Three things you probably did not know about Brazil’s growing fintech sector

Here in Brazil, the changes have taken place at a rapid pace. More than 75% of the country’s 215 million people have smartphones, and they are increasingly urban: more than 85% live in cities. The adoption curve for smartphone-enabled digital services has been steep, and online banking is widely used now. The lives of urban Brazilians are about commercial activity, and many new people are entering the banking system.

Change has taken place at a rapid pace in Brazil

Most non-Brazilians know little about our banking system. Until recently, only three large private banks and one state-owned bank accounted for almost 100% of our banking market.

By comparison, the five largest banks in the United States together have only a market share of around 42% (according to Statista). Traditionally, Brazil was a much less diverse, more monopolistic banking landscape.

Those days are over. Brazil’s banking system is moving rapidly towards one that offers more freedom of choice, and the newer available choices tend to appeal more strongly to customers with lower incomes.

The rapid use of mobile phones and digital services by the lower classes created enormous opportunities for neobanks and fintechs to enter the market with new financial products – aimed at today’s Brazilian workers – and the seamless experiences and lower fees that traditional banks could not offer. These companies can offer better customer service because they are unloaded by older models to do so.

Background on Brazil and Latin America

Brazil is the largest economy in Latin America and has the region’s largest population, and it has some unique characteristics that require creative solutions.

For example, a large proportion of Brazilian micro-entrepreneurs run their business informally and thus cannot generate invoices or receipts, and these people rarely separate the business from the private economy. To facilitate the formalization of micro-entrepreneurs, the Brazilian government created MEI SME, a business classification focused on these micro-entrepreneurs, with special tax conditions for those whose annual income stays below R $ 81,000 (approximately $ 16,900).

For MEI, formalization is the key to digitization and, ultimately, to business expansion through financial services, such as payment processing on POS (Point-of-sale), credit, immediate payment solutions and other services. It is important to address this type of customer with a banking solution designed specifically for them, because they have real and specific needs, but also have limited income. MEIs are generally turned off by the costly fee structures inherent in large traditional banks.

A large proportion of the Brazilian population is considered low-income (Brazil uses the terms C, D and E classes to refer to the working and low-income classes). Although these people make up a majority of the population, they also tend to be the most underprivileged. The C, D and E classes generally receive the lowest quality of services in general (and customer service in particular) from the largest banks, but they also pay a disproportionately high level of fees on the accounts and transactions, partly due to the fact that they are perceived as higher. Danger.

My company and others have seen a tremendous opportunity to meet the needs of these people by doing what the big banks seem unwilling or unable to do: offering better service and lower fees to these groups. It is a large market, and a huge opportunity for inclusion: according to the World Bank, Brazil’s workforce is about 96.5 million people, of which 90 million fall into the lower classes.

Three key drivers for growth in Brazil

Marcelo Haddad, Neon

There are a few things that drive Brazil’s growth that are worth highlighting:

During the early days of the pandemic, when economic downturns were most felt by so many people, the Brazilian government issued coupons to a large portion of the population, but they did so through the large state-owned bank. Every Brazilian has a citizenship benefit (in much the same way that all Americans have a Social Security card), but government coupons could only be used in certain ways. People could not just withdraw money and spend it as they wished. It could, for example, be used to pay bills, but it was very challenging to actually get liquidity with the public benefit.

A loophole was soon discovered, which allowed people to transfer these funds to a digital bank, where they could have immediate liquidity. Due to this, many of the neobanks and fintech companies saw rapid growth during this period. This was a wake-up call for the population, one that inspired many people to start migrating away from their traditional banks and state banks and look for more modern financial services and tools they could use in their daily lives.

2. A major driver was the launch of an immediate payment methodology developed by the Banco Central de Brasil (BCB, the Brazilian central bank) called Pix. All financial institutions were required to offer Pix and were prohibited from charging customers for it. People in Brazil use Pix a bit like Americans use Venmo: to exchange money between friends, pay for goods and services provided by a company, or even make or receive government payments, all through the smartphone.

Before Pix, every bank-to-bank transfer included a transfer fee. By eliminating transfer fees for everyone, Pix helped level the playing field for new fintechs to enter and compete by offering new, more appealing, less expensive services.

Another major driver of this trend is more general, but no less effective: the general global trend towards open banking. Neobanks are some of the most profitable banks in the world due to their lower cost structure. They can offer competitive products and services to anyone with an internet connection, at a much lower cost of doing business. This has opened up several opportunities for both neobanks and their customers.

It is an exciting time in Brazil, we are witnessing the emergence of a large new market in the global fintech economy, at the same time as we see millions of Brazilians gaining access to a financial system that traditionally excluded them. It really is a win-win situation.