Brazil is positioned to be the next global FinTech powerhouse

The Timing is Right

The Digitalization of Financial Services

Latin America is one of the world’s fastest growing markets for financial technology (FinTech) adoption, and Brazil is home to the largest number of FinTech startups in the region. In the 2017?EY FinTech Adoption Index , Brazil emerged as the fourth largest adopter of the 20 markets studied. In Brazil, 40% of the population lives in rural areas where bank branches are sparse and hard to reach, and there is a ready market for banking by smartphones and other mobile devices - Brazil has the highest smartphone adoption rate in Latin America, making mobile apps a readily available way to deliver financial products.

Digital banking is a real thing, and it has proven to be the preferred channel for financial services in Brazil. In fact, digital channels now account for 57% of all transactions in Brazil.

In a highly competitive segment such as FinTech, the companies that gain the most market share are those with the best tools for user ease and convenience. In fact, 46% of Brazil’s FinTech users say they are generally willing to use the most convenient financial services product even if it isn’t the cheapest. This explains the rise of emerging FinTechs like Original and NuBank. NuBank for instance has raised $150 million in the first quarter of 2018 and more than doubled its customer base from about 1.3 million in 2016 to 3 million users by end of 2017.

Incumbents Are Too Comfortable

With over 200 million people, Brazil stands as the most populous country in South America and accounts for 35% of Latin America's GDP. Brazil becomes even more attractive as a market when considering how comfortable incumbents have become;

• Top five banks, excluding development banks, hold?84% of total loans.
• The country has one of the?highest spread rates in the world.
• People in Brazil pay an average of more than?300% a year for unsecured overdraft.
• More than 30% of the Brazilian population remains excluded from traditional banking services.
• The more than 50 million brazilians without access to financial services represent a potential market of about?$169 Billion as of July 2018.
• High interest rates as much as 15% — that’s 400% APR.

Now for a long time incumbent banks were getting away with this, but things are changing fast. More affordable and user-centric players in the Brazilian financial sector are showing up with solutions aimed at increasingly digital consumers, with ever growing demands for practicality, transparency and customized services. Goldman Sachs predicts that FinTech companies in Brazil will generate a potential revenue pool of about $24 billion over the next 10 years.

Regulation is Encouraging Competition

The FinTech boom in Brazil is no surprise, especially when considering the support from regulatory bodies. Now, Latin America has not gone as far as the EU has in creating the General Data Protection Regulation (GDPR), an initiative that gives consumers control over the way their personal data is used. However, Brazil’s regulators do recognize the need for an updated licensing regime. Regulations that protect customers while lowering barriers to entry and increasing competition is seen as beneficial to all players, including traditional banks looking to develop their own financial technologies.

Regulatory support is further demonstrated as the Brazilian Central Bank and the securities regulator Comiss?o de Valores Mobiliários (CVM) have created internal groups aimed at creating a system that fosters innovation. Regulations created in the last few years have targeted areas in payments (the former oligopoly of the payments sector has been broken up) and lending (Brazil’s Central Bank has enacted its first regulations for fintechs, authorizing two types of fintechs -?Peer-to-Peer Lending (SEP) and Direct Credit to Borrowers (SCD). It aims to increase competition in loans, in a country with notoriously high interest rates.

There is of course a lot more that needs to be done to reduce regulatory barriers for FinTech, but Brazil seems committed and very closely following the EU model.

Venture Funding in Brazil

The number of fintechs mapped in Brazil increased from 244 to 332 in 2017, with companies acting in lending, investment, financial management, payments, insurance, cryptocurrencies, debt renegotiation and other services – more than the rest of Latin American countries combined.

When it comes to venture funding, despite continued dominance in the region, Brazil posted the highest growth numbers of any Latin American market. As for June 2018, funding in Brazil totalled approximately $4.1 billion, with Argentina at second with $600 million total raised.

In terms of deal flow, Brazil leads in that category as well with a total of 721 deals completed as of June 2018. Other countries?did experience growth as well - Colombia, for example, went from just 3 deals in 2013 to 38 in 2017, and now at about 86 total.

However, despite on-and-off trends?in other countries, we can expect to see Brazil continue to dominate the Latin American region in both growth and sheer numbers. Its proven tech ecosystem and wide range of investors also make it a possible launching point into the other countries in the region.

Brazilian FinTech Ecosystem

Brazil is in a leading position with?377 Fintech startups, an ecosystem 1.5 times larger than Mexico and up to 3 times larger than Colombia, the third largest Fintech ecosystem in the region with 124 startups.

Currently, Brazil’s six?main FinTech segments?are:?

• Payments and Remittances, accounting for 25% of total with 96 startups
• Enterprise Financial Management, with 17% of total with 63 startups
• Lending, representing 15% of total with 56 startups
• Personal Financial Management, accounting for 8% of total with 30 startups
• Crowdfunding and Wealth Management, each accounting for 7% of total with 25 startups in each segment.?

In order to gain deeper insight into the FinTech startup ecosystem in Brazil, Finnovista conducted a survey with 189 startups and the following insight was extracted from the survey.

As illustrated, the majority of FinTech startups have been founded in Sao Paulo as it accounts for 71%, followed by Rio de Janeiro at 8%, Belo Horizonte with 5% and Porto Alegre with 4%. Pertaining to operations in other markets, 70% of companies claim to be operating only in Brazil, while 30% confirmed operations beyond national borders.

Regarding the maturity stage of Fintech startups in Brazil, 35% of them claim to be in Growth and Expansion stages, while 31% say they are Ready to Scale, leaving the remaining 33% of Brazilian startups in early stages.

In terms of the age of companies, Brazil’s Fintech ecosystem is mainly composed of young startups, as 82% are less than 5 years old.?Only 18% of the surveyed startups are more than 5 years old.

The survey alludes to the importance of the unbanked/underbanked and financial inclusion as 35% of Fintech's target their product and/or services to this market. However, on the other hand it is interesting to see 28% of Brazilian FinTech startups are targeting the B2B market including financial institutions and corporates, which showcases the progress made towards increased collaboration and integration of old and new.

Now in terms of funding, the survey indicated 67% of Fintech startups in Brazil claimed to have received external funding in the past, and out of the 89 startups that agreed to unveil the amount received, 57% have received under one hundred thousand dollars, while only 13% claimed to have received over one million dollars.?

Conclusion

Overall, Brazil presents a mature Fintech ecosystem headed towards expansion and greater financial innovation. With a population of over 200 million people and high levels of mobile and technological penetration, Brazil has an economic market that has tremendous opportunity for further innovation and technology - positioning the country as a strong candidate to become a global FinTech hub.

***Note - None of this is original research. I have leveraged amazing secondary sources such as CBInsights, Finnovista, EY, etc to write this article.