Brazilian financial technology entities (Fintechs) face a myriad of opportunities but will have to prove their resilience under a much tougher economic environment, according to Fitch Ratings. Companies that were already able to raise capital — and that remain well capitalized — are the ones better positioned to handle these headwinds and defend their franchise.
Brazil is Latin America’s largest fintech market. Digital services have been on the rise with Fintechs and the Central Bank leading initiatives to foster competition, promote financial inclusion and lower banking fees. The COVID-19 pandemic stimulated the ongoing migration of Brazil’s banked population to online services which, combined with a relatively stronger payment regulatory framework, entrepreneurship and product innovation, opened access to increased banking digitalization and financial inclusion to households with no previous access to banking services.
PIX, the Brazilian instant payment system launched in 2020 allowed the financial inclusion of over 50 million individuals – people that made their first ever bank transfer. At end-March 2022 the number of PIX users reached 124 million, with transactions of around BRL780 billion every month, and according to the Bank for International Settlements PIX had the fastest adoption curve amongst all real-time payment systems in the world. Some Fintechs are strongly engaged in developing new products derived from PIX — such as insurance (to PIX’s frauds due to phone theft) and the potential for PIX clients to divide a single payment into several installments.
The Open Banking (Open Finance) framework in Brazil is also paving the way for Fintech expansion. Fintechs’ competitive position relative to large retail banks, which also provide similar services, was often constrained by their lack of access to historical customer data, typically only available from credit bureaus. Open Finance will ease this access and Fintechs – that have already been consulting their own client bases — expect acceptance to be high.
On the other hand, current negative market sentiment combined with rising interest rates — could challenge Fintechs’ funding and liquidity stance, especially for those who are dependent on structured funding products and/or institutional investors by regulatory limitations, which in turn are more price sensitive relative to granular and cheap retail deposits. Domestically, the policy interest rate (SELIC) increased from a historical low of 2 per cent in March 2021 to 13.25 per cent as of June 2022. Fintechs that are dependent on future inflows of new capital are also likely to be challenged under the current scenario given reduced investor appetite.
Passing higher funding costs to customers may be challenging given Fintechs largely price-driven strategies and customers’ relatively weak commitment to their franchises. High costs of customer acquisition will also limit Fintechs’ marketing spending, key for the client acquisition goals. In Fitch`s view, this has the potential to change the industry to be more oriented on client retention – based on cross-selling and client-activation (compared to today´s strategy of pursuing aggressive client base growth).
Fintechs with a well-developed business profile — encompassing clients, products and channels — that already addressed both capital and funding aspects are likely to maintain their growth pace — increasing market share and even potentially acquiring complementary smaller entities.
Fitch sponsored a webinar on June 9 with other domestic market participants and addressed this as well as other important subjects about Fintechs in Brazil.
