Brazil is undergoing a fintech revolution

Technological innovations are shaking up the payments and finance world in Brazil. The country has an impressive number of new fintech companies that are disintermediating a highly concentrated banking system, serving consumers in ways that the incumbent banks do not and offering millions of Brazilians their first bank accounts. Some of these companies are revolutionizing the country’s financial industry.

Brazil is well suited for fintech innovations for three main reasons. First, Brazil’s banking system is small relative to the size of the country, and it is heavily dominated by just a few banks. The country’s five-bank asset concentration, which is a measure of the five largest banks as a share of total commercial banking assets, has long been around 80%. This banking concentration in the US is around 50%. The rigidity and oligopolistic nature of Brazil’s banking sector has constrained the economy, leaving too many Brazilians unbanked and consumers looking for better and more convenient options.

Second is changing consumer preferences. Brazil’s fintech start-ups identified widespread consumer frustration with incumbent banks and quickly jumped in to offer a range of fintech products, all accessible via a smartphone and in a relatively quick timeframe. There is also a well-established culture of installment payments in Brazil. The widespread use of payments for both large and small purchases began in the 1950s with the popularization of ‘crediários’, where consumers could register at a store to buy goods but then pay for them over a number of months. This culture of installment payments lends itself well to increased digital funding, resulting in a proliferation of payments-oriented fintech startups operating in Brazil.

Thirdly, the government has given several initiatives to promote increased competition in the banking and payment sector. The first was in 2010 when Brazil’s regulator ended the duopoly that the dominant credit card acquirers had in Brazil. By introducing competition and reducing the fees merchants pay for credit and debit card transactions, savings were passed on to the consumer, ending a period of above-normal profits for acquirers. The incumbent banks that owned the acquirers were then forced to look for ways to replace those profits and grow in a more consumer-friendly way.

In 2013, Brazil’s central bank became responsible for regulating the payments industry with a mission to ensure that all payment card brands were accepted by all acquirers, as well as launch programs to increase financial citizenship and offer more affordable credit. Since then, there has been an increase in the number of participants in the payments industry and an emergence of new products, both of which have increased competition in the market.

Another government initiative worth noting is Pix, launched in November 2020. Pix is ​​an instant payment system operated by the central bank where consumers and merchants can send and receive money via a QR code. Pix is ​​a way for ordinary Brazilians to avoid some of the fees that banks usually attach to standard services like money transfers, and it’s very popular. An estimated 118 million Brazilians (two-thirds of the population) use Pix.

There are dozens of new companies changing the way Brazilians buy, save, invest and access a myriad of financial services. These new companies are skipping traditional banking, payments, wealth management and insurance services. They successfully use consumer data and network effects to challenge and disrupt the sleepy incumbent banks and offer millions of Brazilians their first bank accounts and financial products.

However, there have been mistakes, and there are likely to be more. Companies in this sector have attracted capital at astonishing rates of growth. Unfortunately, for some participants, this growth was accompanied by mismanagement in the form of sloppy credit extensions. The most obvious examples have seen a reckoning in their share prices and there will most likely be some consolidation in the sector with stronger players scooping up the distressed.

Consolidation may also occur due to the fact that consumers are unlikely to have more than a couple of payment or digital banking apps on their phones – there may only be a few winners. The companies most likely to thrive in this industry are those that are able to grow around deposit and liability based products (rather than driven by rushed credit growth).

Brazil’s fintech scene is a classic example of innovation out of necessity. This is a country where millions have been underserved by traditional banks for decades. The unmet need for basic banking services is a key reason why Brazil has such a vibrant and innovative fintech scene. The improved experience and lower fees are appreciated by Brazilians across the spectrum. Perhaps Brazil offers a partial road map for the future of financial innovation in emerging markets.

Kate Jaquet is Co-portfolio Manager at Seafarer Capital Partners.

This is an edited excerpt of the original article. The full version can be found here.