Fintechs in Brazil follow different paths to grow
Alan Leite, Farm's CEO; Maxnaun Gutierrez, head of products and individuals at C6 Bank; and Romulo Pereira, product and customer service director at iugu. Photo: Courtesy

A race to be a financial institution? Not exactly. Fintechs in Brazil follow different paths to grow

Add more layers of technology, then more products and services and you will have more customers and revenue. That's a general path for every fintech company, but in Brazil there are more regulatory steps in this process than what meets the eyes

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Founded in 2012, the automation platform of financial operations iugu received a license from the Brazilian Central Bank last August to operate as a payment institution. With this license, the company can connect directly to the Brazilian Payment System (SPB in the Portuguese acronym) and offer a more diverse portfolio of products and services without intermediaries.

The license to operate as a payment institution came about after rigorous scrutiny by the country’s Central Bank. The process for obtaining authorization began in 2019 and required investment in people (mainly in the technology, compliance, and fraud prevention teams). iugu will know if the investment was worth it only in the coming months when it actually starts operating as a payment institution, explains the company’s product and customer service director Romulo Pereira.

“We now have a much wider range of products for customers, who can hire services directly from iugu. In this way, we were able to increase the spectrum of functionalities, but also the quality of the service, as we concentrate operations without intermediaries,” he explains.

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For Pereira, cutting intermediaries of the operation flow is the primary benefit that comes with the license of a financial institution; in addition to being more efficient, the process is also cheaper. Bonus: being regulated by the Central Bank gives the company a chance to increase its customer base.

“We have reached some niche customers that we would not be able to reach without the approval of the Central Bank. Many companies, mainly conglomerates, and multinationals restrict partnerships and require certain levels of data protection. With the license, this operational capacity is certified by the Central Bank. Now it is easier to approach these customers,” explains Pereira.

The “race” for new licenses

Like iugu, more and more fintechs have tried to fit into specific segments regulated by the Brazilian Central Bank. There’s no secret: add more layers of technology and processes, then more products and services and, if everything goes as expected, in the end, the result is more customers and revenue.

In addition to the license to be a payment institution, Brazilian fintech companies are competing to become a Direct Credit Society or a Credit, Financing, and Investment Society.

Cora, a startup that works as a digital account for small and medium-sized businesses, obtained the Direct Credit Society license last July. Since then, it has added to its digital account the option of debit card, PIX (Brazil’s instant payments system, powered by the Central Bank), and the direct generation of payment slips. Soon, Cora will also have the credit function in its portfolio.

In April, Cora raised a $26.7 million Series A round led by the U.S. private fund Ribbit Capital, including Kaszek, QED Investors, and Greenoaks Capital. The investment will allow Cora to expand its staff in 2021, going from 110 to 230 people, and launch a credit offer as part of a plan to reach a customer base of 380,000 by the end of this year.

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“In a short time, we were able to develop products that customers really love and that impact their day-to-day business. We have grown our customer base consistently and transformed financial services for small and medium businesses in Brazil,” said the co-founder and CEO of Cora Igor Senra in a statement.

Mercado Pago, the Latin America e-commerce behemoth Mercado Libre’s financial arm, followed a different path and gradually obtained licenses. In 2018, it was authorized to function as a payment institution; in 2020, it became a financial institution after obtaining the Credit Society, Financing, and Investment license.

Now, the company that since 2017 has cooperated with other financial institutions and granted more than BRL 4 billion in loans will be able to offer the same service without intermediaries. The sky’s the limit as different products may be provided within the Mercado Libre ecosystem.

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Some fintechs choose to debut only with the Central Bank license in hand. An example of this approach is C6 Bank, born in 2019, with authorization from the Central Bank to operate as a multiple bank.

“We think it is very unlikely to find a customer who wants five apps to manage their financial life: one for investments, another for credit cards, a third one to check accounts, and so on. That’s why we chose to be a multiple bank from the start,” says Maxnaun Gutierrez, head of products and individuals at C6 Bank.

With the multiple bank license, C6 Bank can offer customers an account and overdraft, a certificate of deposit, foreign exchange transactions, and investments in funds and equity (including from third-party managers) – all in one app. And the portfolio of products continues to grow.

“Since the launch of C6 Bank, we have expanded from 6 to more than 20 offers,” says Gutierrez. “On the same platform, our customer manages all his credit card expenses, uses the points program to buy at the C6 Store, and can consult his international account, with a balance in dollars or euros,” he adds.

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Brazil’s financial arbiter is more and more playing the role of innovation booster

In recent years, the Brazilian Central Bank began to look more closely at the demands of startups in the financial sector, regulating their performance, especially in the credit segment, in a more straightforward fashion.

For the executive director of the Brazilian Association of Fintechs (ABFintechs, in the acronym in Portuguese), Renan Schaefer, the rapprochement between fintechs and the Central Bank is beneficial because it shows an understanding of how important technology is to the financial sector, especially in a market dominated by traditional institutions. 

Renan Schaefer, executive director of the Brazilian Association of Fintechs. Photo: Courtesy

“The regulation of fintechs by the Central Bank improves competition in the financial market. The trend points to more demands for licenses from the Central Bank and more diversified offers,” he bets.

Schaefer notes, however, that being under constant scrutiny by the regulator can become a problem if fintech‘s operation is not well aligned with the license requirements. “There is a fine line between providing legal certainty for the operation and pruning the innovative potential of an operation,” he says.

This is also the concern of Startup Farm‘s CEO Alan Leite. He advocates a friendly environment for startups in all segments, with additional security, control, and regulation levels than those applied to large traditional companies in the financial system. 

For Leite, banks and finance companies also need to recognize the role of fintechs and work together, investing in technology continuously to ensure safety for the entire operation. “Banks have already understood their role. They will continue to have a lot of services and products, but with several startups connecting to them and distributing other services,” he adds.

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The rise of Brazilian fintechs

The number of regulated fintechs in Brazil grew 76% in nine months, from 30 to 53 fintechs, according to Roberto Campos Neto, Central Bank‘s president. 

Among them, 44 operate as a Direct Credit Society and 9 as a Personal Loan Society. The difference between the licenses is that a direct credit company can only make loans with its own capital, without raising funds from the public.

A personal loan company, on the other hand, can perform peer-to-peer lending; these fintechs make financial intermediation, for which they can charge a fee; in addition, they can raise funds from the public.

Translated by Carolina Pompeo