• Brazil is well suited to fintech innovations due to the rigidity of its incumbent banks, changing consumer preferences, and pivotal government initiatives.
• Once agitators in the sector, homegrown fintech firms are now part of Brazil’s financial establishment.
• Companies most likely to thrive in this industry going forward are ones able to successfully grow around deposit-taking and liability-based products.

Technological innovations are shaking up the world of payments and finance in Brazil. The country has an impressive number of new financial technology (fintech) companies that are successfully disintermediating what is a very concentrated banking system, serving consumers in ways that the incumbent banks haven’t, and offering millions of Brazilians their first bank accounts. In my opinion, some of these companies are revolutionizing the country’s finance industry.

Brazil is well suited to fintech innovations for three main reasons – the first of which is the longstanding rigidity and oligopolistic nature of its incumbent banks. Brazil’s banking system is small relative to the size of the country, and it is heavily dominated by just a few banks. The country’s five bank asset concentration, which is a measure of the five largest banks as a share of total commercial banking assets, has long been around 80%. This bank concentration in the United States, by way of comparison, is around 50%.¹² Brazil’s private sector banks have had it good for decades: they have enjoyed immense profits by virtue of high net interest margins, hefty fee structures, a culture of limited lending to consumers and small businesses, as well as avoidance of lending to Brazil’s state-owned enterprises wherever possible. Employing these tactics, Brazil’s private banks have attained return on equity (ROE) levels that average in the mid-to-high teens (compared to U.S. banks’ average ROEs that hover closer to 10%).³ These enviable ROEs have been sustained despite unimpressive product and service innovation for retail customers.⁴ The rigidity and oligopolistic nature of Brazil’s banking sector has, in Seafarer’s view, constrained Brazil’s economy, effectively leaving too many Brazilians unbanked and consumers looking for better and more convenient options.

The second pillar underpinning the growth of the Brazilian fintech industry is changing consumer preferences. Brazil has a young and smartphone-savvy population, many of whom are first generation users of bank accounts and financial products. As the proverb goes, “necessity is the mother of invention.” Brazil’s fintech startups identified broad consumer frustration with incumbent banks and quickly jumped in to provide not just bank accounts but a suite of fintech product offerings, all available via a smartphone and on a comparatively fast time frame. There is also a well-ingrained culture of installment payments in Brazil. The widespread use of payments for purchases both large and small began in the 1950s with the popularization of “crediários,” whereby consumers could register with a store to purchase items, but then pay for them over a series of months.⁵ This culture of installment payments lends itself well to increased digital finance, resulting in a proliferation of payment-oriented fintech startups operating in Brazil.

The third reason behind the growth of fintech startups in Brazil has been several pivotal government initiatives aimed at fostering greater competition in the banking and payments sectors. The first action was in 2010 when Brazil’s regulator ended the duopoly enjoyed by the dominant credit card acquirers in Brazil: Cielo S.A. for Visa and Rede S.A. for Mastercard.⁶ This upended the payments and banking industries. By introducing competition and reducing the fees that retailers pay for credit and debit card transactions, savings were passed on to the consumer, ending a period of supernormal profit for the acquirers. Cielo, for example, enjoyed EBITDA margins above 70% prior to this change.⁷ The incumbent banks who owned the acquirers were then forced to look for ways to replace these profits and grow in a more consumer-friendly way. Then in 2013 Brazil’s central bank became responsible for regulating the payments industry with a mission to ensure that all payment card brands were accepted by all acquirers, as well as launching programs to increase financial citizenship and offer more affordable credit.⁸ Since then, there has been an increase in the number of participants in the payments industry and an emergence of new products, both of which have boosted competition in the market.

Another government initiative worthy of note is PIX, launched in November of 2020. PIX is an instant payment system operated by the central bank whereby consumers and merchants can send and receive money via a QR code. PIX is a way for ordinary Brazilians to avoid some of the fees that banks have typically attached to standard services such as money transfers, and it is very popular.⁹ An estimated 118 million Brazilians (two-thirds of the population) use PIX.¹⁰ Brazil’s longstanding banking oligopoly, changing consumer preferences and well-timed government initiatives have all contributed to the fintech boom in Brazil.

The number and variety of fintech companies in Brazil is impressive. There are dozens of new companies innovating and changing the way Brazilians buy, save, invest, and access a myriad of financial services. Now there is a fintech app for everything from payments processing to loyalty programs, transaction security, real estate technology, online lending, personal financial management, trading technologies, and new generation insurance products. Even more remarkable than the number of new companies is that most of these are true Brazilian companies, founded in Brazil and run by locals. Compared to most other emerging markets, I think that Brazil has a strong pool of software engineers, world class educational institutions and an increasing number of technology parks which support these new fintechs. These new companies are effectively leapfrogging traditional banking, payments, wealth management and insurance services. They are successfully using consumer data and network effects to challenge and disrupt the sleepy incumbent banks and offer millions of Brazilians their first bank accounts and financial products. While some of these companies have grown explosively, extended credit recklessly, and quickly suffered the consequences (more on this later), the capitalist dynamism (companies launching, succeeding, failing, being acquired) and the entrepreneurial drive in Brazil’s booming fintech sector is exciting.

Once agitators in the sector, fintech firms are now part of Brazil’s financial establishment. Most certainly not without some bumps in the road, these fintechs are gaining scale, and some appear to be making inroads at displacing (or disintermediating) Brazil’s rigid banking industry.

Figure 1 shows the market capitalization evolution of Brazil’s financial sector; four traditional incumbent banks are in shades of gray, smaller banks and newer fintech firms are in assorted colors. Almost entirely dominated by just a few banks and payments providers less than a decade ago, today there are many more listed companies offering real competition and innovative products to Brazilians of all means. When I see an industry going through a change like this, I can’t help but get excited by what I see as authentic capitalism at work. Brazil’s traditional brick and mortar banks now all have digital initiatives, but I would argue this is only in response to the rapid growth of the fintech sector. One thing is clear from this chart: Brazil’s fintech companies are gaining market presence by offering faster, better and cheaper products to customers often overlooked by the traditional banking sector.

Source: Bloomberg.

Note: market capitalizations are as of each calendar year-end, except for 9/30/22.

However, it is not all rainbows and unicorns in Brazil’s fintech industry. There have been failures, some quite spectacular and swift, and there are likely more to come. Companies in this sector have attracted capital with astounding rates of growth. Unfortunately, for some participants, that growth was accompanied by mismanagement in the form of sloppy credit expansion. The most blatant examples have seen a reckoning in their share prices and I suspect we will likely see some consolidation in the sector with stronger players scooping up distressed ones. Consolidation may also occur simply due to the fact that consumers are unlikely to have more than a couple of payment or digital banking apps on their phones – there can only be a few winners. I think the companies most likely to thrive in this industry going forward are ones able to successfully grow around deposit-taking and liability-based products (rather than driven by hasty credit growth).

Brazil’s fintech scene is a classic example of necessity breeding innovation. This is a country where millions have gone underserved by traditional banks for decades. The unmet need for basic banking services is a key reason why Brazil has such a vibrant and innovative fintech scene. The improved experience and lower fees are appreciated by Brazilians across the spectrum. Perhaps Brazil offers a partial roadmap to the future of financial innovations in the emerging markets – particularly noteworthy are the substantial strides in making the financial system more competitive, more digital, and more inclusive.

Millions of Brazilians are now accessing loans, making payments, and investing via fintech offerings that are shaking up a banking oligopoly heretofore known mostly for expensive loans, hefty fees and long wait times. The sheer amount of change in Brazil’s fintech industry is exciting, real and worthy of acknowledgement. Valuations have come back to earth for some of these fintech firms; some will likely fail or be acquired, but the future of banking in Brazil is likely changed forever. Compared to the country’s incumbent banks, Brazil’s financial technology companies are offering a variety of products that are easier to use, more broadly offered and with more attractive pricing; now that is progress!

The views and information discussed in this commentary are as of the date of publication, are subject to change, and may not reflect Seafarer’s current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. It should not be assumed that any investment will be profitable or will equal the performance of the portfolios or any securities or any sectors mentioned herein. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Seafarer does not accept any liability for losses either direct or consequential caused by the use of this information.

As of September 30, 2022, Itaú Unibanco Holding SA comprised 2.6% of the Seafarer Overseas Growth and Income Fund, and XP, Inc. comprised 1.0% of the Fund. View the Seafarer Overseas Growth and Income Fund’s Top 10 Holdings. As of September 30, 2022, Itaú Unibanco Holding SA comprised 3.2% of the Seafarer Overseas Value Fund, and XP, Inc. comprised 3.2% of the Fund. View the Seafarer Overseas Value Fund’s Top 10 Holdings. As of September 30, 2022, the Seafarer Funds did not own shares in the other securities referenced in this commentary. Holdings are subject to change.

1. “Brazil: Financial System Stability Assessment,” International Monetary Fund, 30 November 2018.
2. Source: “Global Financial Development Database,” The World Bank, September 2022. “Five Bank Asset Concentration” is defined as: “Assets of five largest banks as a share of total commercial banking assets. Total assets include total earning assets, cash and due from banks, foreclosed real estate, fixed assets, goodwill, other intangibles, current tax assets, deferred tax, discontinued operations and other assets.“
3. Sources: Bloomberg; “Global Financial Development Database,” The World Bank, September 2022.
4. “Brazil’s Banks, Profitable Whatever the Economic Weather,” The Economist, 2 August 2018; and “Brazil’s Biggest Banks Battle for Reinvention in Digital Era” Financial Times, 4 April 2021.
5. “Why do Brazilians Love to Pay with Installments?,” Ebanx, 25 August 2020.
6. Gabriel Garber and Márcio Issao Nakane, “The Break of Brand Exclusivity in Brazilian Credit Card Acquiring,” Banco Central do Brasil, June 2015.
7. Source: Bloomberg.
8. “Report on Financial Citizenship 2018,” Banco Central do Brasil, 2018.
9. “Brazil’s Biggest Banks Battle for Reinvention in Digital Era” Financial Times, 4 April 2021.
10. “Digital Payments Have Gone Viral in Brazil,” The Economist, 14 May 2022.