Mexico City — Emilio Smith wanted to increase his credit line at HSBC, but the bank would not extend it, and required him to make a daily purchase with his card to avoid the annual fee. This prompted him to look for more flexible options, a natural step to becoming a customer of one of the many neobanks that fill the gaps that traditional banks have not been able to fill more efficiently.
Consumers in countries where fintechs are gaining presence are leaving their traditional banks to try their luck with these companies due to the greater ease of access to credit, flexibility, simpler interfaces for understanding personal finances, and a perception of security.
Seventy-five percent of customers are attracted to the cost-effective and seamless services of fintechs, according to the World Retail Banking Report 2022, conducted by French digital banking transformation firm Capgemini in conjunction with the European Financial Management Association (EFMA).
Neobanks are also competing by offering more attractive services, such as commission-free transfers, one of the main reasons users are making the switch from banks to fintechs, Nicolás Perdomo, head of South America sales at Backbase, a financial technology company, told Bloomberg Línea.
But are users really switching from traditional banking to fintech? Not exactly. The reality is that users are trying out the services, but they still have accounts with their primary bank.
Emilio Smith, after his experience, turned to Nu, but he still has an account with Citibanamex, one of the three largest banks in Mexico, because of the benefits it offers, especially the ticket pre-sale promotions for entertainment events.
Nu, like fintechs Albo and Stori, which seek to democratize access to financial services, offers credit even to people who have fallen into the credit bureau, a ‘blacklist’ in Mexico on which debtors are placed, and which is used as a guide for banks or mortgage providers when considering an application for a loan.
That was the reason why Marissa Sánchez opted to open an account, as it gave her the opportunity to access credit after having entered the bureau due to a human error by BBVA Mexico (when it was still Bancomer, before being bought out by Spanish giant BBVA), even though she had healthy finances.
Sánchez, however, maintains her relationship with the bank, because that is where she receives some payments.
A study by the consulting firm McKinsey & Company states that consumers now demand more flexible processes and that, after the Covid-19 pandemic, they are exploring new options. Seventy-one percent prefer multichannel interactions, and 25% want a 100% digital experience with their bank. This data explains why some users are switching from banks to fintechs.
Nu, Smith’s bank of choice, recently chalked up 2.7 million customers in Mexico. The company says it is opening the door to financial services for a wide range of people previously excluded by the banking system. In addition to the unbanked, it claims to be attracting users who already had accounts at other banks.
Emilio González, general manager of Nu Mexico, told Bloomberg Línea that the bank has become the largest issuer of new credit cards in the country since arriving in the country in March 2020. “Month by month we issue more cards than any other bank,” he said during the Latin America Summit 2022, organized by Brazilian fintech Ebanx, in October.
Despite being the largest neobank in Latin America, Nu barely has 2% penetration of the financial market in Mexico. Banco Azteca and MercadoPago lead, with 18% and 16% market share respectively, according to the study Engagement Banking in Latin America in 2022, published by German financial technology firm Backbase.
The study shows that traditional banks remain the market leaders, but non-traditional platforms largely coexist with them and are capturing more and more customers.
Fifty-one percent of those who participated in the study use only a traditional bank (down from 55% in 2021); 40% use both a traditional bank and a non-traditional player, and 9% use only a non-traditional player. Only 12% prefer to stick with the bank they have always used.
Rebeca Arredondo opened simultaneous debit accounts in fintechs Albo, Klar and Cuenca, with Albo the one that works best for her, she says, because of its constant improvements in the application, and the ease of payment of services and control of expenses, although she continues to keep an account at Santander to receive payments and make interbank transfers. The reason for this is that some sites detect Albo as a transfer and payment system and not as a bank.
Ángel Sahagún, founder and CEO of Albo, believes however that neobanks do pose a threat to traditional banks. “Definitely the fintech sector is stealing clients from banks,” he told Bloomberg Linea.
Although Albo launched in 2016, focused on the underbanked and unbanked, it currently captures customers who were banked, but who have found Albo to be a better solution, Sahagún said.
In Mexico, says the Backbase study, 41% choose a banking institution for ease and agility of use.
Marissa Sánchez, as a user, highlights the ease of use of fintech and customer service: online and from the app. She assures that she does not plan to return to traditional banking to apply for a credit card.
Should banks be concerned about this?
The answer is not heterogeneous, points out Felipe Pérez, director of the FAIR Center at the Business School of the Tecnológico de Monterrey university in Mexico.
Each financial institution may have its own position, for example. There are international institutions that prefer to sell their retail business to focus on large agents, but there are institutions that are internally generating technological innovations to serve digital users, says the academic.
This happens, Pérez continues, because in the banking business it can sometimes be more expensive to originate a loan of $1,000 pesos than one of 10 million pesos, so some banks are not interested in this sector.
Traditional banking does not want to be left behind however, and is working to digitize and offer better services and experiences to its customers. The Backbase study indicates that users’ perception of digital service quality has improved compared to last year.