7. The emergence of FinTechs in Brazil
7. The emergence of FinTechs in Brazil
Differently from China, Brazil has just started to face the eruption of the FinTech sector. Why, how, and when are they arising? What are their main focus, their target consumers and their main obstacles? Are these companies impacting the country by bringing new solutions to financial problems?
These are some of the questions that will guide the present chapter. Only after discussing these sub-topics, the impacts of FinTechs in the Brazilian Payment market will be addressed – the case study about PagSeguro can be found in the next chapter.
7.1 An overlook at the sector
Although some so-called “FinTech” companies emerged as early as 2009, just in 2014 the sector started to experience a significant growth – both in the number of companies being created and in the amount of money invested and generated. In 2015, for instance, it is estimated that the total amount invested in the FinTech sector was around R$1 200 million2 (50 million USD3), and, by 2016, this investment grew up to R$ 515 million (USD 161 million) – Brazil became the 8th biggest destination for investments in FinTechs.4
Also during 2016, there were already 309 Brazilian FinTechs5 and almost 70% of them were already in operation – they had already customers paying for their products and/or services. Moreover, the annual revenue of more than a half of those companies was exceeding the mark of R$ 1 million of Brazilian Reais each by the same year; around 2/3 of the companies received investments by that year (38% of the total number of companies obtained more than 1 million Brazilian Reais each); and the number of employees had already surpassed 20 people in almost 20% of the FinTechs in operation by that time.6
Even though there is an expressive interest on developing B2C solutions, the Brazilian FinTechs do not focus on providing products only for final consumers. Indeed, just 31% of the services provided between 2015 and 2016 were directed towards individual consumers (pessoa física in Portuguese). Solutions created for companies and business represented 27% of the services and products offered by these FinTechs (B2B solutions). 42% of the services and products, however, were offered for both Business and Individual Consumers. This multifocal approach aimed to provide a bigger market share for those new companies and startups getting into the Brazilian financial sector.7
The multifocal approach of Brazilian FinTechs can be explained as the solution found to survive in a financial market historically dominated by few big financial institutions and traditional banks. Indeed, the consolidation of many startups and small size FinTechs still require a big amount of investment and support from big investors in order to keep their solutions alive, competitive and appealing to the consumers. Unfortunately, many companies bankrupt in their first years or are just acquired by bigger companies and established banks - reducing, then, the competition and the number of new players one more time.
In spite of that, Brazil is still considered the leader in the number and in the impact of FinTechs in Latin America8. The geographical distribution of FinTechs, however, is asymmetric in its territory. By far, São Paulo city is the place that has the biggest concentration of FinTech companies and startups (around 65%) as well as the biggest infrastructure and ecosystem for their development – incubators, investment funds’ offices, financial institutions headquarters, technology companies, among other elements. During the past 5 years, the city has become a natural FinTech hub. Other cities such as Rio de Janeiro, Belo Horizonte, Florianópolis, and Recife are also developing their own FinTech Ecosystem and public policies to attract and/or to incentivize the establishment of this kind of company.9
The quality of Internet access and the amount of people connected also play a decisive role in the development of those local hubs. As it can be seen in the figure7.1, there are more Internet users in the Southeastern region (mostly, Minas Gerais10, São Paulo and Rio de Janeiro States). Therefore, the number of FinTechs emerging in São Paulo, Belo Horizonte and Rio de Janeiro is also related with the big demographic concentration of Internet users connected through a considered good Internet infrastructure – the best in the country and one of the best in Latin America.
Similarly to Colombia, Chile, Mexico and Argentina, the main focus of FinTechs in Brazil is the payment sector – accounting for more than one third of the services and solutions offered. PagSeguro Uol, Mercado Pago, Stone Pagamentos, Bebuble and NuBank are the biggest, most famous and most expressive companies in payments sub-sector. The types of products and services offered by Brazilian FinTechs can be found in figure 7.2 below.11
After payment solution, the second largest offer of services is related to Wealth Management solutions. Companies such as GuiaBolso, Contabilizei, ContaAzul and Simplifica are some examples of Brazilian Fintechs that are offering this kind of service. Magnetis (robot-advisory company for investments), E-Dinheiro (multiservice platform), StartmeUp (fundraising), and Nexoos (loans) are some other examples of Brazilian Fintechs.
7.2 Brazilian FinTechs
The development of FinTechs in Brazil did not follow the same path observed in other countries such as China, United States, United Kingdom and Singapore. Indeed, the emanation of new business models applying new technologies to the financial system is a quite recent phenomenon. The first Brazilian FinTech – a Peerto- Peer lending platform called FairPlace – started its business in 2009. However, it faced some regulatory constraints that blocked its business model and services’ offer, and, unfortunately, the company was not able to keep its activities.
This happened because the Brazilian regulatory scenario. According to Brazilian laws – law # 4.595/1964 (art. 17)12 and law # 7.492/1986 (art. 16)13 – loans and other financial services cannot be offered by non-financial institutions and/or by financial institutions that are not properly and formally registered in the Brazilian Central Bank. Furthermore, all the financial activity might be regulated and/or supervised/inspected by other governmental agencies such as the Conselho Monetário Nacional CMN (National Monetary Counsel in English), the Securities and Exchange Commission of Brazil (CVM), among others. These two laws, associated with other regulations released by the Central Bank throughout the years, contained partially the eruption of the FinTech phenomenon in Brazil.
Because of the regulations applied, any company must be registered at and approved by monetary authorities in Brazil if it provides financial services such as loans and payment platforms within the Brazilian territory. This process of registering and getting the license to operate is bureaucratic and takes a long time. As consequence, entrepreneurs need to overcome this “entrance barrier” by either applying and waiting for a new financial license or associating with an already established financial institution or bank.
Since 2009, however, the federal government has reviewing the legal framework concerning digital financial activities. In 2011, the CMN authorized banks and other specific financial institutions to operate bank accounts only by electronic means – opening bank accounts and making all the transactions exclusively through digital means was, then, allowed. As consequence, the total time spent by clients while opening their bank accounts, contracting services and paying bills, for instance, decreased.
Although some transaction costs were reduced due to the implementation of low-cost digital technologies, the reduction of bank fees charged did not happen as it was expected. Indeed, many banks kept charging high transaction fees to their clients, which allowed them to maintain an exorbitant profit margin even during one of the most severe economic crisis that the country has ever faced.14
Not only the big profit margin, but also the lack of good, accessible and easyto- use financial services’ offers also contribute to create an economic macro system where many costumers’ needs were not satisfied. Taking advantage of both the dissatisfaction and the unmet costumers’ needs, startups and other technology companies started, then, to provide financial services by applying new digital technologies and channels to the old-fashioned banking system’s activities. Indeed, knowing the weaknesses of the current legislation and understanding the new demands coming from the unserved – or underserved – bank clients, entrepreneurs and IT companies shifted their focus to the financial sector and started to provide new digital solutions to existing banking problems. Instead of offering an illegal – or not registered – service, these entrepreneurs used the current legislation in their favor as much as they could. They interpreted the laws and used their legal blurred gaps in order to establish new – and legal – companies and solutions.
Figure 7.2.1 Number of Internet Users in Brazil between 2015 and 2022.15 Sources: Author, based on APEX BRASIL (2017) and Statista (2017).
By 2015, not only the number of dissatisfied bank clients was getting bigger, but also the numbers of Internet users and of smartphone devices were increasing expressively in the country. As it can be seen in figure 7.2.1, Brazil had more than 110 million netizens in that year, 72.53 million of them accessing the Internet mostly by their mobile devices (either tablets or smartphones). Indeed, the number of users has not stopped growing during the last years. In 2017, it reached a historic peak of 119 million people and, by 2022, it is expected that the total amount of netizens will surpass 130 million all over the country. Additionally, the percentage of population accessing the Internet has also risen during the last decade. As figure 7.2.2 shows, the percentage of the Brazilian population using the Internet has more than doubled between 2006 and 2016.
Following a similar path, the usage of Internet and Mobile Banking has also shown a strong growth since 2011. In fact, the number of transactions made through these digital channels grew 138% between 2014 and 2015. In 2014 there were 4.7 billion of transactions made through mobile devices in Brazil and, during the following year, this number increased to 11.2 billion transactions16 – around 21% of the total 54 billion transactions made in the country.17
In this context, having a big number of Internet users as well as of bank clients, shop owners and enterprises using their mobile devices to connect to their bank accounts and hire bank services worked as another incentive for startups come along with new digital solutions for old financial obstacles. In order words, the big fat bank fees charged, the high number of dissatisfied bank costumers, and the convenient access to the Internet and to mobile banking platforms in Brazil were decisive for FinTechs flourish in the country.
Furthermore, the number of people already using digital marketplaces – both national and international based ones – to purchase goods and services also increased significantly during the last decade. As it can be observed in the figures 7.2.3 and 7.2.4, the number of active e-consumers in Brazil has jumped from 31.27 million in 2013 to 46.93 million in 2016, an expansion of approximately 15 million people in three years. Moreover, the e-commerce total amount of sales rose from around R$ 6 billion in 2007 to almost R$ 45 billion in 2016.
Nevertheless, there also other crucial factors that must be taken into consideration when studying the blooming of the FinTech sector in Brazil – especially those focused on Payment. The two most important that were not properly addressed so far in this analysis are the following: the imbalance in the demand-offer of financial and banking services/products; and the negative externalities of a consolidated, rigid, low competitive and protected credit card and payment sector.
As China, Brazil also faces a big imbalance between the offer of financial and banking services by the traditional banking system and the demand for those products from different segments of the society. For instance, the country still has a big number of unbanked people – 60 million people, all as old as or older than 18 years old. This amount represents approximately half part of the Brazilian economic active population –110 million people in 2017. In 2016, the unbanked population was responsible for 665 billion of R$ in (informal) transactions, sales, etc.18
Not only the number of Brazilian unbanked people is high19, but also the number of underserved and/or dissatisfied bank clients is enormous. Million of bank clients complain about the lack of good credit offers for Small and Medium Sized enterprises (SMEs), the high price it is charged for bank transfers20, the loans’ big interest rates charged21, the few individually customer-designed investment options offered, the long time spent to solve problems related to bank accounts and payments, the old fashioned bureaucracy22 that surrounds almost all the banks’ sectors, the waiting time for transferring money23 during weekends and holidays, among many other issues.
Another issue some people have to face regarding to accessing bank services in the country is that, in some locations, there are neither bank agencies nor banks’ representatives. Indeed, there are cities – especially in the Northern and Northeastern regions – that do not even have ATMs. Even though the government tried to spread the access to bank agencies and ATMs by establishing partnerships between banks and the post office pubic system, the amount of people lacking physical access to banking services and transactions is still impressively big. Unfortunately, this publicprivate partnership did not promote the banking inclusion it was intended and the number of underserved and unbanked citizens remains high.
The second important point that must be highlighted when one studies about FinTech in the country – especially those acting in the payment area – is this: historically, there is a consolidated, bank-linked and credit card-based payment system in Brazil densely spread all over the territory. In other words, there is a historically established payment system based on Credit and Debit card transactions in Brazil that acts as a barrier to the consolidation of new companies that provide digital payment solutions and alternative money transferring methods. Despite being spread throughout the country, this system does not encompass all Brazilian costumers and merchants, it charges high transaction fees and interest rates from both sellers and buyers, and it also maintains a market reserve in the payment sector – these topics will be better addressed in chapter 8.
Go to next: 8. Brazilian Payment-focused FinTechs
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R$ stands for Brazilian Real, the Brazilian currency since 1994.
FINTECH LAB (2016). “FinTech Lab Report Brazil 2016”. Accessed on February 20th, 2018.
On December 31st, 2015, the exchenage rate between R$ and USD was USD 1 =3,94 R$ although there was an intense rate’s variation during the same year – the Exchange rate in January, for instance, was around 1 USD = 2,97 R$ in February.
CONEXÃO FINTECH (2017). “Brazil reaches 309 fintech startups in a new mapping of the ecosystem”. Accessed on February 20th, 2018. https://conexaofintech.com.br/en/brazil-reaches-309-fintech/
CONEXÃO FINTECH (2017). “Confira os investimentos em FinTechs Brasileiras em 2017”. Accessed on February 20th, 2018. https://conexaofintech.com.br/guia/investimentos-fintechs-no-brasil-2017/
FINTECH LAB (2016), op. cit., pp. 10
In the Latin Amrica Fintechs’ rank, Brazil occupies the first place with almost 250 Fintechs by 2016. The second place is occupied by Mexico with 158 FinTechs registered by the same year. Other countries that are under the spotlight in the region are Colombia (around 80 companies), Argentina (60 companies) and Chile (56 FinTechs). The FinTechs providing payments solutions are the most expressive ones both in terms of revenue and number.
FINTECH LAB (2017). “Report Brazil 2017”. Accessed on February 20th, 2018.
Belo Horizonte is the capital of Minas Gerais State.
APEX BRASIL (2017). Corporate Venture in Brazil: About Corporate Venture in Brazil & Industry Information. Brasília: Apex Brasil, pp. 27.
“CHAPTER IV OF THE FINANCIAL INSTITUTIONS SECTION I Characterization and subordination Art. 17. For the purposes of the legislation in force, the following are considered financial institutions: public or private legal entities whose principal or accessory activity is the collection, intermediation or application of financial resources of their own or of third parties, in national currency or foreign currency, and the custody of third-party property value. Single paragraph. For the purposes of this law and of the legislation in force, individuals who exercise any of the activities referred to in this article, whether permanent or contingent, shall be considered as financial institutions.” Translation made by the author. Presidência da República: Casa Civil - Subchefia para Assuntos Jurídicos. “LEI Nº 4.595, DE 31 DE DEZEMBRO DE 1964”. Accessed on February 21st, 2018. http://www.planalto.gov.br/ccivil_03/leis/l4595.htm
176 “Art. 16. Fazer operar, sem a devida autorização, ou com autorização obtida mediante declaração (Vetado) falsa, instituição financeira, inclusive de distribuição de valores mobiliários ou de câmbio: Pena - Reclusão, de 1 (um) a 4 (quatro) anos, e multa.” It is considered a crime: “Art. 16. Operating, without proper authorization, or with authorization obtained by false declaration (Vetoed), financial institution, including distribution of securities or exchange: Penalty - Imprisonment, from 1 (one) to 4 (four) years, and fine.” Translation made by the author. Presidência da República: Casa Civil - Subchefia para Assuntos Jurídicos. “LEI No 7.492, DE 16 DE JUNHO DE 1986”. Accessed on February 21st, 2018. http://www.planalto.gov.br/CCivil_03/leis/L7492.htm
In 2015, the five biggest banks in Brazil – Banco do Brasil, Bradesco, Itaú-Unibanco, Caixa Econômica Federal, and Santander – reached R$ 70 billion. This happened during the edge of the Brazilian Economic Crisis. Estadão – Finanças Mais. “Mesmo em meio à Crise, bancos mantêm lucros invejáveis”. Accessed on February 21st, 2018. http://publicacoes.estadao.com.br/financasmais2017/2017/06/29/mesmo-em-meio-a-crise-bancosmantem- lucros-invejaveis/
Estimated values for 2018, 2019, 2020, 2021 and 2022.
Federação Brasileira de Bancos (FEBRABAN); Deloitte (2015). Pesquisa FEBRABAN de tecnologia bancária 2015, pp. 13. Accesed on February 22nd, 2018. https://cmsportal.febraban.org.br/Arquivos/documentos/PDF/Relatorio%20- %20Pesquisa%20FEBRABAN%20de%20Tecnologia%20Banc%C3%A1ria%202015.pdf
180 IDG NOW (2016). “Uso do Mobile banking no Brasil cresce138% em um ano”. Accessed on February 21st, 2018. http://idgnow.com.br/ti-pessoal/2016/05/31/uso-do-mobile-banking-no-brasil-cresce-138-em-um-ano/
Exame (2017). “Desbancarização traz oportunidades ao varejo no Brasil”. Accessed on February 22nd, 2018.
According with a research made by Data Popular, the Brazilian unbanked distribution among the social class is as the following: 11% belongs to the upper class; 48% resides in the middle class and 37% is found in the lower segments of the society. Exame (2017). “Desbancarização traz oportunidades ao varejo no Brasil”. Accessed on February 22nd, 2018. https://exame.abril.com.br/negocios/dino/desbancarizacao-traz-oportunidades-ao-varejo-nobrasil/
According to the Brazilian Central Bank, the average transfers’ costs are as it follows:
Type of transfer Transfer fee (only applicable for individuals, not for enterprises)
1) Personal DOC/TED R$ 15.00 | USD* 4.61
2) Personal DOC/TED (via Internet/mobile) R$5.00 | USD* 1.5
3) Between accounts in the same bank R$ 4.46 USD* 1.37
*Exchange rate 1 USD = R$ 3.25(rate of the same day this fees were realized by the Central Bank)
Source: author based on Brazilian Central Bank (2018). “Consolidado – Bancos Privados + Bancos Públicos +
Caixa Econômica Federal”. Accessed on February, 22nd, 2018.
According to the Brazilian Central Bank, the average interest rate charged are as it follows:
Type of Loan Interest Rate (only applicable for individuals, not for enterprises)
1) Good acquisition -
Per month: 3.87% | Per Year: 61.73%
2) Cheque Especial (associated with the bank account, easy to contract) - Per month - 7.97% | Per Year: 184.99%
3) Consigned loan (via INSS) -
Per Month - 2.00% | Per Year: 26.88%
4) Consigned loan -
Per month: 3.3% | Per Year: 48.36%
5) Personal loan not consigned -
Per Month: 11.91% | Per Year: 324.28%
*Exchange rate 1 USD = R$ 3.25(rate of February 21st, 2018)
Source: author based on Brazilian Central Bank (2018). “Taxa de Juros de Operações de Crédito”. Accessed on
February, 22nd, 2018. http://www.bcb.gov.br/pt-br/#!/c/TXJUROS/
Usually, the whole processo of openning a bank account takes around 90 minutes and it demands the customer to go to the specif bank agency he/she wants to open the account in. Additionally. The “future” cliente also must to bring a couple of documents such as National ID, proof of residency, among many others.
If a transfer is made during the weekend or holidays, it is necessary to wait until the next business day to have it completed – the other person or enterprise’s bank account get the Money.