The growing pains of Brazil’s fintech market

. Oct 23, 2018
The growing pains of Brazil's fintech market Brazil's is Latin America's biggest fintech hub

The Brazilian Ministry of Finance has entered as an involved party in a lawsuit filed in 2016 by Bradesco, one of Brazil’s biggest banks, against the fintech Guiabolso – a financial planning app with more than 4.5 million users. The bank wants to block the app’s access to their customer’s financial data by claiming it represents a security risk. As the case record is sealed, neither Bradesco nor Guiabolso have made any public statement on the matter. However, the outcome of the court decision will be extremely important to the fintech sector, where data is one of the most valuable resources.

The Ministry fears that a decision in favor of Bradesco could slow the progress of fintechs in Brazil by threatening competition in the sector. In a statement addressed to The Brazilian Report, it argues that once the customer authorizes the use of his/her data, the bank cannot put impede the client from using the app. Bradesco only stated it “does not engage in any anti-competitive conduct.”

Despite struggling to emerge from its worst recession on record, Brazil is the largest fintech hub in Latin America. More than 400 such startups are currently in operation. In line with global trends, these new players are not only changing the way people use financial services but also challenging traditional institutions and regulators.

</span></p> <p><span style="font-weight: 400;">With new regulations becoming a driving force for the fintech industry around the world, the Central Bank and Securities Commission have both joined the Ministry of Finance in closely following this growing industry and its implications for the financial market. </span></p> <p><span style="font-weight: 400;">Back in May, the Central Bank wound up a small lender called Banco Neon due to a breach of regulations. At the time, Neon Pagamentos, a fintech that used the Banco Neon&#8217;s infrastructure, saw some of its operations suspended for a while. Though the startup itself was not liquidated, the case turned into a delicate matter for the country&#8217;s growing fintech sector. </span></p> <p><span style="font-weight: 400;">“This episode had some consequences for the public&#8217;s trust. Mainly because of misinformation. Despite having the same name, they were different companies. But fintechs could take a lesson from this: one has to be really careful when choosing their partners in this market,” said Marcelo Bradaschia, coordinator of a fintech course at Getulio Vargas Foundation (FGV) and co-founder of Fintechlab, a hub that maps this sector in Brazil. </span></p> <p><span style="font-weight: 400;">In April, the month before the Neon Bank winding up order, the National Monetary Council &#8211; of which the Central Bank is part &#8211; passed a new regulation (CMN 4.656) welcomed by the sector.  Put simply, it made it easier for fintechs to work on the credit market without necessarily having to partner up with a traditional player &#8211; as was previously required. </span></p> <p><span style="font-weight: 400;">“Maybe if that regulation had existed before we would not be talking about the Neon case, as the fintech itself was financially healthy. The problem was with its partner,” argued Mr. Bradaschia.</span></p> <p><span style="font-weight: 400;">Overall, regulators in Brazil are sending signals that they do want to encourage technology and competition in the financial sector. According to Guilherme Horn, an advisor of the Brazilian Association of Fintechs (ABFintechs), the ongoing discussions around what has been globally called open-banking is one example of this. The term refers to a system that enables third parties to have access to financial institutions&#8217; data upon request of the customer. </span></p> <p><span style="font-weight: 400;">By accessing the interfaces that would be provided by the financial institutions, third-party developers (fintechs, for example) can build applications and services around this data. The service offered by Guiabolso in Brazil can be considered an example of this, as the app accesses users banking information to help them manage their finances.</span></p> <h2>Brazil&#8217;s fintech market</h2> <p><span style="font-weight: 400;">Even though the fintech expansion in Brazil is connected to an international boom in this sector, the country does have some characteristics that make it a particularly fertile ground for fintechs. A population of over 200 million people, Brazilians&#8217; eagerness to embrace tech solutions, and a significant part of the population without access to traditional financial services are three such examples. </span></p> <p><span style="font-weight: 400;">In the first half of 2018, there were 404 fintechs operating in the country &#8211; a 22-percent increase when compared to the end of 2017, according to the latest Fintechlab Radar, an initiative that has been mapping the fintech industry in Brazil since 2015.</span></p> <hr /> <p><img loading="lazy" class="alignnone size-large wp-image-10326" src="" alt="The growing pains of Brazil's fintech market" width="1024" height="720" srcset=" 1024w, 300w, 768w, 610w, 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /></p> <hr /> <p><span style="font-weight: 400;">The dissatisfaction of customers with the services offered by a few big players has created new opportunities for entrepreneurs and investors. Even though the macro scenario remains the same (a highly <a href="">concentrated</a> banking sector), Mr. Horn argues that the fintech market in Brazil is maturing.</span></p> <p><span style="font-weight: 400;">“The expansion of the range of sectors where those startups are operating nowadays is a sign that this market has matured in recent years. We still have around 30 percent of the fintechs in Brazil operating in the Payment subsector, but there is a growing number of startups offering services related to Investment and Lending, for example,” Mr. Horn explains.</span></p> <p><span style="font-weight: 400;">A report published recently by PwC and ABFintechs outlines the profile of fintechs operating in Brazil based on 224 startups in the sector that participated in the study. It shows that the South and Southeast regions are home to 93 percent of these companies. The state of São Paulo by itself hosts 58 percent of them.</span></p> <p><span style="font-weight: 400;">The report also highlights that 46 percent of the fintechs were founded after 2016, which indicates how recent the boom of this growing market in Brazil is. The majority of them (51 percent) claim to be in the early stages of operation, with only 13 percent considering themselves consolidated in the market, i.e., with clients and revenue or investments over BRL 20 million.</span></p> <hr /> <p><img loading="lazy" class="alignnone size-large wp-image-10324" src="" alt="The growing pains of Brazil's fintech market" width="1024" height="683" srcset=" 1024w, 300w, 768w, 610w, 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /></p> <hr /> <h2>Investment</h2> <p><span style="font-weight: 400;">At the beginning of October, Brazil&#8217;s fintech sector made international business headlines due to a USD 180 million investment in the Brazilian startup Nubank by China&#8217;s Tencent &#8211; one of the most powerful tech firms in the world. With the investment, Nubank saw its value increase from USD 2 billion in early March to USD 4 billion now. Founded in 2013 and acting as a digital bank and credit card operator, the company is the biggest startup in Latin America that is not publicly traded. </span></p> <p><span style="font-weight: 400;">According to the latest KPMG report, which offered a global analysis of this market, the overall investment in fintech in Brazil has grown dramatically in the first 6 months of 2018, with USD 257 million invested. For comparison, USD 134 million was invested in the whole of 2017. </span></p> <p><span style="font-weight: 400;">While the KPMG report refers to Nubank as an outlier in terms of deal sizes &#8211; even before the recent Tencent investment &#8211; it argues the startup highlights the growing attention Brazil has been receiving by global Venture Capital. “The country is well positioned for continued growth over the next few quarters,” the report states.</span></p> <p><span style="font-weight: 400;">Mr. Bradaschia agrees with this optimistic view: “Overall the market is going towards a more competitive direction. There are definitely still many opportunities to be explored through new technologies and companies in Brazil,&#8221; he said.

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Laura Maia

Laura Maia is a journalist based in Rio de Janeiro. She holds a master's degree in Journalism, Media, and Globalisation from an Erasmus joint program between City University of London (UK) and Aarhus University (Denmark). She covered finance for one of Brazil's leading newspapers, O Estado de S.Paulo.

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