Three things you probably didn’t know about Brazil’s booming fintech sector
Here in Brazil, change has happened at a rapid pace. More than 75% of the country’s 215 million inhabitants own a smartphone, 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 now widely used. The life of urban Brazilians revolves around commercial activity, and many new people are entering the banking system.
Most non-Brazilians know little about our banking system. Until recently, only three large private banks and one public bank accounted for almost 100% of our banking market.
In comparison, the five largest banks in the United States combined have only about 42% market share (according to Statista). Traditionally, Brazil was a much less diverse and more monopolistic banking landscape.
Those days are over. The Brazilian banking system is rapidly changing towards a system that offers greater freedom of choice, and the new choices available tend to appeal more strongly to low-income customers.
The rapid adoption of mobile phones and digital services by the lower classes has created a tremendous opportunity for neobanks and fintechs to enter the market with new financial products – aimed at today’s Brazilian workers – and seamless experiences and lower fees that traditional banks couldn’t offer. These companies can provide better customer service because they are not hindered by legacy models to do so.
Information about Brazil and Latin America
Brazil is the largest economy in Latin America and has the largest population in the region, and it has unique characteristics that require creative solutions.
For example, a large portion of Brazilian micro-entrepreneurs run their business informally and therefore cannot generate invoices or receipts, and these individuals rarely separate their business from their personal finances. To facilitate the formalization of micro-entrepreneurs, the Brazilian government has created the MEI SME, a classification of companies focused on these micro-entrepreneurs, with special tax conditions for those whose annual income remains below R$81,000 (about 16 $900).
For MEI, formalization is key to digitizing and ultimately expanding business through financial services, such as point-of-sale (POS) payment processing, credit, payment solutions snapshot and other services. It is important to address this type of clientele with a banking solution designed specifically for them, because they have real and specific needs but also have limited income. MEIs are generally put off by the expensive fee structures inherent in large traditional banks.
A large part of the Brazilian population is considered low-income (Brazil uses the designations classes C, D and E to refer to the working and low-income classes). Although these people make up the majority of the population, they also tend to be the most underserved. Classes C, D and E generally receive the lowest quality of services overall (and customer service in particular) from the largest banks, but they also pay a disproportionately high level of fees on their accounts and transactions, in partly because of their higher risk perception.
My company and others saw a tremendous opportunity to meet the needs of these people by doing what the big banks seem unwilling or unable to do: provide better service and lower fees to these groups. It’s a big market and a great opportunity for inclusion: according to the World Bank, the Brazilian workforce numbers around 96.5 million people, 90 million of whom belong to these lower classes.
Three key drivers of growth in Brazil
There are a few factors driving Brazil’s growth worth highlighting:
1. At the start of the pandemic, when the economic setbacks were felt the hardest by so many people, the Brazilian government issued bonds to a large part of the population, but it did so through the large public bank. Every Brazilian has a citizenship benefit account (the same way every American has a Social Security card), but government vouchers can only be used in certain ways. People couldn’t just withdraw money and use it however they wanted. It could be used to pay bills, for example, but it was very difficult to get cash with this public benefit.
A loophole was quickly discovered, allowing people to transfer these funds to a digital bank, where they could have immediate cash. For this reason, many neobanks and fintech companies grew rapidly during this period. This was a wake-up call for the population, which inspired many people to start moving away from their traditional banks and state banking and to look for more contemporary financial services and tools that they could use. in their daily life.
2. A big driver was the launch of an instant payment methodology developed by Banco Central de Brasil (BCB, the Brazilian Central Bank) called Pix. All financial institutions were required to offer Pix and were prohibited from charging their customers for it. Brazilians use Pix much like Americans use Venmo: to exchange money with friends, pay for goods and services provided by a business, or even make or receive government-related payments, all through their smartphones.
Before Pix, every bank-to-bank transfer included a transfer fee. By waiving transfer fees for everyone, Pix has helped level the playing field for new financial technologies to enter and compete by offering new, more attractive and lower-cost services.
3. Another main driver of this trend is more general but no less impactful: the general global trend towards open banking. Neobanks are among 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 significantly lower cost of operation. This has opened up more opportunities for neobanks and their customers.
It’s an exciting time in Brazil, we’re seeing the emergence of a major new market in the global fintech economy, while watching millions of Brazilians gain access to a financial system that has traditionally excluded them. It really is a win-win situation.