Brazil’s fintechs need a wave

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The industry needs a change in the macroeconomic environment.

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Banco Inter’s IPO in Brazil was the first by a financial institution in the country since 2012. It was also one of the reasons the bank won Euromoney’s award for Latin America’s best digital bank.

The deal was important. It raised around $200 million equivalent and increased the bank’s equity by 2.4 times. It also opened a door – with strong demand and healthy pricing likely to tempt other online banks.

Startups flourishing

Backed by a central bank that is keen to expand fintech as a way of challenging the high interest rates charged by the incumbent banks, startups have been flourishing in Brazil recently. A report by startup monitor Innovation found that in the year to September 2017, the number of fintechs in the country rose from 219 to 309.

Lenders remain a minority – 12% of startups – while payment systems make up the largest fintech category, with a 28% share. This balance is expected to change. The central bank has published two resolutions (4,656 and 4,657) that would allow fintechs to run their own banking services – such as lending, payment collection and insurance brokerage. Previously, fintechs needed to partner with traditional banks to operate in such areas.

The first of these resolutions would create peer-to-peer lending for loans of up to R$15,000 ($3,833), although fintechs cannot use their own capital for such activity. The second allows fintechs to use their own capital, but they must use securitization to “qualified investors” to leverage portfolios.

It remains to be seen how quickly and how far fintechs will take advantage of these rule changes. A report by Fitch points out that the lending portfolios of the online banks have seen subdued growth. The success in attracting deposits has not been met by demand for credit and so these banks have been largely investing in public securities for revenues.

Persistent concerns

This is because the consumer segment is still quite highly leveraged, with economic growth slow and unemployment still high. The industry needs a change in the macroeconomic environment. Research also points to persistent concerns about fraud and cyberattacks as a big block to consumers’ willingness to become customers with online, startup financial brands.

The established banks are also investing in technology to protect market share, as well as making acquisitions, as with Itaú’s purchase of 49% of online brokerage XP.

So there are many reasons to be cautious about the potential for fintechs to change banking in Brazil. But there is also sufficient work being done by the startups and by the central bank to suggest that, should a favourable economic wind begin to blow, a few could catch a pretty big wave.