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XP’s IPO will attack these 7 weaknesses in Brazilian banks

This article originally appeared in Portuguese in MoneyTimes and has been translated below.

Among the 354 pages of documents delivered by XP Inc. to the US authorities prior to its IPO is a detailed analysis of the major weaknesses of the main Brazilian banks, which are highlighted as direct competitors to the parent company, XP Investimentos.

XP intends to confront these issues using the money they hope to obtain from issuing shares in Nasdaq, the US electronic exchange.

Among the competitor banks named in the report are five of the major Brazilian banks: Itaú Unibanco, Bradesco, Banco do Brasil, Caixa Econȏmica Federal, and Santander.

XP also highlights smaller competitors who are prevailing in specific sectors, such as Guide Investimentos, Modalmais, Genial Investimentos, Easyinvest, Nova Futura, Inter DTVM, and BTG Digital.

In anticipation of the investment, XP notes seven fundamental problems with Brazilian banks which, in their view, “create inefficiency in the market and opportunities for disruption.” Here are the main weaknesses of Brazilian banks, which XP will take advantage of following its IPO:

1.High market concentration:

A report published this year by consulting firm Olyver Wyman reveals the Brazilian market to be extremely concentrated, with the five largest banks in the country already dominating the market almost entirely. XP reveals that of the $8.6 trillion in assets under management by financial institutions, 93% are owned by the top five banks.

“We think that this high saturation creates significant inefficiencies in the market, that which created significant opportunities for disruption, disintermediation, and new business models,” said XP in their filings to the SEC.

2. Heavy, bureaucratic and asset-centered structure:

According to XP, another weakness of traditional banks is their cumbersome structure, with large networks of physical branches, hundreds of thousands of employees, bureaucratic processes, and obsolete and segregated technology platforms.

All these issues result in a waste of time and energy for banks, maintaining their status quo and focusing on customer-owned products instead of promoting better options for clients.

3. Limited range of financial products

Market concentration means clients have a limited range of products and services to choose from. According to XP, traditional banks operate in a loop, trapping customers with products developed by their institutions, increasing fees and reducing profitability.

4. Promotion of inefficient financial products

Again, market concentration causes market leaders to advertise unattractive products and services such as CBD and savings accounts.

“We believe that the continuous offer of these products does not serve the best interests of investors, yet they continue to push high rates in traditional banks,” says the report.

5. High costs and spreads 

XP cites three reasons for this problem. The first is the severe restriction of banking platforms, which offer limited financial products to clients, especially those created by the bank themselves. The second is the emphasis on products that offer low profitability, such as savings. The third is the overly-complex infrastructure of the bank, which elevates costs.

6. Poor customer service

A lack of competition between the major banks results in poor customer service. Traditional banks are not able to focus on the needs of their clients, provide a holistic experience, nor consider new ways of adding value through the business. 

7. Low debt market penetration 

XP notes that the Brazilian debt market is under-developed in comparison to those of Europe and the United States. The implication is the low issuance of private equity-based fixed income products. 

According to XP, large banks take advantage of the credit market concentration to encourage their clients to buy products sold by their own managers. “We believe that this limits the total available credit in the market and fuels a high-cost environment due to strong competition,” the report reveals.

Find the original article in Portuguese in MoneyTimes.

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