➤ Banco Inter's total client base shot up 112.5% to 8.5 million from 4 million throughout 2020.

➤ The company will be using part of the 1.2 billion reais it raised in September to fund M&A activity this year.

Set up in 1994 as a financial institution to serve the clients of a construction and real estate group, Banco Inter SA was not authorized to operate as a full fledged bank until 2008. In that time, the lender never opened a single physical branch, focusing instead on the development of its digital infrastructure.

Four years after obtaining its bank license, it launched what it claims was Brazil's first digital and zero-fee account. That early preparation largely explains how the lender managed to expand its client base by 112.5% in 2020, as the pandemic pushed individuals to seek financial services on their smartphones.

Backed by SoftBank Corp. twice in the last two years, Inter CEO João Vitor Menin told S&P Global Market Intelligence it is Brazil's largest digital bank, as it offers a full checking account, something not provided by competitor Nu Pagamentos SA' Nubank.

In 2018, Banco Inter became Brazil's first fully digital publicly listed bank, and as of Jan. 8, 2021, its market capitalization was 27.6 billion reais.

According to Menin, incumbent banks will have to accelerate their branch-culling efforts, while challenger banks must broaden the ecosystem of financial services within their platforms, as the two compete for market share in Latin America's largest economy.

The following conversation has been edited for length and clarity.

Banco Inter more than doubled its client base in 2020: how sticky will those new clients be and what products will you be offering them?
We actually ended the year at 8.5 million clients. They're going to be stickier than they were in 2019, because of the pandemic, but also because we have been improving our app to make them engage more with us. Onboarding was quicker due to the pandemic, but our shopping, brokerage and insurance capabilities have improved, and new clients will be able to fulfill all of their day-to-day financial needs.

Why have you singled out e-commerce as a top priority for Inter?
Once you start to get the attention of the client, and he realizes he can do everything inside our platform, including shopping, you can get a larger percentage of the client's wallet, and you can improve your monetization, as well as the client's own UX. It's a win-win situation. Retail and banking are always working together, and their unification is a trend that is increasing.

Will the priority in 2021 be to keep growing the client base or selling more products to the existing one?
It's actually both. We need to keep growing, and although that won't happen at the same pace as last year, we are targeting 85% this year, or 15 million customers by year-end. Our cross-selling index, the number of products per client, is just as important a KPI. Today we are at 3.05, and we want to keep growing on that metric which is difficult, because we are adding clients every single day. So we are targeting 3.6 by year-end, which we think is possible as we have improved our CRM capabilities.

This year will be one of economic recovery in Brazil, potentially more so than in other Latin American countries, but what will the main challenges be this year?
We need to have a very reliable product. We cannot be offline, and must address cybersecurity, and that will be our main focus for 2021. At the country level, economic recovery is important to grow our credit portfolio, which is increasing fast, but not as quick as our client growth. This would also help us avoid a spike in NPL levels. We saw very strong job creation in December, a monthly record, which is very important for us.

How do you see digital challenger banks' prospects this year in terms of winning over credit market share from traditional lenders, and which credit segments will be more accessible?
We have two types of fintechs in Brazil: [those that offer] payment accounts and full checking accounts. Nubank and Neon are the former, and won't be as active in loan origination. They're pretty much just doing credit cards, whereas we also have mortgage, payroll and a SME portfolios. Digital banks are going to gain market share in payroll and SME loans, because we are doing very well in bringing in deposits. Today we are more competitive than Bradesco and Itaú in terms of funding, which has allowed us to be very aggressive on the interest rates on those two products. The way traditional banks are doing their business is at risk, and it wouldn't surprise me if, maybe within five years, incumbent banks were to have a smaller market share than the disruptors.

Do you expect branch network reduction to accelerate in Brazil in the coming years, and do you see them disappearing completely in the future?
Yes, I see this trend speeding up. It's normal as an incumbent bank to try to change branch designs, putting a café over there, but they're going to figure out that you don't really need that branch. You don't need to refurbish, you really need to shut it down. The pandemic has helped them start to think like that. Maybe within 5 to 7 years there will be no branches left. That's not to say you don't need to have a human being on the other side of the line, or the keyboard. I like to say we are not a virtual bank, but a digital one, with 2,100 employees serving millions of clients.

Foreign neobanks have been entering the Brazilian market, while some traditional banks are launching 100% digital spinoffs: do you regard this as an obstacle to Inter’s growth prospects?
I don't believe so. We are more convinced than ever that we need to have a full service platform. Many challengers offer only a credit card, or just an investment account. We offer a full ecosystem, to which we have been adding products. This means it's not easy for an N26 — for instance — to just come to Brazil and say "I'm going to compete with Inter." They might gain some traction, but I don't believe they will be the winners at the end of the day. Individuals with two or three accounts at challenger banks will keep only one, and they will choose the one that offers them the most complete range of services.

Do you then see a lot of space for M&A consolidation in the Brazilian fintech space in the coming years?
We have been seeing that, and the partnership between Nubank and Easynvest is an example. They figured out that they needed to combine their services, because neither saw themselves as viable as a stand-alone company. M&A activity will be a trend for 2021, as retail, insurance and other players will be increasingly teaming up with digital banks.

Will Inter be making any acquisitions this year?
We will. We did two in the final quarter of 2020, and raised equity in September, with a follow-on offering. Part of those proceeds will go toward M&A. It won't be a blockbuster deal, but we're buying some know-how, capabilities, teams that will help to improve our UX and product offering.

Do you see the volume of funding rounds recovering in the fintech space this year?
Interest rates globally are very low, and we have a lot of cash that can come to a big region like Latin America, which has been very active in building these new products and platforms, so I believe we are going to have a bonus in funding for these types of ventures in 2021.

As of Jan. 8, US$1 was equivalent to 5.38 Brazilian reais.