When the talk turns to the growth of the Internet, South America hardly ever looms large. Yet in Brazil, the use of the Internet for consumer banking not only is much more common than it is in Asia (Exhibit 1) but also approaches the level achieved in the United States (Exhibit 2). Despite this accomplishment, the on-line strategies of Brazilian banks will succeed in the longer term only if they can satisfy the demands of increasingly sophisticated and decreasingly loyal customers.

Internet banking in Brazil is now reaching a level of penetration comparable to that of telephone and traditional banking. In September 2000, two leading retail banks, Banco do Brasil and Banco Bradesco, had 2.1 million and 1.5 million Internet clients, respectively—17 percent and 14 percent of their total customer base. By comparison, Bank of America had 2.7 million on-line customers and 19 percent on-line penetration, while Wells Fargo had 2.3 million on-line customers and 26 percent penetration.

The big factor in the development of Brazilian banking and the speed of its move to the Internet was the industry’s early use of technology. Brazil endured hyperinflation from the late 1970s until 1994, when the government introduced a rigorous anti-inflation plan. Since unstable money created an opening for huge gains through overnight interbank trading in Brazil’s currency, efficient electronic clearance systems were established quickly, creating a strong technological base that later eased the path to on-line banking.

During the past two years, Banco do Brasil, Banco Bradesco, and Unibanco, among others, have encouraged customers to bank on-line by offering them free Internet access. In the same period, many independent Internet service providers have also supplied access free of charge, prompting clients of other banks to use on-line services. It is questionable whether these providers will continue to pursue the free-access model, which has driven many ISPs into the ground.

In a recent McKinsey survey, 1.3 percent of the respondents claimed to have used the Internet to open new accounts for financial products. The survey results also suggested that medium- and high-income Brazilians are well-disposed to the use of automated- and remote-banking channels—more so than similar customers in Asia. The availability of mobile telephones and computers will encourage this trend; indeed, the survey showed that mobile-telephone penetration in these income categories is upward of 70 percent, on par with figures recorded in Norway and Finland, which have Europe’s highest levels of penetration. Moreover, the potential for growth in the next few years is good, since only 21 percent of the survey respondents declared that they would never use any service or buy any product on-line.

But as Internet banking in Brazil expands, security concerns will have to be assuaged and regulatory barriers overcome. Fully 80 percent of the respondents worried about security or felt uneasy about sending financial information over the Internet. Government regulations, such as requirements that financial accounts be opened in person or that independent brokers be used in insurance deals, could also inhibit the expansion of on-line banking. Despite these widely publicized security concerns, it has achieved 41 percent penetration among the respondents.

Brazil’s financial-services industry is evolving not just in volume but also in sophistication. Before migrating to Internet banking, the first on-line banking customers were primarily interested in basic money-management tasks—for example, moving funds from a savings to a checking account—through remote dial-up connections from the home to a bank’s computers. Customers now take an interest in buying new financial products as well. The advance in this type of demand has been exemplified by the emergence of a number of competitors to traditional banks: on-line personal-finance service providers that offer products such as mutual funds, securities, insurance, and credit cards.

Customers of Brazilian banks also appear to be less loyal than they were in the past. Although the majority of the respondents to the survey declared themselves satisfied with their current financial institutions, almost 30 percent of them said they would move to another one for a small advantage in interest rates or service fees. Of course, intentions don’t necessarily imply actions. But among the 22 percent who had opened a new account in the previous 12 months, one-third chose institutions with which they had no previous relationship. Given the increasing ease of switching banks in the Internet era, this development might be a sign of a new competitive dynamic in the Brazilian banking industry.