First skirmishes in Brazilian fintech war

News and opinion on finance

The growth of fintechs in Brazil has been closely monitored by market participants for years. The narrative is well established: the high adoption of digital technologies (71% of the population has a smart phone) in the huge, entrepreneurial economy has led to a wave of fintech innovation. According to a recent report by McKinsey & Company, there are now around 400 fintechs operating in Brazil which are growing at a compound annual growth rate of 96%.

However, to date the growth has been largely alongside that of the banks. These incumbents have responded to the appearance of the fintechs by adopting a mixture of digital innovation of their own, buying or working closely with fintechs to lessen competitive dynamics, and at times simply ignoring those niches where the nibbling away of profit margins barely registered on the broader profitability of the bank’s operations as a whole.

That uneasy truce is over.

In April the first real shots in the war were fired by the banks. And it is no surprise who the first target is: the payment fintechs, which represent 20% of the total.


Payment services were always likely to the first theatre of Brazil’s fintech war. After all, it’s an area that has been ripe – and successful – for fintechs. Some of Brazil’s first ‘unicorns’ have come from innovators in the payment sector, with PagSeguro and Stone both valued at more than $1 billion dollars and having already completed successful IPOs on North American stock exchanges.

Payments are capital-light and profitable. Well, they were profitable. Even before the developments of April (which I will come to shortly), competition was depressing profitability. Cielo – the payments company of Banco do Brasil and Bradesco – recently announced a 45% fall in its profit for the first quarter of the year (and a 25% fall compared to the fourth quarter of 2018), and blamed the intensity of the competition in its operating environment as the leading cause.

So, while competition has been ramping up over the past year it has recently sparked into fire. Getnet, Santander’s merchant card payments product, announced a reduction in its receivables advance rate to 2%, and harmonized credit and debit charges. The industry average had been around 4.5% so this was an aggressive cut. Safra has also cut its rate (to 2.99%) on its SafraPay card.

However, Itaú has upped that ante – zeroing the rate on its Rede card system from May, for both new and existing customers with annual sales of up to R$30 million.

So far, the obvious casualties of this war have been the fintechs. Investors clearly think they are more vulnerable to protracted price competition 

Cielo is yet to respond directly to the April moves by its competitors but has been slashing prices in recent months (hence those lower profitability results).

But the payment fintechs have already cried foul and lodged a complaint with Brazil’s antitrust authority, Cade. The Association of Brazilian Payment Institutions (Abipag, in its Portuguese acronym) has accused Itaú of anti-competitive behaviour. Its complaint, in essence, is twofold: that Itaú (and by extension other banks) is demanding that clients bundle services (corporate accounts) to get access to the best Rede deals and that it is subsidising its merchant card services from other banking activities to put the single-service payment fintechs out of business.

These complaints have some justification. For example, Rede will also deposit payment funds in clients’ accounts two days after sales – rather than the market practice of 30 days – and free of charge if the company has a small business account with the bank.

In response, Itaú says that clients are under no obligation to keep funds within these accounts (there is no minimum balance). The president of Rede, Marcos Magalhaes, has also claimed that the business will not be subsidised by Itau’s other operations and will “continue to be profitable” on a standalone basis.


However, Rede has long been a source of focus and concern for the bank. It had been slow to respond to the growth in competition from both the banks (especially Santander) and the fintechs. This has concerned analysts – and management – more for the negative impact on Itau’s wider corporate and SME business than for the loss of profit from Rede itself. This year the bank bucked its recent trend for lowering headcount by conducting a recruitment drive of salespeople for its Rede business.

The fintechs are responding in kind: from May, PagSeguro will deposit funds into client accounts “instantaneously”. But, so far, the obvious casualties of this war have been the fintechs. Investors clearly think they are more vulnerable to protracted price competition. On the day that Rede announced the changes to its service charges the stock price of Stone (one of the members of Abipag) fell 24% – as Euromoney went to press it had fallen 37% in April and was tipped by some analysts as headed below its IPO pricing level.

Cade might eventually come to the payment fintechs’ aid. But any ruling will be months away (at best) – and could then be appealed. The worry for the fintechs is surely that by the time any regulatory cavalry appears on the horizon they could already have been routed.

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