The Future of FinTech in Brazil: digital maturity and verticalization

This is going to be a series of 7 articles about the FinTech landscape in Latin America. I will start with Brazil and there will be a new post every Wednesday about other Latin American countries

This is the second part of a two-part article about FinTech in Brazil – you can read the first part in full here.

In the first part I talked about how challenger banks are growing and of Brazil’s FinTech unicorn Nubank. I also mentioned that FinTech adoption rose to 60% between 2017 and 2019 with two thirds of Brazilians using newly available financial services.

To understand the future of Brazil’s FinTech landscape we need to look at the present situation.

The banking sector still is highly concentrated, with 5 banks controlling 85% of the total market. They are Itaú Unibanco, Banco Santander, Bradesco, plus two state-controlled banks, Banco do Brasil and Caixa Econômica Federal. These banks have scaled down significantly their physical:  Itau Unibanco closed down 370 branches in 2019. This was the result of a massive increase in digitalization, along with smartphone adoption in the country.

According to Statista, the smartphone penetration is estimated to be 48% in 2023 – that’s a 11% increase from 2017. That’s excellent news for FinTech, especially challenger banks.

Share of population in Brazil that use a smartphone from 2017 to 2023

Brazil has already reached a digital maturity, in this case, that’s great news for digital banking. Even the “big-5” have already launched digital-only banking and financial services.

Banco do Brasil launched their online credit card Digio and Itau has already started their own FinTech accelerator programmes.

Bradesco launched earlier this year the entirely digital bank Next and it’s expected to reach 2 million clients by the end of 2020. The app and cards have an ultra-modern design with a bold appeal towards the millennial generation. According to the launch video, Next’s  business model is built around services not transactions. 

The challenger bank landscape is already thriving, with Nubank leading the way. Other challengers are C6bank, Neon, Banco Original, Banco PAN. Other international players are already planning to launch in Brazil soon – German challenger N26 plans to launch there this year.

Verticalization: Non-financial services companies going into FinTech

Despite the challenger banks becoming a threat to traditional banks, challenger banks themselves have yet another threat: non-financial services (non-fs) companies launching financial services.

Verticalization isn’t not something entirely new and it’s already becoming a global trend. The prime example is Apple launching its credit card, followed by Uber and others.

Some might argue that non-fs companies already have an unfair advantage over financial services companies: they have a loyal customer base and a big marketing budget.

Also, it’s becoming much easier for non-fs companies to offer these services, in the case of Brazil, they don’t need a full banking licence to offer digital accounts and credit cards. 

I spoke to Gerrit Glass, a FinTech expert based in Brazil,  about non-fs companies offering financial services in Brazil, and he told me: 

“It makes more sense for this kind of player [non-fs] that already has 10 or 20 million customers in Brazil, they can easily verticalize into financial services, they don’t need a full banking license to offer them credit cards and even credit. And they are likely to become more successful than new challenger banks that have to start from zero in customers acquisitions.”

This is already happening in Brazil:  Widely successful food delivery service Rappi – the Latin American equivalent of Deliveroo – launched a prepaid credit card in partnership with Visa. To apply for the card, the customer doesn’t even need a bank account, a good move to include the unbanked part of the population. 

Rappi’s prepaid card can be used in any online transactions, like paying for streaming services such as Netflix and Spotify, and transport applications like Uber, 99 and Cabify. To top-up the Rappi card, the user can transfer the money via RappiPay, an e-wallet available in the app, bank transfer or via invoice (aka in Brazil “boleto”).

For the future of FinTech in Brazil, Glass added: “I see 3 winners: established banks will still keep a lot of customers, then challengers like Nubank will grow and there will be others non-fs players like Uber, Rappi and others going into this direction.” 

This article was originally published on LinkedIn

Marcel van Oost is known as an independent commentator on FinTech through his blog and LinkedIn.

He is an early stage investor and advisor for several FinTechs and neobanks, and leads a FinTech focussed Angel Investor Syndicate.

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