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Brazilian Neon Pagamentos offers cashfree pay at the Rio de Janeiro metro. (Photo: Neon Pagamentos)
Wednesday, September 23, 2020

Brazil: Will Fintech Boom Continue?

Will investors keep putting money into Brazilian Fintech?

Inter-American Dialogue 

Brazilian financial technology companies Neon Pagamentos and Nubank have each raised $300 million in investment rounds in recent months. The investments have come amid rapid expansion of fintech firms this year in Latin America. In the wake of the sharpest economic contraction in Latin America’s recent history this year, to what extent will investors continue putting money into Brazil’s fintech firms? Will tighter credit conditions and global economic uncertainty surrounding the pandemic derail expansion plans for start-ups? Will existing fintech companies in Brazil and elsewhere in the region grow their revenue and market share next year, or will their business be dampened by the economic slowdown? Will new entrants continue to emerge despite the crisis?

Richard Fogarty, managing director at Alvarez & Marsal, and Tony Moroney, managing director at Beta Digital: Statista recently reported a 28 percent increase in fintech start-ups in Brazil year-on-year, and Global Atlanta reports that investment in Brazilian fintech companies reached $1.6 billion in 2019. Brazil’s population of 207 million, along with the shift to digital, affords fintech start-ups ample opportunity to increase their market share and win customers from the dominant top five banks. Fintechs with strong value propositions and revenue generation capabilities will continue to attract investors. Fintechs focused on online commerce have performed particularly well. Others, dependent on lending volumes, margins and fees, face challenges. Concurrently, legislation in some markets is creating business pressures, short-term performance and long-term viability issues. A German digital lender recently shut its operations as legislation in its two main markets meant customers had to be given payment breaks; without income, the business was not sustainable. Efforts to increase competition, coupled with younger demographics, high mobile phone penetration and demand for financial access and alternatives, brings significant opportunities for fintech. In the short term, existing customers may be financially challenged while new customers may have limited capacity to save, borrow or invest. Over the medium term, however, Brazil remains an attractive market. As such, we expect a continuation of new market entrants. Additionally, international banks and technology companies with financial sector ambitions in Brazil will look at fintech acquisitions.

Kai Schmitz, partner at Crestone Venture Capital: The fundraising of Neon and Nubank, two digital banks, is testament to the attractiveness of the Brazilian financial services market. Investors have actually cooled significantly in their enthusiasm about digital banks because of the challenging unit economics and large amounts of capital needed for them to scale. Peers in Europe and the United States have been castigated for these reasons. The Brazilian digital banks are also generating losses, but the high margins of consumer banking in Brazil make profitability more achievable (if not easy). Many fintech companies in the region have benefited from the accelerating digitization of payments and commerce caused by the Covid lockdowns, especially in the area of payments.

Digital lenders have not fared as well. Increased defaults by small businesses and consumers and the tightening credit market make it harder for them to operate at a profit or at least with positive unit economics, and growth has slowed significantly. Having said that, some of the small business lenders in

Brazil have managed their loan portfolios well in the crisis and raised additional capital. While the conditions may have become more challenging, the market opportunity for fintech in Latin America continues to be promising. Low penetration with financial services creates a blue ocean opportunity while high bank concentration has made markets and incumbents uncompetitive.

Deregulation also continues, and in some cases, regulators are actively pursuing a modernization of their financial services markets. The new payment service Pix in Brazil and the deregulation of the acquiring market in Colombia are two examples.

Maybe the crisis will cool the hype, but the opportunities for well-run fintech companies remain very attractive in the region.

Wally Swain, principal consultant for Latin America at Omdia: Just as Covid-19 forced people to stay at home, it has forced businesses that relied on physical storefronts to find new business models. Clients who did not find an adequate mobile or online experience from their traditional financial services provider looked elsewhere.

Cash is still an important tool in Latin America (because of large informal economies, low penetration of bank accounts and distrust of governments) but payments are increasingly shifting to electronic which, as a side benefit, do not transmit the virus as readily as bills and coins. With contactless point-of-sale terminals, the infection risk drops even further. And we have seen a surge in e-commerce for physical goods at the expense of the traditional neighborhood store which was a bastion of cash-only transactions. Brazil has long had the most sophisticated online payments and e-banking ecosystem in the region, and the new P2P facility sponsored by the central bank, called Pix, is making companies rush to register users for the system. This might be the biggest change in payments in Brazil in the last decade. Yes, the economic crisis caused by Covid-19 will reduce the regions’ attractiveness for investment, but that affects all sectors, and we think fintech will continue to grow its share of the investment pie, at least in Brazil.

Silvina Moschini, CEO & Founder of SheWorks!: The pandemic has precipitated a technology Big Bang-like explosion of digital acceleration in industries such as retail and logistics, as well as in business areas such as remote work, among others. The global market share for e-commerce increased by five percentage points year-on-year as of the end of June, a percentage growth that took seven years in pre-pandemic times.

Fintechs that concentrate multiple forms of payment in different currencies on the same platform have become unexpected unicorns hailing from small countries such as Uruguay, and digital banks such as Nubank have registered meteoric growth that promotes the financial inclusion of millions of people who until now were only cash users. Remote work is also having an unexpected impact.

In the last months, half the world’s workforce was sent home, and companies have been forced to operate remotely. Furthermore, eight out of 10 CFOs plan to keep at least 5 percent of their productive force in remote work mode, according to a Gartner survey. The technology platforms that allow working with distributed teams, and which until not long ago were considered a luxury for a few, today guarantee the continuity of business during confinement and also in the future. Fintech startups have enabled global payments for people who can now sell their services to the global market. Covid-19 has created new business opportunities, but it has also accelerated the growth of many start-ups in an exponential way. Everything indicates that the trend will continue as we all adopt new habits and the world as we know it has changed.

Republished with permission from the Inter-American Dialogue's biweekly Financial Services Advisor


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