e-Banking as a Competitive Advantage in Brazil The Federative Republic of Brazil is the largest and most populous country in Latin America, and fifth largest in the world. Spanning a vast area between central South America and the Atlantic Ocean, it is the easternmost country of the Americas and it borders Uruguay, Argentina, Paraguay, Bolivia, Peru, Colombia, Venezuela, Guyana, Suriname and French Guiana - every South American nation except for Ecuador and Chile. Named after brazilwood, a local tree, Brazil is home to both extensive agricultural lands and rain forests. The official language of Brazil is Portuguese.

Possessing large and well-developed agricultural, mining, manufacturing, and service sectors, as well as a large labor pool, Brazil's economy outweighs that of all other South American countries and is expanding its presence in world markets. Major export products include coffee, soybeans, iron ore, orange juice, steel and airplanes.

After crafting a fiscal adjustment program and pledging progress on structural reform, Brazil received a $41.5 billion IMF-led international support program in November 1998. In January 1999, the Brazilian Central Bank announced that the Real would no longer be pegged to the U.S. dollar. This devaluation helped moderate the downturn in economic growth in 1999 that investors had expressed concerns about over the summer of 1998, and the country posted moderate GDP growth.

Economic growth slowed considerably in 2001, to less than 2%, because of a slowdown in major markets, the hiking of interest rates by the Central Bank to combat inflationary pressures, and fears over the economic policies of the new government to be elected. Investor confidence was strong at the end of 2001, in part because of the strong recovery in the trade balance. Highly unequal income distribution remains a pressing problem. After Luiz Inacio Lula da Silva, who grew up in a poor family, came to power January 1, 2003, fears that his party would significantly change the economic policy subsided. The economy is growing again, and is expected to do so for the foreseeable future.

During the early 1990s, the banking sector accounted for as much as 16% of GDP. Although undergoing a major overhaul, Brazil's financial services industry provides local firms a wide range of products and is attracting numerous new entrants, including U.S. financial firms. The Sao Paulo and Rio de Janeiro stock exchanges are undergoing a consolidation and the reinsurance sector is about to be privatized.

The basic business of a bank is to take in money in the form of savings and checking deposits and lend that money out to individuals and businesses. To do this profitably, the bank must charge a higher rate of interest for the money it is lending out than it pays to its depositors. Looking at the balance sheet of bank, one would notice that loans are listed as assets and deposits are listed as liabilities. This is because the bank has a liability to the depositor for the money the bank is using. Banks are one of the few businesses that must create a balance sheet daily to account for inflows and outflows of cash.

Modern banks offer a variety of services to consumers. The more convenient services a bank offers, the better it is able to attract and retain customers. Typical basic services include checking accounts, savings accounts, certificates of deposit and loans. A checking account allows the consumer to write checks to pay his or her bills. The savings account and certificates of deposit, also called time deposits, are designed to accumulate interest, and sometimes have restrictions on withdrawal. Although banks are required to maintain government mandated minimums for cash on hand, most of the cash received by a bank must be recycled into loans. If the bank does not loan enough money, it will not be profitable.

There have been major changes in the banking environment over the last thirty years, such as the removal of restrictions on interstate banking. None, however, has had the potential to radically alter the entire banking industry as does online banking. With online banking, the consumer has access to all bank services without setting foot inside the bank. All transactions are handled over the Internet. Instead of walking into a local bank branch to open a checking account, the consumer may now open that account over the Internet, by using the bank's web site. This new convenience does have the potential for abuse and banks are responding to these challenges by drastically increasing their spending on security and privacy systems. Bank information technology budgets show that spending is being redirected from traditional systems to web-based systems and security.

Deposits are received by the bank and these deposits must be recycled into loans. The difference is that all this takes place over the Internet. Deposits are made through credit cards or electronic transfers from other accounts. Funds are transferred out of accounts through wire transfers to businesses or other institutions. Banks still require signature cards, the difference being that the consumer can print the signature card on his or her own printer at home. Account balances are still insured by the FDIC, and banking regulations are the same. Communication is handled over the Internet, but all banks have contact numbers where the consumer can reach a live person during banking hours.
Many people currently use some type of online banking, although they are unaware of it. Most businesses today offer the convenience of direct deposit. Banks routinely offer customers the ability transfer funds electronically, either within the bank or outside. A recent change in the way checks are handled by banks has changed the way in which funds are collected. No longer do banks wait to pay funds based on receipt of the physical check. This transfer is now handled electronically, drastically eliminating the float on written checks.

Online banking is here to stay. Banks like it because, just as the ATM years ago, it has the potential to reduce personnel costs. Consumers like it because of the convenience. According to all studies, online banking is increasing, whether measured in absolute terms, or as a percentage of households, in spite of consumer concerns about security and privacy. It has changed the competitive environment in banking and those banks that embrace it, will be those that prosper.

Brazilian executives are currently investing in the online banking sector, which has enormous potential. Online banking services are likely to reach 35 million homes by the year 2005. According to an interview with Mr. Cid Torquato, Executive Director of the Camara-E.Net (Brazilian Chamber of E-Commerce) June 13, 2002,

Our banking system as a whole is considered to be very advanced, a worldwide benchmark in many aspects. The banks are the leaders in investments and in fostering the use of IT in Brazil. And they do it for obvious reasons: productivity, competitiveness and profitability. Correios, our postal services, is also launching its Postal Bank in a partnership venture with Bradesco that will reach all of Brazil's over 4,500 cities, making financial services and the Internet available to millions of Brazilians. We interact with those kinds of initiatives and support them. We also work together with our members on regulatory issues concerning means of payment, privacy and security. In addition to this, we collaborate in campaigns to create awareness about important questions, such as digital crimes, best practices in online retail, the use of credit cards and Business Inclusion.

Besides direct transactions in the U.S. banking sector in the past months, Brazilian banks have also identified opportunities in the virtual world. Virtual customers who perform online payments are generally more profitable than the average checking account holders. According to a survey done by Bank of America, online bank customers have 35% higher balances and demand 30% fewer services than regular customers.

Brazilian banks were quick to understand that ready Internet access is crucial for developing an online customer base. Banks were at the head of the free Internet phenomenon that swept Brazil in early 2000. Now that the frenzy has dissipated and most free ISPs have gone out of business or radically changed their business models, banks remain among the few that still provide Internet access free of charge. Most banks have chosen one of two approaches: partnership with a single ISP to provide unlimited access, or partnership with a variety of ISPs to offer a limited number of access hours.

Penetration of personal computers in Brazil is very low (7%), and banks are trying to increase their percentage of clients who can take advantage of e-banking services. Many of the largest banks earmarked considerable funds for financing the purchase of personal computers for their clients in 2001.

E-banking significantly cuts transaction costs for banks. Some of the savings are passed on to clients. Some larger retail banks drop all fees for online transactions, with the exception of money transfers, which are nonetheless 50% cheaper online than they are at a branch. Banks have the advantage of secure financial payment sources - a valuable asset given the serious problem of unpaid bills…