A Danish FinTech eyes great potential on the Brazilian banking market

As we wrote about in our last piece, the Brazilian banking market has been undergoing a radical transformation over the last decade. Brazil is leading a Latin American boom in financial inclusion, with innovative FinTech companies, digital banking and Central Bank-led initiatives providing access to banking for the first time to millions of people. But where does this leave the banking market overall?

With the reality of an economic slowdown in 2023 seeming more and more likely and the digital newcomers gaining ground in the market, the situation is becoming increasingly difficult to manage for the traditional banks in Brazil. The combined result of the three largest private banks (Itaú Unibanco, Bradesco and Santander) of Brazil shrank with 7.31% in 2022. With increased credit risk following the speculative uncertainty surrounding global developments and the ongoing dispute around the “accounting inconsistencies” in the retail-giant Americanas SA, it is essential for the big banks to utilize their resources sufficiently in the time to come. This is where the newest partner of Nordic Brazilian Capital comes into the picture…

Morten Virenfeldt, Founder & CEO - AQRisk

AQRisk is a Danish FinTech with highly advanced solutions for modern banking optimization. Since presenting their first solutions to the market in mid-2018, AQRisk has experienced high growth and today they provide solutions for a wide range of Scandinavian banks. AQRisk combines their vast experience from financial markets and banking with datadriven technology in order to optimize and streamline their clients’ core banking dynamics.

AQRisk provides unique and efficient solutions that have proven to be essential over time and that is why Nordic Brazilian Capital is now assisting them in their entry into the Brazilian market.

“Brazil is a highly attractive market to us - not only does it represent a very large market – it is amid of a rapid digital transition with new tech-driven neobanks, and heavy development in new innovative fintech solutions with and within incumbent banks. I see AQRISK being a natural part of that journey - making it much easier for banks to improve profitability and optimize their banking business“

Morten Virenfeldt, Founder & CEO - AQRisk

Esge Räder (Chief Facilitating Officer & CCO) identifies four dynamics in the Brazilian banking market which calls for further optimization of the core banking book business:

• High interest rate (currently 13.75% - making it difficult for many Brazilians to access credit)

• High level of competition (drives down profit and makes it harder for some banks to succeed)

• Strict regulatory requirements (costly and time-consuming to comply with)

• Large population of unbanked individuals

In a financial climate with high and increasing funding costs, Brazilian banks need to optimize the use of interest rates and fees to offer sharper and differentiated pricing to increase profitability, competitiveness, financial inclusion and better standing with supervisors.  

AQRISK is specialized in enabling progressive banks of all sizes to operationalize their risk-return requirements (risk-appetite) through dynamic, differentiated, and improved cost- and risk-based pricing. This is also a concept, that provides 'fair pricing', as AQRISK’s actionable insights foster increased transparency, which leads to improved customer satisfaction, loyalty and more importantly trust.

At Nordic Brazilian Capital, we fully agree on this analysis and we see great opportunities for partnerships between Brazilian banks and AQRisk. We believe that both the traditional banks and the neobanks can benefit greatly from AQRisk’s solutions and expertise.

What created the FinTech boom in Brazil?

As the Brazilian economy is slowly re-emerging from a periodic recession while the political divide has culminated in the attack on the government buildings in Brasilia, one business sector in Brazil has remained thriving and innovative throughout the turbulence: FinTech.

From 2019 to 2020 investments in Brazil’s FinTech companies grew 73% and since then multiple companies in the sector have been receiving hundred million dollar investments and multi billion dollar valuations. VCBay News now ranks Brazil as the fifth leading FinTech market globally.

“There have been tremendous positive effects of the FinTech boom in Brazil. Historically, the Brazilian banking market has been dominated by the four largest banks, which includes two public banks that are politically controlled.  Effectively, the Brazilian banking market was close to a oligopoly and the consumer suffered with extremely high interest rates charged by these banks. FinTech has improved financial inclusion and made financial services more accessible to the wider population through smart phones, where Brazil has one of the highest penetration rates in the world. The increased accessibility to financial services has also resulted in a higher level of financial education among the population and is changing consumer behavior dramatically.”

- Christian Christensen, Managing Director at Nordic Brazilian Capital

The Brazilian FinTech market is a thriving environment of more than 1300+ well-established companies providing solutions across five major business areas:

• Payments (payment processing, point-of-sale hardware/software, payment gateways, online/mobile payment options, loyalty/reward programs and transaction security/fraud protection)

• Banking (online banking solutions, real estate financing, sales technology, digitalized lending options and personal finance management)

• Financial Management Solutions (software solutions for small-medium businesses and large corporations, automated accounting and AR/AP solutions)

• WealthTech (investment management, crowdfunding, alternative investments and technology for trading, brokerages and capital markets)

• InsurTech (Comparing and purchasing of insurance policies, software solutions for insurance brokers, agents and carriers)

“More sophisticated products are becoming increasingly available to the average customer, for example investment products, mortgages and credit. Further the ease of onboarding through Neobanks and fintechs means that a large part of the population which was prior unbanked are gradually becoming bank customers. This helps them migrate away from the informal part of the economy, save money and increasingly create wealth. One can say that what is happening is a democratization of the financial system which is still mostly used by the more affluent parts of the population.”

- Lauritz Stræde Hansen, Partner at Nordic Brazilian Capital

The story of the Brazilian FinTech company Nu Holdings (also known as NuBank) serves as the poster-child for the boom in digital banking solutions. Since the first transaction with a NuBank card in 2014, things have been moving fast and after multiple investments from American venture capital firms (Sequoia Capital, Tiger Global Management and Warren Buffett’s Berkshire Hathaway Inc.), NuBank’s shares opened at 25% over the offer price on their stock market debut in December 2021. That opening gave NuBank a valuation of 52 billion dollars, which made them the third-most valuable listed Brazilian company - right behind Petrobras and Vale. Today NuBank serves more than 70 million customers in Brazil, Mexico and Colombia, with an activity rate of 82%, which makes NuBank the sixth largest financial institute in Latin America by the number of active users.

So what made Brazil a fertile environment for the evolution of FinTech businesses at a time where the country experienced political tumult and economic recession? We have identified three main factors that fertilized the soil for the rapid growth of the digital financial solutions.

An old and rigid dynamic in the traditional banking system

In 2018, Brazil’s financial market were dominated by four traditional banks (Itaú, Bradesco, Banco do Brasil and Caixa Econômica Federal) who held 76,35% of the deposits, while similar concentrations also applied to the areas of credit and assets. This concentration had been in place since the boom of commodity prices in the early 2000’s and the banks were mainly focused on serving the wealthy minority, which in turn made for high interest rates on loans and little incentive to create consumer-friendly products. This dynamic meant that a large part of the population wasn’t getting served, who are in in turn now the same consumers that the FinTech companies are offering access to affordable financial products and tools for managing private finances. The disruption of the Brazilian banking system has forced the traditional banks to react and create their own digital solutions and the increased competition has prompted a new wave of consumer-friendly options.

Progressive regulation

The financial regulators such as the Central Bank and the Antitrust Authority (CADE) have been keeping their eye on the FinTech sector since 2010, aware of the potential that the innovation of financial products holds, and in 2013 they influenced the government to enact a law that opened up the payment market to the newcomers. Since the first legislation, the payment market has grown exponentially with heightened competition, technological improvements, financial inclusion and new investments as a result. The regulators have been continuously engaged in providing the best possible framework for FinTechs to grow. They have been supervising anti-competitive activities and conducting regulations that keep up with the latest market developments.

A huge neglected consumer group

Since the traditional banks didn’t attend to the needs of the low-income consumers, more than 29% of Brazilians were either unbanked or under-banked (precarious access to banking services) in 2020. That’s around 60 million people who weren’t getting served properly, which in turn created a huge consumer base for the digital banks. 39% of the adult population even attested that they didn’t feel comfortable in the traditional banks. As the pandemic rapidly increased the digital activity of Brazilians, it also accelerated the flow of customers to the new banks. Today it’s reported that 43% of adults in Brazil are using a digital-only bank account - which is the 3rd largest percentage just behind Mexico (57%) and China (61%). Brazil has a relatively young and very tech-savvy population - it’s even reported that Brazilians have the highest mobile usage in the world, which also played a huge part in the rapid adoption of digital banking.

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Sources: The Brazilian Report, World Economic Forum, FT Partners, Forbes

NewC Sport

December 2022

How a Danish company became an essential partner to Brazil’s biggest football clubs

A short story about how we operate and what it means to our partners…

NewC Sport is a Danish company that customizes digital solutions for football clubs, so that they can digitalize and monetize their fan relationships. The digital solutions include ticketing, communication and access control, which are fitted to the specific needs of the football clubs and integrated with their existing systems. Among their customers we find highly developed European football clubs like F.C. København, Brøndby I.F., Cardiff City F.C., Malmö F.F. and also the Danish National Football Association DBU.

In 2019 NewC Sport was in talks with one of the biggest clubs in South America, the São Paulo-based Palmeiras - the most succesful club in the top-tier domestic competitions in Brazil. With 11 national championships and 18 million supporters, this was a huge business opportunity for NewC and they needed to get acquainted with the Brazilian business conditions and culture as quickly as possible. And this is where Nordic Brazilian Capital came into the picture…

Picture: Mikkel Skou, the founder and CEO of NewC Sport

The Founder and CEO of NewC Sport, Mikkel Skou (in the picture), already had a relationship with Christian Christensen (Managing Director of Nordic Brazilian Capital) and Lauritz Stræde Hansen (Partner of Nordic Brazilian Capital) so he understood how NBC could help him and there was a great chemistry from the start.

““They operated like a part of our company from day one!””

— Mikkel Skou, NewC Sport

NBC immediately became a decisive partner in the final stages of the contract negotiations with Palmeiras. It was also crucial for NewC to have legal representation* in Brazil and therefore they needed a partner they could trust.

In the same process NBC also facilitated NewC Sport’s Brazilian bank set-up, got them the bank guarantee that was required by Palmeiras in order to finalize the contract and supplied them with full housing* in their São Paulo office.

After some time, NBC also obtained an accountant mandate from NewC in order to assist them with financial accounting and help them navigate the Brazilian tax system, which can be quite time consuming* - especially for foreigners.

““They helped us with everything in regards to establishing the company in Brazil. With bank setup, with hiring and taxes, with negotiations on a pretty advanced level… they helped us with the company structure. Of course we know how we do it, but NBC helps us adjust to the local conditions (in Brazil).””

— Mikkel Skou, NewC Sport

Over the years, the relationship between NBC and NewC only grew stronger and the work dynamics became more efficient. Today Mikkel Skou considers NBC as NewC’s Brazilian department and has also trusted NBC with a mandate for negotiations on behalf of NewC. This was essential in the process of landing a contract in 2022 with another major Brazilian football club: Clube Atlético Minero.

After three months of negotiating and daily communication, Atlético Minero agreed to sign a deal with NewC Sport, who will help the club modernize and digitalize their ticket sales and fan engagement. The Danish company is now working with the winners of the last two Brasileirão-championships and this could not have happened without the assistance and expertise of Nordic Brazilian Capital. Besides cooperating with the football clubs, NBC and NewC also started a joint-venture looking into real estate and rental business in Brazil.

““When you are well anchored and well consolidated in a place, it becomes easier to invest in other types of projects as well.””

— Mikkel Skou, NewC Sport

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The 2022 election and the state of the economy

Lula defeats Bolsonaro in an historically narrow election and leaves us with the question: Where to now, Brazil?

Below Nordic Brazilian Capital will guide you through the election results, its effect on the business world and the current state of the Brazilian economy.

By an extremely narrow margin former president Lula seized the victory over current president Jair Bolsonaro on sunday the 30th October 2022. This is going to be Lulas third term as the president of Brazil - but what can we expect from his policies this time around? While Brazil is facing a myriad of problems - from hunger and corruption to the global climate crisis - Lula has identified his old enemy as the number one target: poverty. Many of Lula’s promises are reminiscent of the rhetoric used ahead of his terms in 2003 and 2011. Lula enjoyed great success in his former battles with poverty in the early 2000’s - much supported by a global boom in commodity prices - but can he do it again? And how is he going to do it this time around? We have gathered some of the most likely consequences of Brazil’s political powershift…

Increasing public spending and focusing on more redistributive policies

In his victory speech in the center of São Paulo Lula addressed his main political mission: to combat the economical divide in the country that has sent more than 30 million Brazilian citizens into a hunger crisis and 60 million into poverty. Lula has promised to build affordable houses and bring electricity and water cisterns to secluded villages. With funding from the state banks Lula also intends to initiate major infrastructure projects improving public transportation, energy and water supply. Lula has also stated multiple times throughout the election that the richest should pay more in tax and the poorest should pay less. We can probably expect to see him backing different tax reforms that will unify federal taxes on consumption while also advocating for taxing dividends paid by companys. Lula’s biggest challenge will be the financing of the social policies and we have already seen how Lula is fighting the fiscal spending cap, a rule that limits growth in public spending to the previous year’s inflation. He has stated that he intends to change the way public spending is favoring “fiscal stability” over social policies - a comment that made the Brazilian benchmark stock Ibovespa fall 3.35%.

Continuing and expanding the social programs with cash transfers to the poorest

The former social welfare program Bolsa Familia, which was a cornerstone in Lula’s first term as president in 2006, was replaced by the Bolsonaro program Auxílio Brasil in 2021 in order to combat the economic consequences of COVID-19 pandemic. The program offers the most economically challenged families a monthly payment of 400R$ until the end of 2022. Bolsonaro promised to raise the payments with 200R$ - something that was seen by many as an empty election promise - and Lula now intends to deliver on his rivals promise and even extend the program to combat poverty. Lula has stated that he intends to change the name of the program back to Bolsa Familia and add an extra 150R$ for every child under 6 years of age. The funding plans for this significant expansion of the social welfare is yet to be publicized. It is likely that the expansion of the welfare program first will be possible to finance in the national budget of 2023. Lula has now appointed a transition team in order to prepare a new budget allowing him to deliver on his campaign promises. The team consists of both left-leaning and liberal economists, reflecting the broad coalition that helped him win the election.

Initiating a significant climate plan

In his victory speech Lula announced that Brazil is back and “ready to retake it’s leadership in the fight against the climate crisis”. The restoring of the Amazones has been among the top priorities of Lula’s electoral campaign - and with good reason. In the 4 years under the Bolsonaro administration more than 2 billion trees was cut down or burned by loggers, ranchers and soy farmers, many of them illegally, according to environmental research groups Imazon and MapBiomas. Bolsonaro rejected hosting the COP25 as scheduled and he didn’t show up for the COP26 in Glasgow as a reaction to the international critique of the deforestation in the Amazones. More than half of the Amazonia is located in Brazil and that’s why the election of Lula is a crucial element in the battle against the climate crisis. In a conversation with Scientific American environmental law professor Paulo de Bessa Antunes mourns the lawlessness of the Bolsonaro administration while he’s also being optimistic about Lula’s environmental commitment. Lula has also stated that he intends to create a climate change agency that will be superior to the current structure, where climate change is handled politically in the environmental ministry. Even though Bolsonaro tried to change laws in order to expand the deforestation, he faced great opposition in both congress and supreme court. Bessa Antunes estimates that around 90% of the changes was ruled unlawful by the supreme court. With the protection of the Amazonas comes also the protection of the Indigenous people, whom has been mistreated and undermined by the Bolsonaro administration. Even though the power of agribusiness lobbys still remains and they are fighting for the expansion of soybean and meat production while Brazil also elected a conservative congress, Lula might still have the chance of advocating for a green economy with subsidies for sustainable farming, increasing environmental protection and financial support from carbon credits.

Rebuilding the bridges to the rest of the world

Lula’s return also marks the return of Brazil in a geopolitical context from which Bolsonaro almost isolated the country from. As soon as the result of the election was made clear on the 30th of October congratulatory messages poured in from the world leaders who seemed like they have been eager to become reacquainted with Brazil. The american president Joe Biden, newly elected UK Prime Minister Rishi Sunak, French president Emmanuel Macron and European Commission President Ursula von der Leyen was amongst the first to congratulate Lula on the victory and they all expressed their readiness to work on political solutions - especially in regards to the climate questions surrounding the Amazones. Monday the 1st of November the Norwegian Climate Minister Espen Barthe chimed in and expressed his eagerness to reestablish “the historically good collaboration between Brazil and Norway” before he added that a pool of around 5 billion Norwegian kroner (2.49 billion Brazilian R$) in unused aid was being freed to the Amazon Fund for Forest Conservation and Climate Protection. The funds stems from when Norway halted it’s aid in 2019 after Bolsonaro took power. Also Chinas president Xi Jinping send a congratulatory message where he praised the longlasting China-Brazil relationship. Chinese investments have been flowing heavily to the Brazilian energy and mining sectors for years and there is no reason to believe that Lula will risk anything in regards to this dynamic. It generally seems like the effect of Lula’s return is already making its rounds and Lula’s reputation as a pragmatic peoples champ is working in his favor. At the time of writing the arrival of Lula at the COP27 in Egypt has marked Brazils return to the global fellowship of cooperation. Lula’s benevolent attitude can become the driving force for Brazils foreign relations and economic prosperity in the years to come.

“NBC consider the expected change in the environmental policy from the new administration will have a significant impact for Brazil. Due to the current government’s environmental policy primarily on the Amazon forest, there has been a rapid increase of deforestation in the recent years and politically Brazil has suffered substantial reputational damage globally due to its mismanagement of the Amazonas. From an economic perspective, many foreign investors withdrew capital from the country because of the government’s environmental policy. We expect that President Lula will be able to restore the reputation of Brazil if he suceeds in implementing a sustainable policy towards the Amazon.”

Christian Christensen - Managing Director, Nordic Brazilian Capital

The Brazilian Economy

But how are the state of the Brazilian economy looking on the verge of Lula’s third term? Let’s look at some of the key factors…

REAL GDP

The COVID-19 pandemic left Brazil with a -3.9% GDP growth in 2020 (a 5.1% decline from 2019) and despite a tumultuous time the country managed to bounce all the way back to a 4.62% GDP growth in 2021 (an increase of 8.5%). The GDP in 2021 accounted for 1609 billion dollars - making Brazil the worlds 12th largest economy. The growth rate was attributed to the increase in both service and industry following the ceasing of the need for social distancing. These two sectors alone make up for 90% of Brazil’s GDP. The economic activity in Brazil has continued its upward trend in 2022 albeit with a slower pace and more sectoral diversity. Brazil’s GDP is expected to expand by 2.8% in 2022 and then decline to a 1.0% expansion in 2023 as a result of the global tightening of the financial conditions due to the inflationary pressures and geopolitical turmoil.

INFLATION

The annual inflation rate declined to 7.17% in October from a 8.73% rate in September, making it the lowest measured inflation since april 2021. The last three month of deflation seems to be closely linked to the governments measures to reduce prices by capping state regulated taxes on transport, energy and communication. The general projections sees Brazil’s annual inflation rate go down to around 5.36% in 2023, 3.3% in 2024 and 3% in 2025. The opportunism was challenged when The Central Banks Committee of Monetary Policy made an announcement after their last policy meeting, reaffirming their concerns for the global economic conditions following a tightening of financial strategies in the advanced economies. Recently they also confirmed that they intend to keep the Selic rate (interest rate) at 13.75% per year thereby continuing a strategy of a tight fiscal policy in order to combat possible reactions to a global economic slowdown. The Central Bank inflation target is between 1.75 - 4.75% per year, but for now they are tolerating the higher rates.

PRODUCTION

Brazil’s industrial production has slowly but surely been climbing upwards throughout 2022 culminating with a yearly high in August at +2.8% in comparison to same month last year. September saw an increase of 0.4% in comparison to same month last year and October is expected to land on 0.6%. Brazil is still 2.4% below the pre-pandemic level. Biggest falls in production output was seen in production of food products (-2.9%); metallurgy (-7.6%); petroleum products and biofuels (-2.6%); beverages (-4.6%) and wood products (-8.8%). Increases were seen in mining and quarrying industries (1.8%) and machinery and equipment (2.2%).

UNEMPLOYMENT RATE

The unemployment rate keeps falling and is expected to hit 8.7% in October, which would make it the lowest in seven years. In the three months from end of June through September the unemployed part of the population fell by approximately 1.5 million, equivalent to a 6.2% drop, marking the lowest level since December 2015. It will be absolutely crucial for Lula’s government to keep this momentum going. While the state of Bahia has the highest unemployment rate on 15.5%, Santa Catarina State in the South has the lowest with just 3.9%. Also in unemployment we see a clear divide between the mostly Lula-voting states with high unemployment in the North and the Bolsonaro-supporting states with low unemployment in the South.

TRADE BALANCE

With January as the only month with a negative trade balance in 2022, the latest forecast (3rd of October) expects Brazils trade balance for 2022 to amount to 55.4 billion US Dollars, which would make it the second-highest yearly trade surplus ever recorded for Brazil (2021 with 61.2 billion USD). A drop in the international iron prices and increases in the fertilizer and oil prices makes for a slight decrease compared to last year. September 2022 set records for largest monthly import and export in Brazil’s history - with imports amounting to 24.96 billion dollars and exports amounting to ~29 billion dollars, creating a surplus of ~4 billion dollars. In October the surplus narrowed to a surplus of 3.92 billion USD. The trade surpluses the last few years being mainly due to mining and acricultural products, the largest trade surpluses was recorded with China, Argentina and The Netherlands while the biggest trade deficits was recorded with Germany, South Korea and Russia.

FISCAL BALANCE

While the Brazilian GDP hit 1.61 trillion dollars in 2021 and the government balance ended in a deficit of 4.42% in relation to GDP (-17.41 billion dollars) while the expectations this year is that the fiscal spending will land around a deficit of 5.82%. But a lot can change and the Lula government needs a lot of money to live up to their promises. President Bolsonaro raised the Auxilia Brasil payments to 600 BRL per family but didn’t add it to the budget for 2023. In order to cover all his pledges President Lula will need an additional 200 billion BRL next year. In order to expand the government budget by what is needed President Lula may have to ask congress to exceed his constitutional boundaries and break the main fiscal rule in Brazil that limits growth of public expenditures to the previous year’s inflation rate. Lula planned to unveil a multibillion Dollar spending plan on Monday the 7th of October but later delayed the unveiling. It is still to be seen how the new government will go about the public spending.

“NBC’s view on the Brazilian economy at this moment is that although several main indicators like unemployment and production look promising or solid and inflation seems to have been curbed, a potential World recession with falling commodity prices could hit Brazil’s economy hard and President Lula’s government could find both Senate and Congress opposing initiatives to raise public spending, which could make it difficult for Lula to deliver on the campaign promises. The early signs from the Lula camp are to keep interest rates at its current high level which could hamper investments as credit for especially small and mid-sized companies becomes scarce and expensive. On a positive note foreign investors have reacted positively to Lula’s stated focus on the environment which could well mean increased instream of FDI’s.”

Lauritz Stræde Hansen - Partner, Nordic Brazilian Capital

Sources: Macrotrends, Valor International, Bloomberg, World Bank, BBC, POV International, CEIC, Banco Central do Brasil