Brazil: BCB opens up credit fintechs to foreign capital

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Brazilian president Michel Temer signs decree 9,544 before leaving office

Brazil’s central bank (BCB) has taken another step to increase the competitive forces in the country’s highly consolidated banking system by authorizing foreign investors to own up to 100% of credit fintechs.

Brazilian president Michel Temer, who will leave office on January 1, signed decree 9,544 as part of BCB’s ‘+ Agenda’, which aims to stimulate innovation and competition in the credit markets.

The bank said it expects this will speed up foreign entrants into the market for providing loans to Brazilian consumers and companies.

This is the latest rule change to foster competition in the banking system and follows BCB’s introduction of a lighter regulatory regime for fintechs, as well as its decision not to allow Itaú to pursue its majority purchase of XP Investimentos.

The central bank hasn’t signalled that it will extend the rule change to other financial areas, such as payment systems or insurance.


The move will add to the challenge that the large Brazilian banks have been facing from domestic start-ups.

Banco Inter, which issued an IPO in April, continues to grow strongly. In the third quarter of 2018, the bank reported an 83% year-on-year increase in net income, which was mainly driven by a 41% year-on-year increase in credit revenues.

Its total loan portfolio increased by 23% on a yearly basis, and the leading growth segments were mortgages and credit cards.

Banco Inter’s rapid growth – even from a small base (net income reached R$19.1 million in 3Q 2018) – is significant.

Philip Finch, UBS

According to UBS’s financial institutions strategist Philip Finch, the three largest private sector banks – Itaú Unibanco, Bradesco and Santander – are feeling the pressure from start-ups.

“Although lending revenue represents 82% of total revenues at Banco Inter, we see disruption risk for incumbent banks highest in fee-related business,” he says.

“Although Banco Inter’s efficiency ratio remained elevated, we note that all three private banks in Brazil under [our] coverage reported challenging growth trends in the fee business, indicating that competition has become more intense from the arrival of new digital banks and fintech companies.”

The Brazilian fintech industry has been blossoming in recent years. According to Radar FintechLab, there were 404 fintech firms in Brazil in August 2018 – up from 54 in August 2015.

Only 2% of these are full-service digital banks (Banco Inter says 44% of its customers use the bank as their primary bank) and mortality is high – with 25% closing in the first year of operation and 50% with four years – but the new wave is forcing banks to respond.

According to Radar FintechLab, 17% of these 404 companies are focused on digital innovation in the credit markets, with the cost of credit in Brazil one of the highest in the world despite the record low benchmark interest rate a clear opportunity for new entrants aiming to win market share through price.


However, some of these fintechs have already developed scale.

For example, Nubank, which opened in 2013, is already valued at more than $1 billion and has 1.8 million active accounts and had issued 4.5 million credit cards as of June 2018.

Smaller established banks are also developing digital strategies to defend market share from fintechs to try to increase their retail deposit base now that physical branches are not such a constraint on growth.

Banco Sofisa and Banco Daycoval have developed digital branches to meet the changing customer dynamics in the market: in 2017, 36% of all bank accounts in Brazil were opened via smartphones.

Ceres Lisboa,

However, according to Ceres Lisboa, senior vice-president at Moody’s in São Paulo: “These banks have smaller banks and so cannot invest as much in IT innovation and marketing campaigns. It will be harder for them to remain competitive as both fintechs and large banks become better at meeting their customers’ needs.”

Other banks are lowering developmental costs by partnering with fintechs.

For example, Banco Votorantim recently announced a partnership with payment services company Neon Pagamentos to offer car loans. Meanwhile, Banco BMG is acquiring a stake in Granito, an electronic payment credit-card sub-acquirer, to increase its fees and broaden its customer base.

A Moody’s report, authored by Lisboa and dated October 4, pointed out that the impact of the fast-growing fintech sector would be constrained because “funding constraints will limit their growth”.

By opening credit fintechs to foreign ownership, Brazil’s central bank is taking a step to counter this domestic-funding weakness – UBS’s Finch estimates that Brazilian banks’ cost of capital is around 14.5% to 15.0%.

Banco Inter’s ROE in 3Q was 8.0% – opening the sector to foreign capital will increase the volume of capital and should also lower the break-even for start-up lenders.

“By creating new, low-cost technologies, fintechs are prompting banks to rethink their approach to financial transactions so that they can remain competitive,” notes Lisboa.

“Big banks continue to roll out their own innovative initiatives, but a brick and mortar could slow cost cuts. Banks have slashed their physical footprint, but a cultural preference for traditional banking would limit their capacity to accelerate branch closings in coming quarters.”