By Aluisio Alves
SAO PAULO (Reuters) – After years of effervescence, digital banks could be close to a trial by fire in Brazil, as the expansion of the customer base begins to weaken and investors start charging for profitability.
According to Bank of America, bank app downloads and digital wallets in the country fell in September for the first time since 2015. Seven of the top 10 neobanks saw their active user base fall compared to August.
With no new catalysts in sight to keep betting everything on growth, fintechs have been moving to engage and monetize their base, a transition that, according to experts, tends to reduce the number of competitors.
Since the emergence of Nubank in 2013, the country has had more than 700 digital financial services platforms that include payments, insurance, loans, cash management, investments, foreign exchange and private pension, among others.
Riding a ride on technological and regulatory innovation and a formidable volume of investments, fintechs have captured tens of millions of unbanked and dissatisfied customers with traditional banks. PicPay alone, the largest digital wallet in the country, surpassed 55 million users in September, almost double the number of users a year earlier. Nubank surpassed 40 million customers in May.
Much of this recent evolution is explained by the pandemic. In early 2020, when financial industry veterans were already predicting a fintech slowdown, the social isolation forced by Covid-19 did just the opposite. Caixa Tem alone, the digital arm of Caixa Econômica Federal created by the government to distribute emergency aid to people most affected by the crisis, absorbed more than 100 million entries.
In addition, the entry into force of the PIX instant payments system and open banking has taken another turn in the industry. With that, the contributions to fintechs in Brazil broke records.
However, experts in the venture capital industry assess that factors that motivated this movement may be about to go out of the picture. One is the loss of momentum in customer base growth. The other is the end of cheap money, to be precipitated by a cycle of rising interest rates in the US and Europe. Together, they can indicate that it’s time to turn the key.
“Global liquidity has expanded the oxygen balloon of several fintechs in Latin America, including some that have not been doing so well,” said Guilherme Horn, director of strategy and innovation at BV bank. “This could be about to change.”
Changing, in this case, does not mean that the taps will close yet. At least for a while. In fact, a recent study by the investment firm Atlantico estimated that contributions to Latin American startups should exceed 20 billion dollars this year, almost four times the amount raised in 2020, with 40% of that going to digital banks in Brazil.
According to the partner at Atlantico Julio Vasconcellos, the dominant perception is that there are still opportunities in the region in services that are still unexplored, such as insurance, digital currencies, real estate credit and ecommerce.
However, the resources must be progressively channeled to assets that prove to be more viable, that indicate greater chances that they will make a profit. In the first half, around 80% of the money invested in fintechs in Brazil came to Nubank, C6 and Neon, according to data from Atlantico.
RACE TO APPEAR
Data from listed fintechs or those with a higher level of public data shows they are picking up on the signs of the times. Of the eight digital banks in the country that released balance sheets this year, six made a profit, according to the portal Fintechs Brasil. Overall, with profitability well below that of the big banks, but already better than last year.
In a demonstration of the challenge that fintechs will have to balance growth and profitability, in September Fitch cut the rating of BS2 (formerly Banco Bonsucesso), citing deterioration of the financial profile, after the debut of the digital platform in 2019.
To convince the market and investors that they are overcoming the surf, some fintechs are giving more details about their customer base, showing how many of them are for real and not just more app icon on the smartphone.
Picpay reported in September that about a quarter of its 55 million users were transactional, meaning they could earn revenue. In this sense, fintechs with shelves with smaller products are at a disadvantage, as they have more limited power to make their users recur.
Capacity for scale and engagement is a powerful asset for digital banks, especially as they begin to face more intensely the “embedded fintechs”, digital financial arms of retailers or large commercial banks, which are already half of the 20 largest in the country . Not to mention the competition from global groups in some services, such as WhatsApp, from Facebook; and Paypal.
In addition to the great ability to engage users, usually combining e-commerce and entertainment, these companies have great power to capture cheaper resources in the market and a long expertise in credit that the artificial intelligence tools used by fintechs still cannot absorb.
“Success in credit and other forms of monetization of the base will help to point out which will be the winners,” said former president of PicPay and former president of Banco do Brasil, Gueitiro Genso.
Despite gigantic account numbers, digital banks still hold timid loan portfolios. Altogether, they do not reach 5 billion reais, according to the most recent data from the Central Bank, or around 0.3% of the credit stock with free resources in the system.
An example of the challenge facing newcomers came in August, when Stone, one of the exponents of the payments market, announced a quarterly loss of around 400 million reais in loans to small retailers and suspended new concessions.
For specialists, there are still huge spaces to be explored by digital financial businesses in Brazil, which should motivate the appearance of new niche businesses for many years to come. However, businesses that rely on larger scale will start to go through a filter.
An indication of consolidation is the increase in the speed of mergers in the sector, illustrated by the Picpay-Guiabolso, Geru-Rebel unions, in addition to the approximations between Stone and Banco Inter and Creditas with Nubank.
“Nobody imagines that we will have 700 fintechs in Brazil in a few years”, says Túlio Oliveira, vice president of Mercado Pago, the finance arm of Mercado Livre. “It’s possible that there are six or seven big ones left.”
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