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.