Salvador When the Swiss economics student Silvan Roth made an exchange ten years ago at the São Paulo Business University Insper, he was amazed: the interest on normal, unsecured loans was around 100 percent a year. Anyone who financed their expenses with an overdrawn credit card paid 300 percent interest. The reason: There was no competition in Brazil’s financial market. Four banks – two state and two private institutions – largely controlled the banking business alone.
Roth founded the Fintech Emprex with two partners in Switzerland and Brazil. They want to make better loan offers than the established banks and therefore check the creditworthiness of potential borrowers – all via their digital, data-driven platform.
Roth and his partners are using an “open banking” infrastructure for this, which the Brazilian central bank has been implementing since the middle of last year and which is currently completing the fourth phase. It enables account holders to freely share their financial information in exchange for better loan offers. “The banks won’t like that,” says Roth. “But they will hesitate to cut rates quickly.”
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He reckons that it will take four to five years for interest rates to fall to internationally comparable levels. He wants to use this time to build up his loan portfolio. At 30 billion dollars, the volume of unsecured loans is still small in relation to economic strength. But that will grow as the loans become more attractive.
Fintechs benefit from central bank regulations
Like Roth, many fintechs in Brazil are benefiting from the new regulations that the Brazilian central bank has been implementing for several years. Your goal: you want to increase competition and efficiency in the financial sector. “To do this, the central bank is opening the playing field for new players,” says Roth. That started in 2013 when the central bank relaxed the monopoly of credit card machine operators. For three years now, the central bank has accelerated the pace rapidly.
Fintech expert and business lawyer Bruno Balduccini lists the measures: For example, the lower regulatory requirements for fintechs that have been able to sell credit via digital platforms since 2018. The Pix instant payment system for instant direct transfers. Around half of the 212 million Brazilians have already paid with Pix.
Foreign investors have recently been allowed to invest in Brazilian financial companies without the special presidential approval required beforehand. The requirements for exchange rate transactions, trading in electronic currencies and the regulations for Brazilian accounts abroad have also been relaxed or are about to be opened further.
Nubank: IPO attracted attention
Nubank’s IPO last week drew global attention to the Brazilian fintech industry. The digital Neobank was founded seven years ago – with a free credit card. Today Nubank offers all the services of traditional banks via app.
With a valuation of over 40 billion dollars, Nubank is now the most valuable financial institution in Latin America – leaving its established competition far behind. “The companies like Nubank, which are now quoted on Wall Street – these are the pioneers of the first generation,” says Diego Perez of the Abfintechs Association in São Paulo. This also includes the payment system providers Stone and PagSeguro, as well as the investor platform XP. “But the next generation now also wants to go public.”
There are now around two dozen fintechs that compete with banks in many activities and have already achieved high scores. The takeover carousel among fintechs is turning faster and faster. Before going public, Nubank took over six other fintechs itself. According to a survey by the Brazilian venture capital association Abvcap, around six billion dollars flowed into fintechs this year through October. That is three times more than in 2020.
Roth, who is looking for investors for his fintech Emprex, had actually planned to bring money from Europe to Brazil. But that is no longer absolutely necessary. There is enough capital in the market in Brazil.
Interest abroad is increasing
Foreign investors are also increasingly interested in Brazilian fintechs: the generally increased interest of venture capital investors in high-growth technology companies in Latin America is seen as a major driver of the valuations. A total of $ 6.5 billion in venture capital flowed into start-ups in Latin America in the first half of 2021. 40 percent went to fintechs, and more than half of this amount went to Brazil.
US investor Berkshire Hathaway around Warren Buffett joined Nubank in the middle of the year. In the digital Neobank C6, for example, JP Morgan took over 40 percent of the capital. Japanese mixed fund Softbank has just increased its Latin America fund from $ 5 billion to $ 8 billion to invest in startups in the region. A part also flows into fintechs.
For example in Fintech Avenue, which offers US bank and investment accounts for Brazilians. The German fintech expert Gerrit Glass is helping to build this. He says that Brazil’s fintech market can grow so quickly because regulators and consumers do not focus on data protection, as in Europe, but on the broader and cheaper range of services. He says: “With the new technologies, you first see advantages here rather than concerns.”
Space for new providers
In the meantime, European fintechs such as the direct bank N26 are also trying to gain a foothold in Brazil. After an initial attempt three years ago, the Neobank from Germany is now trying to occupy a niche with the combination of digital direct banking and financial advice. N26 itself does not comment on the strategy in Brazil.
But it should not be easy to gain a foothold in this market against the strong local competition, say experts. On the other hand: If N26 could manage to acquire one to two million customers in Brazil – that would be almost a third of its current customer base in Europe.
Perez from the Fintech Association still sees room for numerous new providers in Brazil’s financial sector. Because the central bank would still work out the framework conditions for many products. For example in the area of blockchain, digital currency or financial transactions in the metaverse. Perez is certain: “The pace of investment will increase significantly.”
More: Nubank celebrates its IPO in New York – paper loses significantly at the close of trading