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Latin America (LATAM) is experiencing a fintech boom — and Brazil, the region’s economic powerhouse that’s home to the world’s fifth-largest population, is leading this revolution. There were 380 fintechs operating in the country in May 2019, per Finnovista, and around two-thirds (64%) of Brazilian consumers are defined as fintech adopters by EY — a rate that’s level with the global average and higher than the majority of G7 countries’. Several factors have created a fertile environment for innovation across the financial services industry, driving this revolution:

  • A large underserved population: Around 45 million people in the country don’t have access to or have not used a bank account in the past six months, per data gathered by Instituto Locomotiva, giving fintechs an opportunity to deliver innovative solutions that can bring this informal economy online.
  • Demographics: The median age in Brazil is 32, providing the country’s fintechs with a large, youthful, and tech-savvy consumer base that’s likely to be more receptive to digital financial solutions.
  • Smartphone and internet penetration: Three-quarters of Brazilians used smartphones in 2017, which is expected to tick up to 86% by 2025 — and both figures are the highest across the region, per GSMA data. Meanwhile, internet penetration stands at 70%, 13 percentage points higher than the global average, per PagBrasil. This has created, and continues to create, opportunities for mobile-first financial service providers to reach more consumers in the country.
  • High fees charged by incumbents: Brazil’s four largest banks — Banco Bradesco, Itaú Unibanco, and the state-owned Caixa Econômica Federal and Banco do Brasil — control almost 80% of the country’s deposits, with similar concentrations in credit and assets, per data cited by the Netherlands Enterprise Agency. These players charge some of the highest fees and interest rates in the world: While only 26% of adults globally say cost was the top reason for not having a bank account, 60% of Brazilians say the same, per World Bank.

  • Supportive regulation: Brazil’s fintech-friendly regulatory agenda aims to stimulate competition in financial services. For example, it introduced new rules in 2018 allowing fintechs to extend credit directly, rather than having to use banks as intermediaries, and published guidelines for open banking implementation in April 2019.

Notable Fintech Segments
Business Insider Intelligence has identified two especially noteworthy fintech segments: digital banking and enterprise financial management (EFM). Here’s why:

  • Digital banking, despite accounting for only 4% of the fintechs operating in Brazil, has seen significant adoption among consumers. Thirty-two percent of the population has an account with a neobank, compared with 3% in the UK — home to the most vibrant neobank market in the world — and 2% in the US, per a recent survey by Kantar seen by Business Insider Intelligence.
  • Excluding payments, EFM has the second-highest concentration of fintech players. Seventeen percent of startups operate in this space, per Finnovista, focusing on solutions to help businesses manage and govern their financial operations.

Noteworthy Fintechs: Digital Banking
When selecting notable digital banking fintechs, Business Insider Intelligence looked into key metrics, including funding figures, customer numbers, and product suites, to identify players making a meaningful impact in Brazil’s banking landscape.

Nubank. The neobank initially launched with a credit card due to Brazil’s large but expensive and uncompetitive credit market, Nubank CEO David Vélez told FT Partners. Since credit cards are a high transaction product that generates substantial data in a short period, Nubank was able to build a more robust credit and fraud model, which likely supported its move into other types of consumer loans. It has since broadened its services to include checking accounts and personal loans, is building an SMB offering, and is expanding to Mexico and Argentina.

Nubank’s base of 15 million customers is the largest among neobanks in Brazil and globally, outside of China. Twenty-eight percent of Brazilians who bank with a neobank do so with Nubank, per Kantar. It also secured a $10 billion valuation earlier this year, making it the highest-valued private tech company in LATAM, per PitchBook data cited by The Wall Street Journal. Going forward, the neobank should consider broadening its services to generate greater revenue from its existing user base: It could create a financial marketplace and provide users with access to products from third parties, like wealth management and insurance services, for example.

Banco Inter. Founded in 1994, Banco Inter is a success story in how innovative and long-term strategic thinking can help financial institutions (FIs) thrive in the digital age. The real estate-focused firm reinvented itself as a digital bank in 2014, and has since acquired more than 2.5 million customers.

Inter’s diverse suite of products gives it a leg up over competitors. While neobanks in developed markets have just started broadening their offerings, Inter has already developed an extensive suite of services, including insurance and investment products, that customers can purchase via its platform. This allows Inter to generate more revenue per customer than the likes of Nubank, therefore nullifying, to an extent, the impact of Nubank’s substantially greater customer numbers. It’s also reportedly in talks to partner with US ride-hailing service Uber, which would allow it to target Uber’s 17 million Brazilian users. As Inter looks to build on its success, the company should consider expanding beyond Brazil into other Latin American markets, given the parallels in those countries open the window for it to become similarly successful there.
Neon. Founded two years after Nubank and Inter, Neon gained strong early traction — it counts more than 2 million users. Like its peers, Neon offers a fee-free credit card and checking account. Customers can also invest using the platform, including via a round-up payments feature, popular among neobanks, that automatically invests the money for them. Its unique features include facial biometric authentication for account openings and transactions — a first in Brazil, according to the bank.
Neon’s burgeoning reputation for innovation has not come without challenges. Within days of announcing its Series A round, the neobank’s banking partner, Banco Neon, was ordered into liquidation amid regulatory breaches. The startup was forced to temporarily halt services as a result, because it used Banco Neon’s infrastructure to power its checking accounts. While it’s since started a new partnership with Banco Votorantim, Neon could build its own processing infrastructure to avoid a similar fallout in the future.

Opportunities In Digital Banking
Given Brazil still has a large unbanked population, there’s a vast opportunity for incumbents and fintechs to scoop up millions of customers. Widespread mobile penetration means more players can broaden their reach than traditionally possible. And one way to capture these unbanked customers is via partnerships with nonfinancial service players: Uber’s potential partnership with Banco Inter, for example, would allow the latter to offer loans to Uber’s drivers by leveraging their earning data to assess creditworthiness, likely at a lower cost than it would otherwise due to this trove of transactional data.

But there’s also a huge middle-class population in Brazil for digital banks to target — especially with savings and investment products. Despite its large unbanked population, over 100 million people in the country are classified as middle class. Given this population is likely to be more lucrative than the unbanked segment, competition for these consumers will be fierce among banks. However, by coupling the transformations driven by Brazil’s fintech-friendly regime, such as open banking, with technology, players can differentiate and stand to outcompete their incumbent and fintech peers. For instance, they can bolster their product suites beyond basic banking services to meet the needs of these middle-class consumers, including by offering services like wealth management and trading, either through partnerships or by building these services in-house.

Noteworthy Fintechs: Enterprise Financial Management
Business Insider Intelligence deemed the listed EFM fintechs as noteworthy by looking into crucial metrics, including funding figures, client numbers, and pain points these players’ solutions addressed for Brazilian SMBs.

ContaAzul. ContaAzul provides a cloud-based accounting software for Brazilian SMBs and their accountants. It’s amassed more than 60,000 customers, over 4,000 accounting partners, and $37 million in funding; most recently, it raised $30 million in a Series D round in April 2018, per Crunchbase.
Its success has been built on its ability to meet the everyday challenges Brazil’s startups face by helping them save time and resources. Using ContaAzul’s platform, businesses can manage day-to-day financial activities like e-invoicing, reconciliation, and business insights. According to CEO Vinicius Roveda, the platform can reduce time spent managing these daily activities by 65%, per FT Partners. ContaAzul’s partnership with accountants is also a powerful competitive advantage that likely helps it sign up more SMB clients, as the efficiency gains it delivers to accountants likely encourage them to push their SMB clients to use the service. To this end, the platform has cut an accountant’s time spent per customer from 15 hours per month to a few minutes, per FT Partners. The startup, which also integrates with four major banks in the country to facilitate data sharing, can further consolidate its early success by expanding its integrations with the FIs and fintechs SMBs use to meet their needs: By integrating with banks, the platform can streamline the process of applying for loans by sharing SMBs’ financial data directly with partner banks, for instance.

Omie. Omie has developed a cloud-based, SaaS platform that leverages AI to help SMBs manage their daily functions, including invoicing, inventory management, accounts receivables, and accounts payables. Additionally, Omie’s platform assists SMBs with their point-of-sale, stock management, and working capital management needs.
Omie’s year-over-year growth highlights how quickly SMBs have taken to its solution. The company almost doubled the $4.3 million in revenue it registered in 2017 to $7.3 million in 2018. Among its core strengths is Omie’s integration with major accounting and tax platforms, which can streamline financial management processes for SMBs. With more than 2.7 million SMBs eligible for Omie’s services in Brazil, the startup would be well served by doubling down on its marketing drive to make these potential clients aware of its services.

Contabilizei. Contabilizei provides an automated cloud-based financial and tax accounting service for SMBs that helps them remain compliant with Brazil’s complex federal, state, and municipal tax system. Its suite of services also includes personalized consulting, invoicing, and payments services. The company has raised $20.1 million to date and attracted over 10,000 customers, saving them a total of R$500 million ($121 million), per FT Partners.
Brazil’s complex taxation structure is one of the biggest pain points for SMBs — a boon for Contabilizei. Due to a number of factors, including that there are multiple government bodies responsible for taxation in Brazil, there are thousands of different tax rates. Determining which one is applicable for them is therefore a complex and time-consuming challenge for SMBs. By developing an automated tax accounting platform, Contabilizei has tapped into this point of friction to ease these players’ burden and deliver substantial financial savings in the process.

Opportunities In EFM

Brazilian SMBs still face a slew of challenges, including access to credit — an opportunity EFM startups, fintechs, and incumbents can tap into through partnerships. The country has 8 million underserved micro and SMBs, which have an estimated credit gap of $237 billion. Fintechs have already caught on to this opportunity: Nubank announced in July 2019 that it will launch banking services for SMBs, for instance. That Nubank is only turning to the segment now highlights how underserved Brazilian SMBs are — 84% of SMBs lack access to capital. Given the challenges the majority of SMBs face in the country, there’s ample opportunity for fast movers to scoop up large shares of the market quickly. In the case of capital access for SMBs, EFM fintechs and incumbents can partner to address this audience: Incumbents would be able to tap into the accounting data these players have access to to provide SMBs with credit facilities, for example.

With open banking progressing rapidly in Brazil, forward-looking players can develop integrated ecosystems that can meet SMBs’ widespanning needs. An ecosystem is a bundle of services or products delivered by a single player or network of partners, either within the same industry or across industries. Open banking, by enabling data sharing and unlocking vast troves of information, opens opportunities for incumbents, EFM fintechs, and other fintechs to offer end-to-end services that meet SMBs’ demands. UK-based Starling is utilizing this ecosystem model to provide SMBs with services ranging from banking to insurance, cybersecurity, and accounting, for example.

Challenges To Fintech Growth

Though Brazil’s fintech-friendly regulation is easing barriers to entry for startups, it’s also nascent, meaning startups have to navigate an uncertain legal terrain. For instance, the central bank’s new regulations for fintechs operating in the credit space were welcomed by the industry because they created a safe environment for credit-focused fintechs to develop, according to Brazilian business lawyer Rodrigo Vieira cited by S&P Global. But evolving regulations mean compliance requirements are constantly changing, which is likely challenging for fintechs, as they typically have fewer resources than established peers.

The massive success seen by players like Nubank is intensifying competition. Brazil’s incumbents have woken up to the threat from fintechs, and some, like Banco Bradesco, are fighting back by launching their own digital offshoots, while others are transforming their core businesses to become more digital. And these efforts are paying off: Bradesco launched its digital banking brand Next in 2017 and has since signed up more than 1.1 million customers, opening 8,000 accounts daily, per Euromoney. Players from other segments are also launching their own digital offshoots: Cielo, a leading payment processor and the largest merchant acquirer in Brazil, planned to launch digital banking services in October. Brazil’s fertile fintech landscape is driving competitors from abroad to enter the market as well: German neobank unicorn N26 is planning a Brazil launch in 2020, while US-based corporate credit card startup Brex is also eyeing the country, for instance. For the country’s fintechs, especially smaller ones, this increased competition can crowd them out and stifle their growth opportunities.

Source: Business Insider

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