By Tatiana Bautzer and Carolina Mandl
(Reuters) - A new breed of digital brokers is taking on the handful of Brazilian lenders such as Itau Unibanco Holding SA and Banco Bradesco SA that long had a lock on retail investors seeking a one-stop shop for banking and investments.
Backed by investors such as China's Fosun International Ltd and private equity firms General Atlantic LLC, Advent International and Warburg Pincus LLC, the newcomers have already lured more than 10% of the 2.98 trillion reais ($736 billion) invested by Brazilians in local mutual funds, stocks and bonds.
That may be just the beginning, as several firms are now poised to expand their investment platforms to become full-service banks, offering credit cards, checking accounts and bill-paying services.
"We expect the banks to be threatened by fintechs mainly in fee-based businesses, such as asset management, credit card and merchant acquiring," said UBS strategist Philip Finch. He added that traditional banks' lending business appeared safer, as capital requirements create a higher barrier to entry.
Market leader XP Investimentos, partially backed by Itau and General Atlantic, aims to quadruple its assets under custody to 1 trillion reais by December 2020, almost four times its current size, with others setting similarly lofty goals.
As Latin America's largest economy continues to sputter, the digital investment startups are one of the few sectors hiring at breakneck pace.
"A year ago we had 30 employees. We'll probably have 200 people this year," said Habib Nascif, chief executive of online investment platform Orama, which was one of the first Brazilian companies to offer zero-fee mutual funds, in 2011.
Brazil has one of the world's most concentrated banking markets, with its top-five banks holding 82% of total assets, far above the 43% in the United States or 48% in the UK.
Brazilians hold some 61 million savings accounts with 737 billion reais in deposits, usually yielding well below the benchmark Selic rate, which has declined in recent years. The lower returns have many eyeing alternatives to savings accounts, which were long the traditional banks' main investment product.
Aware that newcomers pose a real threat to their businesses, the country's largest private-sector banks – Bradesco, Itau Unibanco and Banco Santander Brasil SA - are revamping their asset management offerings, distributing third-party investment products and even lowering fees.
Two years ago, Itau tried to secure a deal to eventually acquire control of XP, but Brazil's central bank partially blocked the transaction, capping Itau's stake at 49%.
XP, which is planning a U.S. initial public offering, was granted a banking license in December and plans to become a full-service lender in the future, competing with its main shareholder.
XP, which has 1.1 milion clients, expects to start offering loans backed by clients' investment holdings soon, Gabriel Leal, one of its partners, said in an interview.
Banco BTG Pactual, long known as an investment bank, also plans to build a full-service online retail bank in a pivot similar to U.S. rival Goldman Sachs Group Inc's shift to a more consumer-oriented business model.
"Banks can now grow without brick-and-mortar branches," said BTG Pactual partner Marcelo Flora. "That's why BTG has decided to invest in retail banking."
BTG, which has spent 300 million reais so far on its digital brokerage operation, is also looking at a move into Chile and Colombia.
BTG's online brokerage, like Orama, has also been slashing fees on certain kinds of funds, a trend that may be putting pressure on banks, which have already suffered an erosion in card-processing revenues.
"Fee income in Brazil used to grow more or less in line with loans," said UBS analyst Finch of the Brazilian lenders, which report quarterly earnings in the next three weeks. "This year, banks are recognizing competitive pressure and have set more modest targets."
Itau earlier this year reduced its fee income growth outlook to a range of 2% to 5% in 2019, down from as much as 5.5% to 8.5% last year and well below loan growth guidance of 8% to 11% this year. Although Bradesco has not set new targets for fees, the bank was below the bottom of its 2019 target as of April.
Fund transfer fees, which offer hefty profit margins to Brazilian lenders, could also have their days numbered.
Chinese conglomerate Fosun in November bought a 69% stake in online brokerage Guide Investimentos for 290 million reais. Now Fosun is considering bringing a digital payment system like Alipay, owned by Alibaba Group Holding Ltd, to Brazil, said Guide partner Aline Sun.
Guide's goal is to become a one-stop platform for clients, adding more financial services, including ways to ease client transfers from investment accounts, she said.
Portugal's largest private lender Millenium BCP, in which Fosun is also the largest shareholder, struck a deal offering a payment service to its customers there in November.
($1 = 3.7795 reais)
(Reporting by Tatiana Bautzer and Carolina Mandl; Editing by Christian Plumb and Tom Brown)