“Brazil is not for beginners,” commented Bruno Balduccinileading fintech partner in the law firm Pinheiro Neto. The “Godfather of Fintech”, as he is known in the Brazilian venture ecosystem, was not citing historical criticism of excessive bureaucracy that gave birth to this local expression. Rather, Balduccini recognized the evolution of Brazil’s fintech ecosystem: the sophistication of its capital markets, advances in its regulatory regime, and the companies that have transformed the financial services landscape, including Nubank (one of the most valuable challenger banks in the world). ).
Brazil is Latin America’s most developed ecosystem for technology-enabled financial services, and it is difficult to overstate the importance of the Brazilian government in increasing financial inclusion by promoting reforms across all areas of financial services. From the separation of the banking system that started in 2013 — which allowed newcomers such as e.g Credits and Neon applying for tiered licenses that are faster and cheaper than a full banking framework—Brazil is one of the world leaders in regulatory-driven innovation in financial services. More than half of the country’s adult population, a staggering 64 million people, made their first digital payment transaction with PIXBrazil’s instant payment system designed by the central bank. Also, more than 18 million accounts agree to share their data in the context of open finance, a growth of 95 percent from September to December 2022. And after pilot projects last year, Brazil is in the advanced stages of launching its digital central bank currency, True digital, which wants to leverage tokenization and smart contracts on the blockchain to enable programmable money. For innovators, change means opportunity.
Brazil’s fintech boom has been rooted in democratization.
Rather than a zero-sum game for market share, Brazil’s fintech explosion has been centered on expanding the size of the market. Through a combination of regulatory reforms, business model innovation and technology, millions of previously disadvantaged consumers and micro, small and medium enterprises (enterprises often referred to as “MSMEs”) were brought into the formal financial system. As of 2021, 96 percent of Brazil’s adult population had access to a digital wallet or banking services, up from 55 percent in 2010. Part of the success in expanding access is building into regulatory reforms the ability of banks and fintechs to maintain positive unit economics ( versus eliminate exchanges, for example – something other regulators have done), and therefore stimulate participation and accelerate adoption.
At the same time, the possibility remains. Less than half the population has access to credit, private health insurance penetration is still below 25 percent, and the credit gap in MSMEs is huge. With one of the most complex tax systems in the world, a large but still mostly analogue agricultural sector, an economy insulated from cross-border trade, and the potential to become a leader in climate change, Brazil remains a breeding ground for the next generation of disruptors.
Brazilian entrepreneurs push the fronteh.
The biggest business opportunities are about solving big, structural problems. The more difficult the challenge, the greater the upside potential. Kovi is one example: Brazil is one of the largest markets in the world for ride-sharing apps, and while 90 percent of the population wants to own a car, less than 25 percent of Brazilians have access to financing for one. Through its innovative car subscription model, Kovi’s approval rating is more than 2x higher than traditional car finance, allowing it to expand access to car ownership for both gig economy drivers and low-income consumers.
Accounting is another highlight. With built-in financial services, the company’s tax and accounting software-as-a-service (SaaS) platform delivers significant value to its small and medium-sized business (SME) customers. On the other side, Monkey has created a unique marketplace for anchor-led supply chain financing, with multiple lenders competing through auctions to provide financing to SMEs. The depth of innovation required to solve tough regional challenges, combined with Brazil’s high talent density, will increasingly create opportunities to invest in companies that are not just local winners, but global powerhouses.
Latin American entrepreneurs are battle-tested to crisis.
Brazil’s top private banking economist, Itaús Fernando Goncalves, recently discussed the balance of the country’s macroeconomic environment, from strong net dollar reserves that provide currency stability, to fiscal policy challenges and the likelihood of continued higher interest rates. Along with the global slowdown in venture markets, the bonanza years of 2020-21 are definitely over. But for local contractors, building in a resource-constrained environment is the rule, not the exception. Having scaled one of the most successful technology companies in the region during periods of economic turbulence, Sergio Furio, CEO of Creditas, stated the situation brilliantly. “There is no such thing as being a peacetime commander in Latin America,” he said. “There’s always a crisis in Latin America, and that’s probably the beauty of it.”
Vibrant capital markets stimulate innovation.
With more than 28,000 investment funds, 25 million quota holders and $1.5 trillion under management, Brazil has highly developed capital markets. Flexible financial instruments backed by pools of different types of receivables, such as invoices, real estate or agricultural receivables (known as FIDCs, CRIs and CRAs, for example) are popular fixed income investment options widely used by fintechs to finance their business. in capital efficient ways. This type of off-balance sheet financing – not available in many other emerging markets – lowers entry costs and provides greater leverage for investment in new businesses.
As a testament to this power, structured funds in the country comprising credit, real estate and equity have grown at an impressive 21 percent compound annual growth rate (CAGR), a factor of 6.5x, over the last 10 years. Companies like Kanastraan asset management as a service platform that provides end-to-end infrastructure for originators and investment firms that raise funds is surfing this tailwind.
Brazilians practice south-to-south cross-pollination.
Fernanda Carmago of Wright Capital shared how widespread learning sharing has become among colleagues in emerging markets, as there are both successes to emulate and similarities to exploit. Kovi co-founder Adhemar Milani Neto is a former manager of 99, which was acquired by Didi, a large Chinese tour company. PIX, Brazil’s instant payment system, was modeled after India’s Unified Payment Interface (UPI) implemented to accelerate digitization and financial inclusion – and has since inspired other Latin American countries to follow suit, including Mexico with CoDi, Colombia with Transfiya and Peru with Yape.
The joy is palpable and unquenchable.
Perhaps the least surprising thing is how much the Brazilian spirit has maintained, despite the country’s challenges.
There really is a lot to celebrate.
