Brazil’s financial technology sector is entering a new chapter of growth. On December 8, Nubank raised $2.6 billion in initial public offering on the New York Stock Exchange. The São Paulo-based digital bank’s IPO was one of the largest in the United States in 2021 – and a watershed moment for the Brazilian fintech industry. A wave of public offerings is now likely to follow in New York and possibly London as well, with Creditas and Ebanx among the next top contenders.

“I do think a lot of companies will follow in their footsteps,” Julia Figueiredo, director of startup banking in Latin America and Miami for Santa Clara, California-headquartered Silicon Valley Bank, tells LatinFinance. “There’s a lot of disruption yet to happen in fintech in Brazil.”

Investors seem to think so. Brazil drew $2.15 billion in venture capital in fintechs during the first three quarters of 2021, nearly three times as much as in the same period in 2020 and 2019, according to preliminary data from the Association for Private Capital Investment in Latin America (LAVCA), a New York-based industry group. At 61, the number of deals was nearly double the 32 over the first three quarters of 2019. Moreover, the second quarter of 2021 saw the highest dollar volume on record, LAVCA said. 

Yet Brazil’s fintech market today looks much different and is far more competitive than it was a few years ago, even for Nubank.

“Traditionally, the focus of fintechs was on offering single, extremely specialized solutions enabled by new technology that contrasted with the more general solutions offered by traditional financial institutions,” the Brazilian consultancy Distrito wrote in a 2021 report. “Today we see companies more and more expanding their offerings.”

A group of fast-growing native digital banks is providing a comprehensive suite of services, serving as competitors to both Nubank and the large incumbent banks. These include Banco Inter, C6 Bank and Neon.

The incumbents are already feeling the pinch. In 2016, these banks had 99% of the accounts in Brazil, according to a report by McKinsey and Company, a New York-based management consulting firm. By 2021, that number had dropped to 68%.

São Paulo-based C6, which has been fully operational for just over two years, has tripled its number of clients to 12 million clients over the past year alone. The bank, in which New York-based JPMorgan Chase & Co. took a 40% stake in June 2021, offers more than a dozen products in payments, investments and credit. Brazilians can open global accounts in euros and greenbacks as well.

“We have a complete investment platform with funds and stocks in Brazil and overseas,” Luiz Marcelo Calicchio, a C6 co-founder, said in an interview in November with LatinFinance. Clients can buy Brazilian and US stocks and treasury bonds, among a host of other products, he said.

The firm’s strategy from its founding was to become a complete bank on the bet that Brazilians would want to “re-bundle” their financial services after the first wave of fintechs.

In 2019, Calicchio told LatinFinance that they had opted to launch as a full-service bank because their reading of the market concluded that “to be profitable, the bank has to be complete.”

He said at that time that “a part of our strategy is not to try to be another player [like fintechs are doing] in the unbundling of banking services. Customers are getting tired of it.”

The firm has stayed true to that strategy and sees that doing this is an advantage in an increasingly competitive field. “Not pivoting from your strategy is a competitive advantage because you can have long-terms plans and long-term achievements,” Calicchio told LatinFinance in the more recent interview.

Up next: Credit

C6 offers credit cards, personal loans, and car and home equity loans. Now it wants to grow in the credit space. That may prove a challenge. They will face competition from the large incumbent banks like Itaú Unibanco and Banco Bradesco that still dominate credit.

“In order to disrupt the credit space, we need to have many clients in order to have large amounts of deposits,” said Calicchio.

C6 is taking a shot at making this happen. Ten years from now, C6 expects to get 70% of its revenue from credit and 30% from banking, he noted. They also want to ramp up credit offerings to smaller companies.

Analysts think that fintechs and digital banks can make greater inroads in credit. Although they are growing quickly, fintechs and neobanks’ market share in credit is still tiny, at 0.94% in June 2021, according to Moody’s Investors Service. “We expect loan growth to accelerate in the next three to five years as they develop their product range for their existing customer base and benefit from open banking,” the credit ratings agency wrote in a research note in August.

C6’s plans, of course, raise the question of how it will finance the growth. For now, C6 says it has enough capital and has no plans to go public. “An IPO is no longer in C6’s plans. We are sufficiently capitalized,” Calicchio said.

The executive thinks that being private may give the firm a leg-up on competitors.

“We think there exists a very big advantage today to not doing an IPO. It’s to have access to our competitors’ numbers without giving them access to our numbers,” Calicchio said. “We can study all the listed banks in the market, but they can’t study C6.”

C6 sees its competition today coming mainly from the incumbent banks, less so from other fintechs or native digital banks.

“The competition now comes less from newcomers,” said Calicchio. “The digital banks are already starting to consolidate. The market is maturing.”

Indeed, the founding of new fintech companies has dropped for two straight years since peaking at 180 in 2018, according to Distrito. Only 59 got started in 2019. In another sign of consolidation, fast-growing fintech Ebanx said December 15 that it acquired Brazil’s Remessa Online, an international money transfer company, for more than $200 million.

Expanding abroad

Banco Inter, another growing digital bank, also provides a full suite of services. “The clients moving to digital banks are those inconvenienced by the incumbent banks,” João Vitor Menin, president of the firm, recently told LatinFinance. “They don’t want niche services. They want a full-service alternative.”

Banco Inter expects to end 2021 with 16 million clients, he said, twice what they had at the end of 2020.

One difference from its competitors is that the digital bank is aggressively pursuing the United States as a market. In August 2021, Banco Inter agreed to acquire Manhattan Beach, California-based fintech company USEND, which has about 150,000 clients across 40 states and allows US residents to exchange money and transfer it overseas, facilitating things like remittances.

While today nearly 100% of Banco Inter’s customers are based in Brazil, “in 2022, we want to grow in the US in a more accelerated way than in Brazil,” said Menin. “After Brazil, the US will be our next important market.” That means, he said, that the digital bank will provide debit and credit cards there, investments, insurance, and a host of other products.

That’s the first step of expansion. In the second half of 2022, Banco Inter will look at Europe as well as Mexico, Menin said. “Mexico has a very strong relationship with the US,” he said, adding that many Mexicans use USEND.

In the United States, Menin said Banco Inter will initially target a long-underserved group. “The US has a lot of immigrants who send a lot of money every day overseas,” he noted. He wants to make his firm a hub in connecting those transfers.

While the United States is considered the center of the financial world, Menin is not particularly impressed with the country’s banks, saying that transfers are expensive, service is slow, and it takes too long for deposits to clear.

“As incredible as it seems, as technologically advanced as the US is, its banking sector is very antiquated,” the executive said.

A key to expanding in the United States includes being based there and migrating from Brazil’s B3 stock exchange to Nasdaq. That plan was approved by Banco Inter’s shareholders last November but suffered a setback when too many took the option to receive a cash payout rather than convert their shares.

Still, Menin says it’s merely a postponement of the plan.

“There’s a good chance we’ll be able to do it in the first half of next year,” he said, emphasizing that “the migration plan continues.”

Going niche

Even as several digital banks focus on complete banking for consumers, some fintechs are targeting underserved customers.

Klubi is one. The São Paulo-based fintech is seeking to digitally transform consórcio, a Brazilian group purchasing plan dating back to the 1960s.

In consórcios, individuals join a group that wants to buy a specific item in the future, and they pay monthly installments toward this. Each month, the group’s administrator awards credit in cash to one member, adjusted for inflation. That person can then make the purchase. The process continues until each member can do the same. No credit history is required.

The group administrator charges a fee but no interest, and that fee becomes its revenue. The rest of the money is given back each month through drawings.

Brazilians have used the model to purchase cars, electronics and real estate. In 2020, more than half of all motorcycles sold in Brazil used this method. Yet most consortiums are controlled by a few large firms, mostly big banks, and the middlemen, such as bank managers, often take a cut.

Eduardo Rocha, chief executive officer and founder of Klubi, tells LatinFinance that he wants to disrupt this model by disintermediating it. He thinks now is the right time, given Brazil’s deteriorating macroeconomic environment.

“Interest rates are going up and at the same time the banks are becoming more restrictive in approving credit,” he says. “This reinforces the importance of consórcios.”

Klubi received approval from the central bank and started operating in the fourth quarter of 2021, initially focused on automobiles, which have seen prices skyrocket this year.

Rocha said the company will later add other products like real estate, electronics and travel.

Cora is another fintech looking for growth in niche markets. Founded by Leonardo Mendes and Igor Senra in 2019, who together previously founded the Brazilian payments platform Moip, Cora provides a checking account and debit card to Brazilian small and medium enterprises (SMEs) to make payments and transfers. The startup also provides automated analytics visualized on dashboards so clients can better understand their businesses. In 2021, they added a credit card.

Cora has about 230,000 customers, Senra tells LatinFinance. Its sweet spot is targeting businesses with between five and 10 employees.

Cora may be on to something.

SMEs is “a market that still has a lot of room to grow,” says Figueiredo of Silicon Valley Bank, adding that the opportunities for growth in Brazil abound. “I don’t think every company should follow Nubank, Inter, and C6” in offering a whole suite of products. LF