Rising costs on fintechs may halt Brazil’s credit deconcentration process

Roberto Campos Neto, chairman of Brazil’s Central Bank, recently said that credit concentration in the country had fallen by around ten percentage points over the last ten years due to the monetary authority’s regulatory push that triggered a fintech boom. 

Still, official data gathered for The Brazilian Report by investment platform TC Matrix shows that the country’s five major banks ended last year with control of 72.6 percent of all credit volume and 63.1 percent of industry revenues. While current credit concentration levels are lower than ten years ago, they are higher than in 2015.

The numbers also show that the “Big Five” in the country’s banking industry have grown in credit and revenue while more institutions in the field have increased in size. 

Haunted by the global financial slowdown, inflation, and a new cycle of high-interest rates, fintechs that made Brazil an international benchmark in financial innovation now face a much more tortuous path to growth.

Together, Itaú, Bradesco, Santander, Caixa Econômica Federal, and Banco do Brasil earned BRL 100.7 billion (USD 18.4 billion) in 2021. Four of the top 10 most profitable banks in the world last year were headquartered in Brazil. 

“It’s as if the concentration group had gotten bigger. More banks are getting big, and small- and medium-sized banks are merging or being acquired,” explains Carlos André Vieira, TC Matrix’s chief analyst.

The latest Central Bank studies point out that the link between concentration, competition, and bank spread is not only complex but lacks conclusive causes. 

Although the competitive environment is an important factor to determine the spread, an increase in the degree of competition alone would be unlikely to lead to such a significant change.

A 2019 study showed that differences in the degree of power between large and small institutions would only explain 7.3 percent of the average spread of 25.3 points in a given sample. 

For a sustainable reduction in credit cost, it would be necessary to combine competition expansion with measures to reduce default events and information asymmetries between borrowers, in addition to increasing the capacity to recover collateral.

Some of the country’s most recent regulatory changes managed to influence precisely that, helping to take Brazil’s bank spread down in the process. Now, a tougher economic scenario threatens to impose a slowdown on the country’s fintech revolution. 

While banks such as Inter and payment institutions such as Nubank have grown in importance in people’s daily lives, they are still far from scratching the surface of the volume of credit handled in the country. “Itaú grows its credit portfolio by an entire ‘Nubank’ every year,” Mr. Vieira says, “boosted mainly by its growing business customer...