Not even your wallet escaped digitization. In the transition from our pockets and purses to the virtual environment, a process materialized by our cell phones, wallets have multiplied. In Brazil, hundreds of them are offered by companies from the most different branches, from the obvious financial institutions to retailers, restaurants, and a multitude of other specific applications.
This profusion of digital wallets reflects the maturity of the country’s financial system digitization and, at the same time, the lack of specific regulation for this business model, which also allowed companies to advance in financial services more freely. “These entities [which offer digital portfolios] are not subject to the regulation and supervision of the Central Bank and, therefore, it is not for us to define their modus operandi,” says João André Calvino Marques Pereira, head of the Central Bank’s Financial System Regulation Department.
But what exactly is a digital wallet?
Even people in the market, like Rodrigo Knudsen, Vitreo‘s manager, an asset-management fintech that uses algorithms to suggest investments for retail clients, say that the explanation is not simple. However, there are some characteristics that often appear in the statements of the various sources consulted, such as the non-involvement of traditional banks. “Given all the technology and the digital environment, the company manages to make more money and the customer gains more efficiency, without having to deal with the bank’s high fees,” says Knudsen.
“We see this term [digital wallet] being used in multiple ways,” explains Ury Rappaport, co-founder of Swap, a startup that allows other companies to create fintechs using its white-label products, that is, with their own brands.
The executive says that the concept of digital wallet has evolved rapidly. In the beginning, it was just a digital means of storing payment information, such as debit and credit cards (“very similar to a conventional wallet”, says Rappaport), a concept that João André corroborates when adding that the digital wallet allows the customer to “quickly and safely make purchases and financial transfers”.
This concept includes pioneering services such as PayPal and its newest rivals in Latin America (PicPay and Mercado Pago), as well as solutions from major global mobile platforms – Apple Pay, Samsung Pay, and Google Pay.
In this evolution process of digital wallets, “an extrapolation of the concept started to happen”, continues Ury. “That was when the wallet stopped being a card aggregator and became a ‘parking lot’ of money. You are now able to leave the money in your wallet,” which, according to Ury, opened a new range of possibilities.
This movement gave rise to intermediary accounts, with credit that could be used to pay for services and/or products of the company that provides the solution as well as that of partner companies.
It was when the digital portfolios of companies that do not operate primarily in the financial sector appeared, such as iFood (the leading delivery app in Brazil), 99 (the number two ride-sharing app in the country), B2W (Ame) and Magazine Luiza (two of the largest retailers in the country), as well as specialized firms such as TruckPad Pay, which bridges carriers and truck drivers. “There is an interest by companies in facilitating finance and financial operations for their customers,” says Raquel Santos, entrepreneur, and mentor of financial management for entrepreneurs.
“At the end of the day,” sums up Ury, “if we think about what is a‘ digital wallet ’? It’s like a ‘branded’ checking account of an institution that is not a traditional one. Almost a ‘light’ checking account”. And if there are already many of them today, the trend is that this number will continue to increase at a strong pace.
“We have even been sought out by funeral homes”
Ury Rappaport and his partner, Douglas Storf, are ‘graduates’ of 99, the Brazilian mobility startup that became the country’s first unicorn after being bought, in 2018, by the Chinese Didi.
In early August, 99 launched 99Pay, its digital wallet. It was the fulfillment of an old plan, which dates from the time when the pair today at the helm of Swap worked there – Rappaport as general payments manager, Storf as director of financial services.
“At the time of 99, we tested every company that made digital wallets, ‘bank as a service ’(Baas), cards, and we thought everything was bad,” recalls Rappaport. “This 99 fintech that they launched now, we tried to launch in 2018. But the big question was that everything we tested went wrong because the services were bad”. Despite the trauma, the episode yielded the idea for a new startup, Swap.
It is estimated that there are already more than 600 digital wallets in Brazil. It may seem like a lot, but for Swap this market is incipient and many businesses, of different sizes, can still benefit from this business model.
“It is not a fad, a niche thing; it’s kind of like you used to say ‘man, launch an app or launch a website’. It’s as if every business that is relevant could leverage its own ecosystem and create a fintech to be much better, ” says the executive.
Although it has existed since 2018, only now has Swap revealed itself to the market. Unlike other startups who already start with a minimally functional solution, explains Ury, this area (white-label digital wallet solutions) requires intensive capital ($3million-$5million) and a lot of groundwork (about 2–3 years) before to actually start operating. In July 2020, Swap raised $3.3 million in seed investment from a group of investors led by the Brazilian manager ONEVC.
Swap provides financial services to companies in other sectors with a flexible offer that emerges as a middle ground between more generic solutions (from companies such as the acquiring firm Stone and the retail management platform Linx) and super specific ones, which, in many cases, do not make sense for smaller companies. “We have a unique value proposition, which is to focus on bringing access to this industry,” says the executive. And he believes that this proposal has an enormous reach. “We have even been sought out by funeral homes,” he exemplifies.
If the advantages on the business side are evident, the end consumer may be stunned by the number of wallets vying for space on his or her smartphone screen.
Ury, from Swap, believes that the potential for digital transformation of the financial sector in Brazil is so great that there is room for everyone, banks, fintechs, and companies that want to offer their digital portfolios and that this is also an opportunity for each segment to focus in their strengths.
“Banks are undergoing a moment of transformation, but there is a reflection to be made: should they be competing with fintechs? Or should they focus on their ‘core’ value proposition, which is risk management? By doing this very well, you have a multitude of products to offer, including for partner fintechs,” he suggests.
On the other hand, Alexandre Amorim, investment manager and financial planner at ParMais, believes that strong incentives, such as generous cashback programs and the exchange of advantages for the appointment of new customers, reflect an ongoing battle between companies to capture more customers, in order to consolidate themselves or, alternatively, be sold to another larger company. Precisely for this reason, it is a good idea to think twice before creating a new registration in any digital wallet. “The more accounts or means of generating credit or payment obligations you have,” he warns, “the easier it gets lost track of your own money – and that’s a problem.”
Digital wallets and Brazil’s instant payments system, PIX
Digital wallets offered by payment institutions, that is, those that offer a prepaid payment account through which their customers can move resources to and from that account, are compatible with PIX, Brazil’s instant payments new system expected to be launch in November, says Angelo José Mont Duarte, chief of the Central Bank’s Competition and Financial Market Structure Department. “For this, payment institutions must apply for PIX membership,” he says.
The most up-to-date version of the list of participants in the process of joining PIX, of September 14 (in Portuguese), brings 935 institutions, including some digital wallets, such as PayPal, PicPay, and Mercado Pago.
Translated by Fabiane Ziolla Menezes