E-finance for SMEs in Brazil Antonio C. B. Oliveira Executive Director, Banco Itaú UNCTAD, Geneva, October 2001

Commercial Banking in Brazil 170 banks Leading banks are universal banks Large retail banks have an extensive branch network covering the entire country Banking processes are modern and investment in IT is high and comparable to developed countries Public services bills and taxes are paid at banking branches Service oriented culture Trend is toward consolidation and reduction of the number of banks Highly competitive banking system with incresing presence of global players

Top Brazilian Banks AssetsEquityDepositsBranches Banco do Brasil $63.7$3.6$ BNDES$47.3$5.1-1 CEF$41.6$1.8$ Bradesco$40.5$4.0$ Itaú$30.8$3.6$ Santander Brasil$27.0$2.0$ Unibanco$23.1$2.5$ Others$165.5$16.8$ Total$439.5$39.4$ Share of top 762%57%30%68% Source:Brazilian Central Bank - billion US dollars

Why Brazil has a modern banking system? Brazilian banks have invested heavily in IT since the late 60’s. High inflation rate was driving the technological development in the banking system Inflation may also be the explanation of the relatively high penetration of banking in Brazil (65% of the population have a banking relationship) Inflation is under control since 1994 and competition is driving IT investment

Internet in Brazil 5,9m regular home users 11m total number of users 46m projected number of users in m e-banking users ISP offer includes free access, low speed paid access and broadband E-commerce still very small but growing

Internet banking overview Most Brazilian banks are following the “clicks & bricks” strategy Internet used as low cost distribution channel Increasing acceptance of internet banking by both individuals and companies Active promotion of online banking Some banks are entering into strategic alliances with ISP, others are offering free Internet access to customers

SME and E-finance SME are active users of E-finance in Brazil 30% of Itaú SME customers use E-finance National payment system is essential infrastructure for E-finance E-finance more important for transactions and payments than in credit and loans

Payment systems infrastructure Brazil has a standard national system to handle all types of payments by individuals and enterprizes This system was the foundation upon which E-finance was able to develop

National payment system Seller send invoices eletronically to banks Banks print invoices and deliver them to buyer Buyer can pay invoice on any branch bank in the country or through e-finance Invoices sent to banks for collections are used as collateral to get credit The system is evolving to a completely paperless system in which invoices will be sent by or presented to the buyer in XML format and paid by e-finance transactions.

Standard format for all invoices

Clearing system for payments Invoice payments are handled by a national clearing system operated by Banco do Brasil Money transfers between individuals and companies are processed by the same system The system is paperless, very eficient and fully compatible with the Internet banking channel.

Payment system costs and volumes Price per transactionNumber of transactions per month Invoice collectionUS $ m Payment orderUS $ m

E-finance services available to SME Current account management Obtain balances, statements and other information (browser and ) Transfer money to other accounts Send payment orders Request checkbooks

E-finance services available to SME Payment of salaries All employees open accounts in the same bank as the company Salary payments are electronically sent to the bank and credited to employees

E-finance services available to SME Collections of receivables SME send electronically all sales invoices to bank Bank print and mail invoices Invoices are paid at any bank branch or by Internet transaction Bank collect payment from clearing system and transfer money to SME

E-finance services available to SME Payment of suppliers Invoices sent by suppliers are eletronically sent to bank On or before due date, company authorize on Internet the bank to charge the payment to the current account Bank send payment through the national clearing system Company can manage payment schedules and receive control reports

E-finance services available to SME Credit Related Services Credit application submitted electronically After a line of credit is approved by the bank, SME can use the loan via internet transaction. Receivables are electronically sent to bank and used as collateral for loans

E-finance services available to SME Expense account management Employees are given magnetic cards From any ATM in the country they can witdrawl advances from company accounts Company can manage amounts and authorize withdrawls

E-finance services available to SME Other functions available Mutual funds investment Payment of taxes and utilities bills Credit card related transactions Mobile banking Insurance purchase Buy and Sell stocks

Critical factors for E-finance development National payment infrastructure as a foundation for E-finance Service oriented culture “Bricks & Clicks” strategy Technologically advanced banking system

Critical issues for E-finance evolution Laws and regulation for digital signatures of loans and other financial transactions PKI infrastructure will be essential for lowering transaction costs Adoption of compatible regulations for E- finance in Mercosur will enable international trade to use same mechanisms already in use for domestic financial transactions