First there is the tech itself. And while tech in finance is admittedly not a new addition to the beat, the pace of expansion has become to feel a little intense.
It’s not just that innovation is coming in faster waves or that it’s increasingly complex, it’s that technology is now actually changing business strategy. It is creating brand new ecosystems, rather than just giving a productivity jolt to existing financial segments.
It’s all been a bit bewildering – for this journalist at least.
It’s also fascinating, but to keep on top of the subject – more than 600 fintechs now operate in Brazil alone, according to the central bank – I’ve been focusing reporting at Euromoney’s natural audience. And that means focusing on scale.
What are the big, incumbent banks doing to retain scale? Which of the new payments systems do I need to look at, which digital banks already have either scale or the potential to grow rapidly?
Increasingly I have been working on the theory – set out in November’s article ‘Can credit pop Brazil’s fintechs?’ – that the provision of credit will create a natural barrier to the creation of scale. In other words, to be a long-term winner in Brazil’s financial world, companies must offer credit. That, in turn, requires scale.
This has naturally led my focus to be on those companies – let’s call them banks – that already offer credit. That’s easy enough. But then come the startups, the disruptors that plan to offer credit, or already do so at low levels – that’s the digital banks.
It’s not easy to offer credit unless you have a deposit base – and new digital banks often don’t – so it will be hard for them to compete
That’s pretty easy too, but here the focus has been on the practical difficulties they will face. It’s not easy to offer credit unless you have a deposit base – and new digital banks often don’t – so it will be hard for them to compete.
It also handily knocks out, or at least down, most of the companies from other financial segments. Payment providers don’t really offer credit; so I’ve pretty much covered the payments companies from the perspective of the threat to the incumbents’ ability to charge fees, and then left them alone.
Credit is also a weakness of the e-commerce platforms, but they have key advantages of branding around retail that could be used as a platform. They are highly recurrent business for a large number of clients, and the development of big data systems offers potentially interesting competitive positioning for the growth of new financial products.
My approach to digital banking might, however, be wrong: it ignores some emerging companies or sectors. A recent report from BTG Pactual gave an in-depth evaluation of a range of software suppliers that are reverse engineering credit solutions. These so-called ‘techfins’ are trying to broaden out their financial ecosystems with such products.
For example, Xerpa, an HR software provider has begun to offer a salary advance product to its clients. In a country where overdrafts have recently been capped at a ‘mere’ 8% a month, there is the opportunity to build a pretty strong and sustainable credit business.
Other Brazilian software providers are doing similar things. Totvs is offering supply-chain credit to the small business sector.
Meanwhile, cross fertilization isn’t just reliant on credit. Retail software firm Linx, for example, is getting into payments and QR code solutions.
Ultimately scale still matters. A couple of years ago a friend of mine was giving a glowing review about an online broker he had started using. Little did I realize then that in January 2020, I would watch that company’s chief executive landing in a helicopter for an interview about his expansion plans after XP Inc’s $2 billion IPO.
And yes, the addition of credit services to XP’s business model was a big part of that conversation.