Brazil has 200 million digital accounts and a challenge: how to make them actually used
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Brazilian digital banks face a decline in the number of users and feel the pressure for profitability

After the bonanza, Brazil's digital banks and fintechs face a slowdown in their user base as investors start to demand profitability

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After some booming years, digital banking may be getting close to a litmus test in Brazil, as customer base growth begins to slow and investors start to demand profitability.

According to Bank of America, downloads of banking and digital wallet apps in the country dropped in September for the first time since 2015. Seven of the 10 largest neobanks saw their active user base fall compared to August.

With growth slowing down, fintechs have been trying to engage and monetize their user base, a trend that, according to experts, tends to reduce the number of competitors.

READ ALSO: Downloads of digital banking and investment apps suffer a decline in September, says BofA

Since the launch of Nubank in 2013, the country already has more than 700 digital financial services platforms that include payments, insurance, loans, cash management, investments, foreign exchange, and private pensions, among others.

Riding on the back of technological and regulatory innovation and a formidable volume of investment, fintechs have reached tens of millions of unbanked people and customers dissatisfied with traditional banks. PicPay only, the country’s largest digital wallet, surpassed 55 million users in September, nearly double that of a year earlier. Nubank surpassed 40 million customers in May.

Much of this roaring boom is due to the pandemic. In early 2020, when financial industry veterans were already anticipating a slowdown in fintechs, the social isolation forced by COVID-19 resulted in the opposite. For example, Caixa Tem, the digital arm of Caixa Economica Federal created by the government to pay emergency aid to the poorest, reached more than 100 million new digital accounts.

READ ALSO: Brazil has 200 million digital accounts and a challenge: how to make them actually used

In addition, the very successful launch of PIX (the Brazilian instant payment system) and open banking represented another turning point for the sector. This has all led to record investments in fintechs.

However, experts in the venture capital industry assess that factors that have driven this promising scenario may be about to end. One of them is the growth of the customer base, which has been shrinking. The other is the end of “cheap money” due to a cycle of interest rate hikes in the United States and Europe. These two factors together may indicate that the scenario has changed.

“Global liquidity has given more breath to several fintechs in Latin America, including some that have not been doing so well,” said Guilherme Horn, director of strategy and innovation at BV Bank. “That may be about to change.”

READ ALSO: Only 3.8% of Brazilian cities have a developed payment ecosystem, Visa study shows

This does not necessarily mean that investments will stop. A recent study by investment firm Atlantico estimated that Latin American startup investments are expected to exceed $20 billion this year, almost four times that raised in 2020, with 40% of that going to digital banks in Brazil.

According to Atlantico partner Julio Vasconcellos, the perception is that there are still opportunities in the region in services that are still little explored, such as insurance, digital currencies, real estate credit, and e-commerce.

However, resources should be progressively channeled to assets that prove to be more viable, with greater chances of turning a profit. In the first half, about 80% of the money invested in fintechs in Brazil came to Nubank, C6, and Neon, according to Atlantico’s data.

READ ALSO: Latin American super apps battle to achieve greater user recurrence while there is still room for everyone

Scale and engagement capacity

Data from listed fintechs show that they are noticing these changes. Out of the eight digital banks in the country that released their balance sheets this year, six made a profit, according to the portal Fintechs Brasil. Overall, with profitability well below that of the big banks, but already better than last year.

To convince the market and investors that they are beating the challenges, some fintechs are giving more details about their customer bases, showing how many of them are for real.

Picpay reported in September that about a quarter of its 55 million users were transactional, meaning they could yield revenue. Fintechs with a smaller product portfolio are at a disadvantage because they have more limited power to make their users recurring.

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

Scale and engagement capacity is a powerful asset for digital banks, especially at the moment when they start to face more intensely the “embedded fintechs”, digital financial arms of retailers or large commercial banks, which are already half of the top 20 in the country. Not to mention the competition from global groups in some services, such as Facebook’s WhatsApp and Paypal.

In addition to their great ability to engage users, often combining e-commerce and entertainment, these companies have great power to raise cheaper funds in the market and long expertise in credit that the artificial intelligence tools used by fintechs cannot yet absorb.

“The success in the credit and other forms of monetizing the base will help point out which will be the winners,” said former PicPay president and former Banco do Brasil president Gueitiro Genso.

READ ALSO: Latin American super apps battle to achieve greater user recurrence while there is still room for everyone

Despite the gigantic account numbers, digital banks still hold shy loan portfolios. A sample of the challenge that the entrants face came in August, when Stone, one of the exponents of the payments market, announced a quarterly loss of about BRL 400 million in loans to small merchants and suspended new concessions.

For specialists, there are still many gaps to be explored by digital financial businesses in Brazil, which should motivate the emergence of new niche businesses for many years to come. However, businesses that depend on a larger scale will find it more difficult to become consolidated.

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An indication of consolidation is the increase in mergers in the sector, such as the Picpay-Guiabolso, Geru-Rebel mergers, as well as the partnerships between Stone and Banco Inter and Creditas with Nubank.

“Nobody imagines that we will have 700 fintechs in Brazil in a few years,” says Tulio Oliveira, vice president of Mercado Pago, Mercado Livre’s finance arm. “It’s possible that there will be six or seven big ones left.”

(Translated by LABS)