative: Clodomir Felix (Deloitte Financial Services Industry Leading Partner), Paschoal Pipolo Baptista (Deloitte Financial Services Industry Partner), Renato Souza (Brand & Communication Director), Giovanni Cordeiro (Research Manager), Bruna Luz (Research Analyst), and Evelyn Carvalho (Publication Supervisor).

Suppliers Mare Magnum (Layout) Ultraprint (Printing).