A couple of years ago, Pedro Conrade had a bad experience with his bank. “I went one real [$0.31] into overdraft in my account, and the bank charged me more than 40 reais to use the facility. I thought it was an abuse and tried to find something different in the banking market. I could not find anything,” he says.

In his mid-20s and with experience in funding technology startups in Brazil, Conrade decided to do something about it. In 2015 he opened his own business, Contro.ly, a provider of prepaid cards. The company rapidly found a market, amassing more than 10,000 users in a year. Last July, the business evolved into Banco Neon, a digital bank that focuses on young customers and already has more than 20,000 accounts.

“We tried to introduce a solution that did not exist in Brazil,” Conrade says. “Our mission is to offer an alternative to the banking services offered to consumers in Brazil, which are very bad and not transparent enough.”

Banco Neon is an example of a growing number of financial technology companies, or fintechs, that have emerged in Brazil to challenge the country’s largest banks, such as Banco do Brasil, Itaú Unibanco and Bradesco. The new arrivals offer simple services for consumers who may struggle to understand the fees charged by traditional banks. They also want to take advantage of an eagerness to embrace new technologies in Brazil and the recent removal of hurdles to newcomers in lending and payment services. In late 2013, for example, Brazil’s central bank authorized non-financial institutions to offer mobile phone payment tools, something only banks were permitted to do until then.

Above all, Brazil’s fintechs say retail banking offers opportunities for companies that can innovate and overcome the challenges that entrepreneurs face, including a lack of funding and a regulatory regime that, even if it has evolved in recent years, continues to baffle many financial startups.

“Fees and commissions are very complex to understand in Brazil, but we exempt our clients from most of them,” Conrade says. “There are no monthly fees and no charges for opening an account or for maintenance.”

Banco Neon charges for cash withdrawals and bank transfers but it waives the fees on the first of each transaction every month. The bank provides debit cards so clients can access their accounts and make electronic transfers, but it does not offer credit. It also allows clients to invest in a simple financial instrument that delivers 80% of the DI interbank interest rate. The bank has no branches and has a staff of 50 in São Paulo and another 30 in Belo Horizonte, mostly working in IT, Conrade says.

Pulling power

Banco Neon’s growth offers a textbook example of how a startup can take advantage of opportunities in the market, but it is not the only fintech to make waves in Brazil.

The industry attracted 200 million reais of investment last year, according to FintechLab, a local consultancy. That could reach 450 million reais this year, it predicts. Venture capitalists and angel investors are participating, but Brazil’s large banks have also spotted the trend and are funding innovative projects. Marcelo Bradaschia, a partner at FintechLab, says there are 350 to 400 fintechs in Brazil, with perhaps half of them already in operation. About one third focus on payment systems, followed by financial planning and credit as the most popular segments, he says.

For Marcelo Ciampolini, who heads the local division of the German peer-to-peer lending platform Lendico, “2015 was the year when the fintech sector boomed in Brazil.” If Banco Neon has set its sights on banking fees, Lendico aims at high-quality borrowers in a credit market where good and bad payers alike are thrown in the same basket because of rising default rates.

“We started to look at Brazil in 2013 and we identified a huge opportunity, thanks to the sheer size of the market and the very high level of bank interest spreads in the country,” Ciampolini says. By focusing on Brazil’s top two income brackets and granting loans to select applicants, Lendico manages to charge less than half the market rates, he says. In about a year, Lendico has received loan applications for more than 5 billion reais and lent around 30 million reais. Lendico provides loans of up to 35,000 reais to be paid back in 12, 18 or 24 months. Delinquency levels are below 2%, which is around 10 times lower than the consumer finance market as a whole, Ciampolini says.

The online payments platform Vindi has found a niche by getting its customers around often cumbersome payment procedures in Brazil. “We are an integrated payment structure that allows clients to sell their products and services in whatever way they want and wherever they want,” chief executive officer Rodrigo Dantas says. Dantas and his partners created Vindi in 2013 as a subscription payment platform commissioned by a foreign company that, in the end, gave up on its plans in Brazil. From there, Vindi evolved to offer automated payment services. Brazil lenders usually issue invoices called “boletos” to their clients, who send them to their customers along with payment instructions, Dantas explains. The companies then have to issue tax invoices, settle payments of the boletos and chase any late payments. If card payments are involved, a slew of acquiring banks and other players also get involved. By incorporating the whole process in the Vindi platform, Dantas says clients only need to work with his company and an acquiring bank to manage payments. Vindi issues invoices, settles accounts and monitors late payments. One client, a consulting firm, has cut the time it spends each week on payment orders to 90 minutes, from nine hours, Dantas says.

Vindi also allows clients to offer subscription services paid for with credit cards, a novelty until recently. As a result, several small businesses and independent professionals are moving away from the boleto system and charging customers’ credit cards.

The company recently expanded its business by acquiring AceitaFacil, another payment services business. At the outset, Vindi’s partners put their own money at stake, but the firm has contacted investors and got 1.8 million reais in the latest round of fundraising in September.

Today, Vindi employs 40 people and has annual revenues of 7 million reais. Vindi’s 1,500 clients include accountants, fitness centers, undertakers and language schools, among others.

The bottom line

Making money, however, remains an elusive task for many Brazilian fintechs, even the most successful ones. GuiaBolso, for example, has garnered more than 2.7 million users for its financial planning app. When it launched in 2014, it was more popular in Brazil than the dating app Tinder, cofounder Thiago Alvarez says. GuiaBolso is a free service that only now is moving towards a revenue stream by adding investment advice to its personal financial planning tools. But several investors, including eight venture capital firms from Brazil and abroad and the World Bank’s International Finance Corporation (IFC), have spotted the potential.

Usage of the app has exposed a lack of financial education in Brazil. GuiaBolso has discovered that users overestimate their incomes by an average of 8%. It also has found out that 36% of people with the app used overdraft facilities every month, and 15% were rolling over credit card debts. It is not hard to guess the potential consequences of such habits in a country where interest rates run at 300% per year for personal overdrafts and 450% for credit cards.

The GuiaBolso app helps users get out of financial tangles by automatically inputting data from their bank accounts, analyzing where their money goes and identifying potential sources of savings.

With the peculiarities of the Brazilian market, Alvarez believes GuiaBolso is an even more useful tool for bank customers than similar initiatives that preceded it in the US and other developed economies. “We noticed that the problem is a big one in Brazil, due to education levels, high interest rates and other factors,” he says. The next step is to teach users how to make their savings work harder, this time charging a fee from the providers of investment products recommended by the app. 

For every fintech that manages to attract the interest of investors, several others fail to make the cut. Gaining traction is tough anywhere in the world for a startup, but fintechs in Brazil face especially daunting challenges. In addition to growing competition, they need to deal with a dearth of funding from venture capitalists or angel investors that provide the lifeblood to their Silicon Valley peers.

Even if fintechs manage to raise money from investors, they need to negotiate the tight regulations that have enhanced the safety of Brazil’s banking industry but also made the sector difficult to break into. Lendico, for instance, had to adapt its business model before launching in Brazil.

Different from the German operation, the platform does not offer peer-to-peer lending in Brazil. But it has signed a deal with Banco BMG, a mid-sized lender that focuses on payroll loans, to provide the money for credits approved by Lendico. “Our goal is to build up a history of lending and default rates, and after that to open up the platform for investors who want to lend to our clients as well,” Ciampolini says.

Dantas, for his part, says many of the startups that are coming to market will lose their way in the maze of regulations. Not surprisingly, he says, the people behind Brazil’s successful fintechs are often experienced financial hands. Dantas himself worked for 14 years at Itaú before moving into the fintech business. Alvarez cut his teeth at the consulting firm McKinsey, alongside his partner Benjamin Gleason, who moved on as the CEO of Groupon in Brazil before launching GuiaBolso.

Brazil’s central bank has been open to suggestions from fintechs and made changes in the past five years to open the way for new companies offering credit and payment services, say some entrepreneurs. Nonetheless, compliance costs and other requirements still weigh on everyone in the industry, says Dantas. Vindi has more expansion plans and, to avoid any unsavoury surprises, has secured the services of the local law firm Fialdini Advogados.

Others join forces with an established financial institution to help with financing and regulatory compliance. To launch Banco Neon, Conrade joined Control.ly’s structure with Minas Gerais-based lender Banco Potencial. Vindi also works with banks, some of which recommend the service to clients, as does GuiaBolso.


Two-way street

For the likes of BMG, working with fintechs provide an opportunity to access new revenue streams with few extra costs. Ciampolini sees the alliances as a win-win situation. “Consolidation in the banking sector has reduced the number of players, and the market is restricted today to lenders that are either very small or very big,” he says. “But small banks now have an opportunity to grow organically without the expenses required to open branches around the country.”

Big banks are also aware of the trend and have contacted a number of fintechs with designs of bringing them into the fold. Dantas says Vindi received an aggressive offer from a bank that made a lot of financial sense but did not fit the vision the founders have for the business. “They wanted to take full control of the company,” he says. “But I promised myself that I would never work again in an environment where you need to wear a silk tie to be respected.” LF