Brazil’s banking system is known for its distortions: a large concentration that paves the way for huge spreads, higher fees, and poor services for customers. An environment where big players have so much power does not seem particularly welcoming for new companies, but fintechs have been able to benefit from the blind spots left by market leaders to become one of the largest startup segments in Brazil—and new regulations are set to boost it even further.

Data provided by the Fintech Mining Report 2019, elaborated by the intelligence unit of innovation company Distrito, estimates that in just three years, an average of almost seven new fintechs opened every month in Brazil, with the sector amounting to 550 companies as of May 2019. According to Brazil’s Startups Association (ABStartups), the financial services segment takes up nearly 4 percent of Brazil’s 12,106 startups, making it the third largest sector.

</span></p> <p><span style="font-weight: 400;">But the companies&#8217; ability to provide amenities big banks cannot is not the only explanation for the rise. According to Gustavo Gierun, Distrito’s co-founder, a mix of available funding, the search for more efficient alternatives amid the economic recession and properly-applied regulation has provided fertile soil for these companies to develop in the country. </span></p> <p><span style="font-weight: 400;">“Innovation and technology benefit from crisis because people are willing to save. And some sectors are more attractive in Brazil than others; financial services have a lot of funding available. When you have a large market, filled with inefficiencies, there are investors willing to take risks. Also, </span><a href="https://brazilian.report/money/2019/03/13/roberto-campos-neto-central-bank/"><span style="font-weight: 400;">Brazil’s Central Bank</span></a><span style="font-weight: 400;"> has been crucial to spurring competition,” he told </span><b>The Brazilian Report.</b></p> <h2>Growth opportunities for fintechs</h2> <p><span style="font-weight: 400;">These factors explain the shape the industry is taking in Brazil. Payment methods and credit, areas where Brazilian banks have struggled to provide more efficient services, have become the top two segments (out of 14) for fintechs. And the Central Bank has </span><a href="https://brazilian.report/money/2018/01/17/fintech-bank-concentration/"><span style="font-weight: 400;">intervened to entice competition</span></a><span style="font-weight: 400;">.</span></p> <p><span style="font-weight: 400;">The payment method sector, for example, has undergone a revolution. A few years back, Cielo, a company owned by banks Banco do Brasil and Bradesco, was the undisputed leader on Brazil’s market. Then, Central Bank lowered transfer fees for debit cards and reduced the requirements for new companies to obtain operational permits. The &#8220;calm ocean&#8221; from a few years ago has given way to cut-throat competition.</span></p> <p><span style="font-weight: 400;">Last month, Itaú Unibanco (Brazil&#8217;s largest private bank) blindsided competitors by announcing that Rede, its card payment company, would grant advance cash for small- and medium-sized merchants without charging interest rates. Rede will pay merchants who agree to receive their money through an Itaú account within just 2 days. In Brazil, they usually wait 25 days—and pay interest for to make advance deposits.</span></p> <p><span style="font-weight: 400;">The move plunged the share prices of competitors Stone and PagSeguro, which accuse Rede&#8217;s zero-rate strategy of being predatory competition, as the offered product has an opportunity cost of at least 0.5 percent a month (where Brazil&#8217;s benchmark interest rate stands). Moreover, by conditioning the new conditions to customers using an Itaú bank account, Rede was accused of making a &#8220;tied sale&#8221;—which is illegal under Brazilian law.</span></p> <p><span style="font-weight: 400;">For overall markets, however, lower prices propel consumption and growth. Data from Abecs, Brazil’s Credit Card Companies Association, show that the transaction volume of both credit and debit cards has been growing in Brazil </span><a href="https://www.abecs.org.br/indicadores-graficos"><span style="font-weight: 400;">for the past three years</span></a>.</p> <p><span style="font-weight: 400;">When it comes to credit and access to financial institutions, Brazil’s huge market is another attraction. According to </span><a href="https://www.bcb.gov.br/nor/relcidfin/docs/Relatorio_Cidadania_Financeira.pdf"><span style="font-weight: 400;">data</span></a><span style="font-weight: 400;"> from the Central Bank, in 2017, 86 percent of Brazilian adults had some sort of contact with banks, such as current or savings accounts. It is above the global average of 69 percent </span><a href="https://epocanegocios.globo.com/Economia/noticia/2018/04/meta-do-banco-mundial-e-incluir-1-bilhao-de-pessoas-no-sistema-financeiro-ate-2020.html"><span style="font-weight: 400;">considered by the World Bank</span></a><span style="font-weight: 400;">, but below the universalization reached by developed countries such as Australia, Canada, and Denmark. </span></p> <p><span style="font-weight: 400;">For those who do not have bank accounts, 58 percent say that fees are too high or they do not have enough money to do it—a huge opportunity for fintechs famous for not charging annual fees, such as Nubank, the other unicorn on the list.</span></p> <hr /> <p><img class="alignnone size-full wp-image-17305" src="https://brazilian.report/wp-content/uploads/2019/05/export-clTmk.png" alt="fintechs brazil" width="1200" height="804" srcset="https://brazilian.report/wp-content/uploads/2019/05/export-clTmk.png 1200w, https://brazilian.report/wp-content/uploads/2019/05/export-clTmk-300x201.png 300w, https://brazilian.report/wp-content/uploads/2019/05/export-clTmk-768x515.png 768w, https://brazilian.report/wp-content/uploads/2019/05/export-clTmk-1024x686.png 1024w, https://brazilian.report/wp-content/uploads/2019/05/export-clTmk-610x409.png 610w" sizes="(max-width: 1200px) 100vw, 1200px" /></p> <hr /> <p><img class="alignnone size-full wp-image-17303" src="https://brazilian.report/wp-content/uploads/2019/05/export-94Y0K.png" alt="fintechs brazil" width="1200" height="276" srcset="https://brazilian.report/wp-content/uploads/2019/05/export-94Y0K.png 1200w, https://brazilian.report/wp-content/uploads/2019/05/export-94Y0K-300x69.png 300w, https://brazilian.report/wp-content/uploads/2019/05/export-94Y0K-768x177.png 768w, https://brazilian.report/wp-content/uploads/2019/05/export-94Y0K-1024x236.png 1024w, https://brazilian.report/wp-content/uploads/2019/05/export-94Y0K-610x140.png 610w" sizes="(max-width: 1200px) 100vw, 1200px" /></p> <hr /> <p><span style="font-weight: 400;">As recalled by Mr. Gierun, despite the impressive growth, new transformations are set to create even more disruption. As the Central Bank gets ready to implement open banking, fintechs will have access to consumer data in Brazil, which is currently scarce and retained by banks and credit bureaus.</span></p> <p><span style="font-weight: 400;">“Open banking will be absolutely transformational because it will level the playing field for traditional players and fintechs, and those who weren&#8217;t in the sector will be now. It has attracted companies.”</span></p> <p><span style="font-weight: 400;">For example, thanks to open banking, </span><a href="https://www.infomoney.com.br/minhas-financas/consumo/noticia/8088790/open-banking-o-que-e-e-como-funciona-"><span style="font-weight: 400;">fintechs will be able to integrate with bank systems through APIs</span></a><span style="font-weight: 400;"> and access data such as customers&#8217; current account balances. With this detailed information, it will be possible to provide much more accurate credit profiles and improve risk calculations; as a result, credit is likely to get cheaper. “Customers will have much better services at lower costs,&#8221; he explains. </span></p> <h2>Concentrated development</h2> <p><span style="font-weight: 400;">Despite disruptive business models, Brazilian fintechs share some similarities with </span><a href="https://brazilian.report/guide-to-brazil/2019/04/15/challenges-entrepreneurs-brazil/"><span style="font-weight: 400;">Brazil’s overall business environment</span></a><span style="font-weight: 400;">. Companies are overly concentrated in the Southeast region, especially</span> <span style="font-weight: 400;">São Paulo—a state traditionally related to Brazil’s financial system, home to B3, the country’s main stock exchange and the headquarters of most of the country&#8217;s largest banks. </span></p> <p><span style="font-weight: 400;">For Mr. Gierun, while fintechs remain concentrated, there is an increase in technology hubs in other areas that may lead to new development centers in the country.</span></p> <hr /> <p><img class="alignnone size-full wp-image-17304" src="https://brazilian.report/wp-content/uploads/2019/05/export-X3ovE.png" alt="fintechs brazil" width="1200" height="800" srcset="https://brazilian.report/wp-content/uploads/2019/05/export-X3ovE.png 1200w, https://brazilian.report/wp-content/uploads/2019/05/export-X3ovE-300x200.png 300w, https://brazilian.report/wp-content/uploads/2019/05/export-X3ovE-768x512.png 768w, https://brazilian.report/wp-content/uploads/2019/05/export-X3ovE-1024x683.png 1024w, https://brazilian.report/wp-content/uploads/2019/05/export-X3ovE-610x407.png 610w" sizes="(max-width: 1200px) 100vw, 1200px" /></p> <hr /> <p><img class="alignnone size-full wp-image-17302" src="https://brazilian.report/wp-content/uploads/2019/05/export-U4qjo.png" alt="credit card brazil" width="1200" height="314" srcset="https://brazilian.report/wp-content/uploads/2019/05/export-U4qjo.png 1200w, https://brazilian.report/wp-content/uploads/2019/05/export-U4qjo-300x79.png 300w, https://brazilian.report/wp-content/uploads/2019/05/export-U4qjo-768x201.png 768w, https://brazilian.report/wp-content/uploads/2019/05/export-U4qjo-1024x268.png 1024w, https://brazilian.report/wp-content/uploads/2019/05/export-U4qjo-610x160.png 610w" sizes="(max-width: 1200px) 100vw, 1200px" /></p> <hr /> <p><span style="font-weight: 400;">“It is natural to have a concentration in São Paulo, as it is the country’s biggest market, but it is interesting to see how other states and cities have been evolving. Some startups realized they don’t need to be in São Paulo to sell to São Paulo. Outside the city, you have a lower development cost, cheaper lifestyle. I see a natural trend of decentralization,” he says, citing the cities of Joinville, Florianópolis, Curitiba, Belo Horizonte, and Recife as promising tech hubs, among others. </span></p> <p><span style="font-weight: 400;">Another characteristic the fintechs environment share with overall Brazil’s financial market is the lack of gender diversity at top-level positions: only 12 percent of fintech partners are women. Each company also has 3 partners on average, aged mostly between 26 and 45 years old.

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PowerMay 13, 2019

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BY Natália Tomé Scalzaretto

Natália Tomé Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Most recently, worked as an Editor for Trading News, the information division from TradersClub investor community.