Photo by Joao Tzanno on Unsplash
What once was unthinkable, it is just inevitable now.
When Nubank was just starting, most people were amazed by its boldness to dare to compete with the banks in Brazil but quite skeptical of its potential success. Not due to the product or the quality of the team behind it but instead they were simply acknowledging how powerful the Brazilian bank oligopoly was and how hard it would be to break into this closed group. It would be David versus not one but five Goliaths!
For the ones that aren’t familiar with the Brazilian banking market, the 5 big banks (Itaú, Santander, BB, Caixa Economica, Bradesco) held together more than 87.8% of all AUM of the largest economy in the region, even though it has 131 banks. Due to this situation, Brazil has some of the most profitable banks in the world. (if you want to know more about the banking market in Latin America, check my Banking and Fintech Market in Latin America 2019 report)
To put into perspective, while Brazil was going through its worst modern recession in 2015 and 2016, its GDP lost 7% in total, however, Itaú (Brazilian largest bank) was able to achieve a Net Profit of around US$ 5.9 billion (2015) and US$ 6.7 billion (2016).
The Brazilian banking market has an environment that limits competition due to banks’ influence in the government and very high regulatory barriers. It is so hard to compete in the Brazilian market that even leading global banks such as Citibank and HSBC tried to enter the retail market there and failed miserably, selling their retail operations to Itaú, in 2017, and Bradesco, in 2016, respectively. Only Santander (after acquiring the local bank Banco Real) was able to compete and get to the top 5 banks by AUM, in the 5th position behind the main local banks.
With that scenario, it was normal to think that a small startup in a market that didn’t have yet a structured VC ecosystem wouldn’t be able to break into this oligopoly. Regardless, what once was unthinkable, it just became inevitable.
Nubank had a perfect timing, entering the market when local VCs were starting to get more structured and the region was attracting more attention from global VCs. Just seven years after its start, Nubanks reached 20M customers and is now one of the most valuable fintechs in the world. This isn’t a story of a single startup that against all odds was successful, rather, this is the story of how Nubank and so many other fintechs are transforming the banking market in the region.
The Zeitgeist, in German “spirit of the times”, meaning an invisible agent or force dominating the characteristics of a given epoch. Something inevitable that drives a whole generation. This is exactly what I’m seeing in Latin America now, fintech is now the most relevant startup segment in the region, attracting most of the venture capital investments.
The success story of Nubank, Stone, PagSeguro, Mercado Pago, and others inspired many more fintechs to unbundle and re-bundle some of the most relevant financial services of the banks. Those fintechs are providing financial access to the ones that didn’t have it and improving the user experience for the ones that did have.
This is already having a considerable impact in the region, reducing acquiring fees, consumer and business interest rates, and providing access to credit to people and businesses that were excluded from the formal financial system!
How Fintechs Will Impact the Region?
As Winston Churchill said once: “It is always wise to look ahead, but difficult to look further than you can see“. I don’t intend to predict the future as I know any effort on my part will just be a roll of dice. Instead, I would like to focus on the most relevant trends that are shaping the banking market in the region and let you take your own conclusions.
Regulatory changes: The governments in the region have been slowly moving forward with regulations that are enabling more competition and uses of new technologies. Some examples are the Mexican Fintech Law and the Brazilian fintech credit new licenses and with other countries such as Chile and Colombia actively discussing new fintech regulations. Also, open banking regulations can have a disproportionate impact on shaping the banking landscape as they could improve the competitive environment in the region. Mexico and Brazil are already taking the first steps to establish their open banking regulations, probably in 2021.
Venture Capital Funding: The region has been increasingly attracting venture capital investments, going from a little over US$ 14 million, in 2011, to more than US$ 4 billion, in 2019, achieving an average compound growth rate of around 150% annually. And fintech is the leading sector getting close to 50% of all the last year’s venture capital investments in the region. The impact of Covid-19 is still unsure but local funds such as Monashees, Redpoint, Kaszek, and Allvp have recently raised funds that will still need to be deployed in the region.
Talent: When I started working in the startup world in 2010, I was the peculiar one from my friends. Most of them were working for big banks, consulting firms, or multinationals. It seems that the tide has reversed since then, now it is not only “cool” but it is paying well to work with startups. With increasing funding availability, startups can pay better salaries and attract better talent; recent exits are also proving that it is possible to be successful betting on an early-stage startup. Almost every day, I receive a message of someone with a career in a financial institution looking to move into a fintech. Even foreigners are now moving to Latin America to work for fintechs they have never heard before to take a shot in the region.
MSMEs: According to the OECD Latin American Economic Outlook, MSMEs correspond to 99.5% of all companies, accounting for 61% of all formal employment (considering informality, this number would probably be even higher). Even so, they are usually neglected by the banks due to high costs to serve them and low profitability. Now, fintechs are providing financial products adjusted to their realities leveraging technology for that. Empowering MSMEs will definitely have a stunning repercussion on the economy of these countries.
Banks response: Banks have been attacked by multiple fronts; however, they won’t let themselves be cornered so easily. Most big banks are already aware of the threat and are taking some measures to be able to compete properly.
The most relevant ones are pushing hard on the digitalization of their services. They are following challenger banks’ path and creating digital onboarding processes, improving the mobile experience, and creating services focusing on millennials. Some banks are starting to open their doors to fintechs as tech providers to improve their operations and reduce time to launch new digital products. Innovation is the name of the game and trying to collaborate with startups is a key element for the banks. However, most banks don’t know how to properly innovate and work with startups, those ones will have a harder time to stay competitive in this new environment.
Government Digitalization: Governments are moving more and more toward digital processes and information, and fintechs are eager for that. Many countries in the region are implementing electronic invoices, and digitalizing citizens’ and companies’ information.
Fintechs are following this movement closely, finding new ways to use this available data to simplify the onboarding process, to improve credit assessment, and much more.
Not only that, but governments are also improving their banking infrastructures; as an example, Brazil is launching an instantaneous payment system while Mexico launched CoDi as an initiative to foster QR code payments adoption.
If you went to Ipanema beach in Rio de Janeiro before the Covid-19, you won’t only be amazed by the breathtaking landscape but you will also be surprised by how many street vendors are selling goods accepting debit and credit cards in PagSeguro’s “maquininha” (mobile POS) from the traditional matte, a Brazilian tea, to the refreshing açaí.
Nubank’s success story inspired many new-born fintechs to rise to compete with the banks’ oligopolies across the region. We’re just starting to see the impact that fintech has on the Latin Americans’ lives, and I’m quite sure this will surprise us on how much it will impact the regional economy.
Due to the Covid-19, it is all but impossible to predict what will happen with the fintechs in the short term in the region or even globally. Nonetheless, I’m convinced that the trends that had been shaping Latin America until now won’t change significantly after this pandemic is suppressed, making me believe that we have ahead of ourselves a major shift in the banking market in the region.