The Future of Fintech in Brazil

Introduction

      Brazil represents the world’s 9th largest economy, ahead of both Canada and Russia. It is predominant in size and population in Latin America, and its nominal GDP (gross domestic product) is of around $2 trillion. Nevertheless, Brazil is troubled by political instability, significant income inequality, and high interest rates.

      All of the above have fueled a remarkable new phenomenon. Almost overnight, Brazil has become a hot spot for financial technology (fintech) advancement and implementation.

      With an eager and overlooked consumer base, Brazil is estimated to have more fintech startups than any other nation in Latin America. Recent analysis portrays that over two thirds of digitally active Brazilians have begun to use these new offered financial services and users continue surging: Brazilian fintech adoption saw a 60% increase between 2017 and 2019.

      Through open application programming interfaces (APIs) and also the integration of data system infrastructures, Brazil's open banking initiative targets to accelerate digital interactions between authorized financial service providers on the flow of permissioned user-data and hence disintermediate service offerings to customers.

      The advantages of open banking for existing banks and fintech competitors are clear: democratization of financial services, easier retention of new clients, stability and scalability, more and quicker transfers, and an environment in which everyone can engage in.

Age of Disruption

      One might argue that Fintech is growing all over the world these days. And major global tech companies like Google and Amazon have leapt into the mess. In January, Angela Strange of Andreessen Horowitz famously predicted that any company will be a fintech firm in the not-too-distant future. But Brazil's accelerated Fintech growth is a fascinating example.

      There are currently two banks and more than forty new payment institutions waiting to be approved to operate, showing that the Brazilian market remains an exciting business climate for start-ups in the Latin American region.

      The Central Bank of Brazil (Banco Central do Brasil) is to be praised for encouraging entrepreneurship in its efforts to make digital business easier, more secure and more transparent.

      By being increasingly more open to new concepts, embracing technologies and encouraging greater competition, regulators are motivating fintech innovation, helping to modernize the country and equalize a tightly centralized market that has not evolved for the overwhelming majority of its population.

The Mobile Upper Hand

       Where private banking has historically struggled to serve the vast majority of Brazilians, international telecommunications and mobile providers have effectively delivered cellphones and internet access to the masses.

      Brazil ranks 4th in the list of countries with the highest cell phone use in the world (only behing China, India and the United States). The nation has an estimated 284 million smartphone users and up to 97% of Brazilians access the internet through their phones.

      Pervasive cell phone access has made it easier to provide app-based financial services. For a community already armed with distribution tools and without the expense of the brick-and-mortar sector, Fintech start-ups may provide inexpensive cash alternatives to a vast constituency in need of new convenience. As of 2019, according to analysts at the Locomotiva Foundation, "unbanked" Brazilians are moving about $185 billion USD a year.

An unexpected Supporter

      A receptive user base and readily available innovative technologies are the classic disruption formula that directly draws entrepreneurs and investors. However, the growth of Fintech in Brazil is also being driven by another fascinating player.

      Since the early 2000s, the Central Bank of Brazil has been searching for ways to promote start-ups and improve customer financial participation. Today, the blooming of fintech in Brazil can be closely related to these initiatives.

      For example, in the light of pragmatic policies of the Central Bank, small payments and basic digital accounts apps are not subject to the same regulatory pressure as large banks. They are still regulated but are not faced with prohibitively costly enforcement and operational process requirements during the development phases of company establishment and product scaling. Start-ups can freely apply for licenses intended to promote entrepreneurship and technological innovation up to a certain number of customers or a defined sales limit.

      The push towards the establishment of open banking is one of the most important recent initiatives of the Central Bank. Using a method close to those used by by the UK Competition and Markets Authority in 2016, no formal Brazilian open banking implementation date has yet been set; nevertheless, the Central Bank has issued prospective rules, with a public consultation, and codification is planned to take place by the end of the year.

      Although it is impossible to foresee the future of fintech in such a large nation as Brazil, there are many factors that lead us to affirm that it looks more promising than not.

Sources

Barreto, Alex. “Is Brazil the next Big Thing in Fintech?” Www.mobilepaymentstoday.com, 28 Apr. 2020, www.mobilepaymentstoday.com/blogs/is-brazil-the-next-big-thing-in-fintech/.