Back in 2020, Brazil’s finance minister, Paulo Guedes, spoke quite bluntly of the financial industry: “200 million fools”, he said, are currently “being exploited” by a handful of just five or six banks.
Banking concentration in Brazil, as in many countries in Latin America, is nothing new to its population. For decades, financial services have been traditionally served at high cost by a small number of heavyweight lenders, which, in the case of the South American powerhouse, amount to roughly three-quarters of all loans.
Last month, Brazil’s central bank chief said there had finally been a breakthrough: the banking concentration index went from 81.2% in 2018 to 77.6% in 2020 and “close to 71%” as of this year, he calculated.
To this end, it is the Brazilian fintech industry that has played a major role in advancing competition. With the burgeoning rise of several fintech companies over the past few years, the banking environment is, albeit very gradually, finally starting to change. And the results are coming into sight.
“Banking concentration was reduced by 10%,” Roberto Campos Neto, the central bank governor, said in a hearing in the Brazilian senate. “Is it a lot? No, it is still too little. But it reveals how much fintechs have contributed to reducing concentration.”
Over the past 10 years, a revolution in the sector has taken root. The country has hatched several companies which serve financial products solely through online channels. With time, many of them have grown in size, ultimately attaining the status of unicorn companies and in some cases, floating their shares internationally.
Digital payments have driven a profound change in the industry, leading to advancing financial inclusion and lowering costs for financial products. Since the COVID-19 pandemic, their influence in the industry has become greater as the adoption of digital channels grew massively.
Official regulator data shows that as of this month over 184 million people currently have some kind of active relationship with the financial system, whether it be banks or fintechs. That is almost 20 million more than it was back in 2020.
“Fintechs have made it possible for many people to open their first account with a financial institution or to have access to credit for the first time,” Paulo Oliveira Andreoli, a fintech advisor in Brazil, said. “By offering lower or no fees in addition to credit at a lower price, they have brought more people to the market, expanded the product offering, and provided services at lower costs for consumers.”
The number of fintech companies has grown significantly across the region. A recent report from the Inter-American Development Bank said that the industry had doubled in size in the last three years and that one in every four fintechs worldwide was officially based in Latin America.
Brazil is by far the leading market in the region when it comes to the fintech industry. It harbors 771 companies, up from 547 firms in 2020 and just 230 back in 2017. The number of neobanks went from 6 to 22. “The digital banking industry in Brazil has reached a greater maturity and already relevant adoption levels,” the study found. “It is could be expected that in the future the explosive growth seen in Brasil could replicate in the other main markets in the region.”
According to Carlos Augusto Oliveira, a fintech board member at Bossa Nova Investimentos, simplified rules for fintechs have paved the way for massive growth in the number of companies. “This was fundamental to enable the rapid emergence of new agile, efficient and digital models which have been receiving strong public support and are breaking the big banks’ oligopoly.”
The entry of fintechs has generated profound changes in the market, leading big banks to readjust their cost structure, reduce fees and improve their interfaces and digital offerings in the face of greater competition.
But to be sure, the relevance of the sector continues to be dwarfed by the sheer size of most of its competitors. Even though some, such as Nubank, have excelled in acquiring new customers, the vast majority of lending in the country continues to be disbursed by the large incumbent banks such as Itau, Bradesco, Santander, Banco do Brasil and Caixa Economica Federal.
Fintechs face numerous challenges. Regulation, despite being often more flexible for these companies, still requires a significant capital structure and investment to comply. As many of them grew in size, the central bank tightened regulation on a proportional basis, in many cases bringing it closer to that of a traditional bank.
As companies look to diversify their offering and move beyond payments, they will likely face greater challenges. This is particularly true when it comes to lending, the banks’ main stronghold in which they continue to dominate and where very few fintechs have made sizeable inroads.
But for the most part, industry experts consider a diversification trend into lending as healthy. Henrique Marise, an executive payments manager at Banco Pan, thinks the outlook for the sector continues to be very promising going forward.
“Fintech companies in the payment business continue to lead in the number of startups with 15% share of the total, but this number has already been greater than 20% in the past,” he said. “The diversification shows greater creativity on the part of managers and increases the chances of success.”