Lessons to be learned from FinTech adoption in Brazil
Published January, 2018 |The future of financial services Print
Latin America is one of the world’s fastest growing markets for financial technology (FinTech) adoption, and Brazil is home to the largest number of FinTech startups in the region1. In the 2017 EY FinTech Adoption Index, our second annual study of consumer usage and adoption of financial technologies, Brazil emerged as the fourth largest adopter of the 20 markets studied. Furthermore, research suggests that 40% of Brazil’s digitally active consumers use two or more FinTech services, demonstrating the market’s eagerness to embrace digital banking, lending, payments and other services across multiple platforms2.
The experiences of FinTech investors and startups in Brazil offer insight into the conditions that make the emerging market ripe for FinTech adoption, as well as into the challenges that new entrants face.
FinTech provides consumers and businesses with multiple services that aren’t always accessible through traditional banks, including instant payments, financial planning tools, and inexpensive loans. In Brazil, 40% of the population lives in rural areas where bank branches are sparse and hard to reach, and there is a ready market for banking by smartphones and other mobile devices. It is a tech-literate but financially underserved market – Brazil has the highest smartphone adoption rate in Latin America3, making mobile apps a readily available way to deliver financial products.
As FinTech adoption in the region expands, its innovations are influencing the wider financial services sector. Brazil’s largest banks have a more concentrated market share than in most countries4, but the changes taking place are typical of the dynamic opportunities that open up when a country begins to encourage FinTech growth. Usage of FinTech-style products such as digital-only banking is gathering pace because traditional incumbent banks are mirroring the FinTechs’ practices in order to participate in this growth sector along with new financial industry players, support services, and investors.
A fast-growing industry
When EY launched its first global FinTech Adoption Index in 2015, the industry was still in its infancy: globally, one in seven digitally active consumers was using FinTech. In just two years this has risen to one in three. The 2017 report found that the markets with the highest percentage adoption of FinTech, in order, are China, India, the UK and Brazil.
The FinTech development firm Finnovista estimates that 1,000 new FinTech start-ups have launched in Latin America in the past few years. Brazil stands out, however, as the largest financial technology market in the region, with 244 FinTech firms in 2017, up from just over 50 in 2015, and more than US$300m invested in the industry so far. This includes investment from large venture capital funds such as Kaszek Ventures, Sequoia Capital and Vox Capital.
Some 72% of Brazil’s FinTechs have capital from investment partners, and 14% of the country’s FinTechs have raised more than BRL20m (US$6m) each in investment. Goldman Sachs estimates that Brazil’s FinTech companies will generate revenues of around US$24b over the next 10 years, according to a report published in May 2017.
One example of the success stories fueling FinTech investor enthusiasm in Brazil is Nubank, a branchless financial services company, which provided a case study for our FinTech Adoption Index work. Since its launch in 2014, Nubank has attracted US$180 million in investment capital and it was the first Latin American company to receive the Marketers that Matter award (awarded by an “exclusive community of top Bay Area companies”) for its innovative viral marketing strategy.
The app has three million users, and hopes to grow its customer base exponentially with the launch of NuConta, their own version of a checking account open to all Brazilians as it doesn’t require a credit analysis. Founder David Vélez explains that Nubank has been extremely successful “despite all conventional wisdom,” through its policy of giving customer service analysts “complete autonomy to surprise clients with a personalized experience at any given opportunity.” This practice leads to genuine, word-of-mouth praise from customers through social media – and Brazil’s high social network usage plays to this advantage. As a result, Nubank has grown without having to heavily in marketing.
A demanding customer base
User experience is a key area in which FinTech firms are perceived as superior to “traditional” financial services companies. Brazilian FinTech entrants are catering to a market with a large contingent of savvy digital platform users, who know what they like. In the 2017 FinTech Adoption Index, 57% of Brazilian respondents told EY that they prefer to manage as many aspects of their lives as possible through digital channels. Some 60% of respondents use sharing economy services such as Airbnb at least once a month, 58% say they use on-demand services such as food delivery or ride-sharing at least once a week, and 81% use messaging and video chat apps daily.
For now, Silicon Valley’s reputation for technological advances in finance still exceeds Brazil’s. However, Nubank and other Brazilian FinTech entrants have shown that understanding specific market needs is equally important as technological prowess in the race to attract a growing customer base. A major challenge facing FinTechs is visibility, which they address through social media campaigns, celebrity endorsements and even co-branding with more established institutions.
In a highly competitive segment such as FinTech, the companies that gain the most market share are those with the best tools for user ease and convenience. In fact, 46% of Brazil’s FinTech users say they are generally willing to use the most convenient financial services product even if it isn’t the cheapest. Their main drivers for choosing a FinTech company are ease of setting up an account (37%) and access to a range of products and services (18%).
Our study found that Brazil’s FinTech users have been among the world’s most active adopters of FinTech apps that help them with money transfers and payments, financial planning, savings and investments, and borrowing. Some of the most popular FinTechs in the country, with around two million users, offer innovations that haven’t been widely available through the traditional financial services system. GuiaBolso and ContaAzul, for example, offer online expense controls for individual or corporate customers, while Creditas offers credit that a user can back with personal assets, such as a house or car, to reduce the lending fees.
Brazil’s conventional banks have been forced to react to these developments, recognizing that they too must offer customers easy-to-use digital tools. To that end, they have launched innovation centers and acceleration programs to develop and fund new financial technologies. Itaú Unibanco is a co-founder of Cubo, a workspace for technology entrepreneurs, while Bradesco has started InovaBra, a funding program for innovative financial products and startups. Banco do Brasil operates a lab in Silicon Valley to foster digital innovation.
Indeed, an important takeaway from the FinTech Adoption Index is that change does not only originate from small startups. Some of the biggest global FinTech successes have been the result of combining a large bank’s customer base and distribution capabilities with a smaller firm’s innovations. For their part, FinTechs are finding that partnerships with established banks can help to build their brand in a competitive marketplace.
Banks have also seen the value of becoming digital-only, so that the line between FinTech and conventional banks is becoming permeable. Banco Original, Brazil’s first 100% digital bank, was formed through a 2011 merger of two conventional banks, while Banco Bradesco operates Next, a fully digital banking platform that has become a major player in the country’s digital banking business.
The rise of FinTechs has inevitable regulatory consequences. Every market has to address its banking and privacy laws as new entrants take on a role that used to belong exclusively to banks.
Latin America has not gone as far as the EU has in creating the General Data Protection Regulation (GDPR), an initiative that gives consumers control over the way their personal data is used. However, Brazil’s regulators – like those in the EU and the US – recognize the need for an updated licensing regime. Regulations that protect customers while lowering barriers to entry are seen as beneficial to all players, including traditional banks looking to develop their own financial technologies.
The Brazilian Central Bank and the securities regulator Comissão de Valores Mobiliários (CVM) have set up internal groups aimed at creating a system that fosters innovation. Regulations incorporated in the last few years allow FinTechs to enter the payments market and offer digital bank accounts for individuals, though rules are still needed to address corporate accounts. The Central Bank is considering implementing a framework for partnerships between banks and FinTechs to provide securitized loans as well as for peer-to-peer lending that connects borrowers directly with individual investors.
A model for future developments
Emerging markets with a growing middle class are recognizing the potential for FinTechs to meet underserved demand, and the importance of being proactive in building a regulatory regime that facilitates investment and innovation.
By recognizing the needs to develop a strong FinTech sector, and to review its ‘traditional’ financial services in light of FinTechs’ success, Brazil has already begun to pave the way for the next stage of growth. Already, we are starting to see an influx of global investors and the emergence of supporting sectors that include InsurTech, RegTech and Legal Tech. Emerging FinTech startups are beginning to offering back-office platforms and software to upgrade existing financial systems.
In the coming years, Brazil is likely to experience a wave of consolidations amongst start-ups, and new kinds of partnerships as FinTech firms explore the market. This will include investment from non-financial players, such as telecom companies and retail chains. Activity that is currently confined to more developed markets, such as peer-to-peer lending, automated investing and cryptocurrency payments, may well reach Latin America via Brazil.
The findings from the FinTech Adoption Index suggest that a digital-first approach will eventually be the norm for global financial services. The rapid growth of Brazil’s FinTech sector is an example of how both emerging and developed markets should view the evolution taking place. Furthermore, Brazil demonstrates how established financial services industries with complex legacy regulation can begin to open up and adopt FinTech-style approaches that ultimately benefit both “traditional” players and the market at large.
1Fintech: Innovations You May Not Know Were From Latin America and the Caribbean. Inter-American Development Bank (IDB) and Finnovista, August 2017, p. 14. https://publications.iadb.org/bitstream/handle/11319/8265/FINTECH-Innovations-You-May-Not-Know-are-from-latin-America-and-the-Caribbean.pdf?sequence=7&isAllowed=y
2NB. For the purpose of reporting we define a regular FinTech user as an individual who has used two or more FinTech services in the last six months.
3TechCrunch. “Brazil’s fintech boom offers new vertical opportunities for investors.” Romero Rodrigues, posted May 13, 2017. https://techcrunch.com/2017/05/13/brazils-fintech-boom-offers-new-vertical-opportunities-for-investors/
4“Fintech Brazil’s Moment.” Goldman Sachs, May 2017. https://www.nytimes.com/2017/05/15/business/dealbook/goldman-sachs-sees-big-potential-for-fintech-in-brazil.html?rref=collection%2Ftimestopic%2FGoldman%20Sachs%20Group&action=click&contentCollection=business®ion=stream&module=stream_unit&version=search&contentPlacement=1&pgtype=collection
5https://iclg.com/practice-areas/fintech/fintech-2017/brazil, Section 3.2 on Fintech Regulation