Melodie Michel investigates the factors behind the explosive growth of Brazil’s fintech sector.
With 377 startups as of May 2018, Brazil is officially the number one fintech ecosystem in Latin America. Granted, there aren’t that many fintech hubs in the region – the two main contenders being São Paulo and Mexico City – but with 188 new companies launched and only 30 ceasing operation in the 18 months to the release of the May 2018 study by startup accelerator Finnovista, Brazil deserves recognition.
“Right now, we’re in an explosive growth phase,” Bruno Diniz, managing partner of fintech consultancy Spiralem, tells GTR. “The rate of creation of new fintechs has been higher than the rate of failure. The trend that we’re witnessing is a consolidation of the regulatory landscape attracting new entrants – some of which are coming from the traditional financial sector. Within a two-year time frame we expect to see market consolidation and a stabilisation of this growth.”
The opportunity has caught the attention of investors the world over: Brazil has been dominating fintech investment in the past four years, while Mexico’s share has dropped steadily. In 2017, Brazilian companies raised almost 90% of the total capital invested in the top 10 fintech deals in Latin America, which totalled US$460.6mn, according to FinTech Global, an intelligence and analytics firm. The biggest deals, worth US$190mn-odd in total, were struck by Nubank, a Brazilian digital finance provider.
Sergio Furio, the founder of Creditas, a consumer lending platform that’s been hailed as one of the most successful fintechs in Brazil, explains the shift in the market: “In 2012, when I started the company, there were maybe two companies in the ecosystem and very little capital deployed. At the same time, no one wanted to leave the banking or consulting sector to join a startup. Everything has changed since then: the ecosystem has grown, and there is plenty of capital, mostly international, that wants to be deployed.”
Challenging the status quo
The truth is, Brazil’s financial sector is in dire need of a shake-up. With only five banks (Itáu Unibanco, Banco Santander, Banco Bradesco, Banco do Brasil and Caixa Econômica) owning 80% of the credit market, competition has been too low for too long. This has resulted in a disturbing lack of efficiency, customer dissatisfaction, and one of the highest interest rates in the world – third behind only Malawi and Madagascar, according to Finnovista.
“An unsecured loan can go up to 200% or more. There are a few factors that explain this: first, the lack of competition – a lot of concentration in the banking industry; second, a clear absence of a dynamic mortgage market, which represents only 30% of overall lending, versus 80 to 90% in developed markets like the US; third, the inefficiency of the banking sector,” Furio tells GTR.
There are about 35,000 bank branches in Brazil, he explains, and the debt per branch, which is a measure of profitability, is quite low. “Since they have less volume, they need higher margins in order to be profitable, so the whole market works on the basis of very high margins.”
Creditas uses technology to increase efficiency and lower costs, and is capitalising on the lack of a mortgage market in the country. Since 70% of both cars and houses have no debt attached to them, these assets can be used as collateral, allowing the company to refinance unsecured loans and turn them into secured loans at an up to 10 times lower interest rate.
While Creditas made the choice to focus on the consumer lending segment, Furio believes this model could be applied to business lending. “If a midsize company owns a factory or an office or even a car fleet, you could do something like this to offer cheaper financing,” he says.
Finnovista’s statistics show that most innovation is happening in payments and remittances (25%), but business lending (6%) and enterprise financial management (17%) are also strong areas of focus in Brazil. One such company is F(x), an auction platform for business loans which connects SMEs and midcaps to financial institutions. Launched three years ago in São Paulo, the firm currently arranges secured and unsecured loans, as well as receivables discounting – and is about to launch trade finance solutions.
“We want to start financing export contracts as there is demand. This will be our next product, scheduled to launch in three months’ time. We need to create a specific auction platform for it, then populate it with financiers,” says Dan Cohen, F(x) founder and CEO.
Another factor that makes Brazil ripe for disruption is its size and relatively low financial maturity. With over 200 million inhabitants spread over 8.5 million km2, there are many problems for fintechs to solve, including financial inclusion, SME credit and financial literacy.
For Furio, a Spanish citizen who lived in New York before settling in São Paulo, Brazil wasn’t always the obvious choice, but it’s one he’s never regretted. “What you find in emerging economies is that there is so much work that needs to be done, compared to the competition you find in developed economies. In the US, one specific sub-sector has 20 different competitors, whereas in Brazil, with a unique product and company, you have very little competition. Brazil now combines volume and margins, so it’s a very unique opportunity. There’s a huge lending market, and we find 10 times the bottom margins that we would find in the developed world,” he says.
While the inefficiency of the banking system is not new in Brazil, recent regulatory developments have bolstered innovation. Two laws have been issued to regulate the fintech sector: the first in July 2017 loosened registration requirements for crowdfunding platforms offering securities of small amounts; the second in April 2018 authorised the simplified licensing of direct and peer-to-peer electronic lending platforms, essentially removing the need for them to transact via a third-party licensed financial institution.
Both regulations were drafted through a collaborative process involving all types of fintech players. “I worked in Europe, the US and now in Latin America, and I would say the Brazilian regulatory body is best practice. They are extremely favourable to the creation of the fintech ecosystem and they want to know how we work to provide the tools we need.
In 2016, they started approaching people like us saying ‘we like what you do, bring more competition to the financial sector, what can we do to help?’ This resulted in the new lending regulation three months ago, and we have now applied for our licence,” says Furio at Creditas.
Diniz admits that Brazil regulators have “their own speed”, but believes fintech legislation is firmly on their agenda. “I’m involved along with some representatives from the ecosystem, in conversations with CVM, the Brazilian Securities and Exchange Commission, about best practice for regulatory sandboxes and how to implement them in Brazil. The central bank also has its own agenda on financial inclusion, and issued a report saying that fintechs could help drive interest rates down and be a credit alternative for both SMEs and consumers. Now, with time, they are translating all those points on their agenda into action,” he explains.
Add to this a network of over 50 accelerators and incubators (according to a survey conducted in 2016 by the Aspen Network of Development Entrepreneurs and the Instituto de Cidadania Empresarial), and what you get is an environment conducive to fintech innovation and growth.
Of course, in Brazil, political and economic uncertainty are always an issue, and the upcoming October 2018 presidential election has the potential to disrupt this progress. But entrepreneurs are confident that the change would only be short-term.
“Uncertainty in the market never helps, but the market is so big that it doesn’t really affect our growth. From now until the election, we will probably have a slowdown in activity, but if the election doesn’t end with a terrible result, we expect some amazing growth in the year ahead,” says Furio.
Three Brazilian trade finance fintechs to watch
F(x): Launched in 2015, F(x) works as a digital auction platform for small business loans including working capital and receivables discounting. The company already has 200 investors (including banks, other fintechs and funds) and 500 SME users. It plans to offer a specific trade finance product by the end of this year.
Nexoos: As opposed to F(x), which offers investors the exclusivity of the loan chosen, Nexoos has a peer-to-peer approach that allows funders to decide how much of each loan they want to finance. The company arranges unsecured loans of 1.30% to 3.23% monthly interest rates, and has already facilitated over US$17mn of loans to small businesses in two years
Adianta: Adianta allows business owners to upload their nota fiscal eletronica, a digital activity report requested of most companies by the Brazilian ministry of finance, and automatically assesses how much credit they can receive based on their receivables. Firms receive the money within a day, and Adianta then takes responsibility for collecting the receivables from their customers.