There's a financial revolution underway in Brazil. Rapid growth in the financial technology (fintech) sector means that Brazil now has the world's highest number of fintech companies outside the U.S.
But the pace of expansion is creating risks as well as opportunity, and many start-ups are seeking outside professional expertise to help them navigate the complexities of the regulatory environment.
Fintech – a new technology and innovation that aims to compete with traditional methods in the delivery of financial services – is being encouraged by Brazil's Central Bank, which wants to reduce fees of financial services and expand access to accounts and credit to reach a larger part of the Brazilian population. A large proportion of the country's inhabitants – 35% of Brazilian adults - has never had a bank account, particularly if they are poor. Yet Brazil has the highest number of smartphones in the world, so there is huge potential for new ways of delivering financial services.
The financial technology industry itself is revolutionising the way we do business. For over 30 years, the established way to transfer money between financial institutions has been via a Society of Worldwide Interbank Financial Telecommunication or SWIFT; now, alternative innovations such as the Ripple can make a safe transfer in seconds.
The number of fintechs mapped in Brazil increased from 244 to 332 in 2017, with companies acting in lending, investment, financial management, payments, insurance, cryptocurrencies, debt renegotiation and other services – more than the rest of Latin American countries combined. A Goldman Sachs report of the same year estimated that Brazilian fintech companies would generate revenues of around $24 billion during the next decade. The number of fintechs and financial efficiency startups grew during 2017 from 264 to 369, with insurance and loans the most popular niches, showing a 92% and 75% in the number of initiatives respectively.
Fintechs still represent a tiny minority in Brazil's 1.5 trillion Reais credit market, but their significance lies in their impact on traditional banks, which could be driven to adjust and lower their prices. The current average interest rate used by the traditional banks is 5.67% per month, compared with 1.90% interest rates used by the fintechs.
Start-up fintech businesses run risks. Typically launched by young entrepreneurs with a technological idea, these business owners can be naïve in their understanding of running a company, or how to meet financial and regulatory compliance. An innovative product offering isn't enough to ensure business success. Partnering with a professional business services provider will ensure the underlying requirements of managing a company are met, leaving the technological entrepreneurs to focus on creative product development and meeting customer demand. Robust data management and security of clients' personal information is another area that a reputable business services provider can help with.
The fast pace of the developing fintech industry means that start-ups can be vulnerable to regulatory clampdowns if there's a compliance breach.
There has been an explosion of new products and there's a risk that some of these young companies will fall by the wayside. To survive, a young company may be purchased by a competitor; get a loan or investment from a private equity company, or grow organically with debt transactions. TMF Group services can help navigate any option, plus also assist if you're an overseas investor looking at fintech opportunities.
Overseas investors are recognising the parental of Brazil's fintech industry. Financial planning app GuiaBolso and credit card provider Nubank have recently secured significant backing. Nubank is offering digital bank accounts to people beyond its existing client base of credit card holders, having already signed up 1.5 million customers in a pilot scheme. This means that Nubank is already bigger than Brazil's largest purely digital banks, but it is still a long way off the size of Brazil's top two lenders, Banco Bradesco SA, and Itaú Unibanco Holding SA, which each have 20 million customers.
Brazilian fintech start-up Creditas Soluções Financeiras Ltda has received $50 million investment via Swedish fund Vostok Emerging Finance. Creditas, founded in 2012 and specialising in providing loans with real estate or vehicles as collateral, had a 135 million loan book last year, which it now aims to grow 30-fold in three years.
To stimulate fintech growth, Brazil's Central Bank has enacted its first regulations for fintechs, authorizing two types of fintechs - Peer-to-Peer Lending (SEP) and Direct Credit to Borrowers (SCD). It aims to increase competition in loans, in a country with notoriously high interest rates for consumers.
As the fintech industry grows, so too does competition for customers, who will be keen for reassurance that their money is safe with a start-up business. Fintech start-ups will be competing against a long-established Brazilian banking industry which has won the trust of its customers over decades. But if a new entity has a reputable business services provider alongside, it enhances credibility and fast-tracks the reputation of a young business.
Get expert help
TMF Group in Brazil has the experience and expertise for all aspects of the fintech sector in Brazil, with a wide range of business support services from business start-up to company management. As part of a global organisation with more than 125 offices in over 83 countries, we can offer local knowledge backed by global reach.
Our team of experts can support companies of all sizes and types, local or international, and we can also work with overseas investors looking to back Brazilian fintech companies. We have more than 700 staff locally prepared to meet our clients' needs for accounting, tax, treasury, payroll, structured finance, trust, and corporate services, corporate secretarial, compliance and information technology solutions. To find out more, talk to us.
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