Nubank is a Brazilian Fintech that was co-founded by Colombian David Vélez.
Sharp interest rate hikes in Brazil are hampering the business model of fintech companies including StoneCo, NuBank and PagSeguro Digital, which had been offering cheaper loans and services than the big banks and growing at a dizzying pace. .
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The fintech industry, which exploded in recent years with record venture capital investments and public share sales, is suddenly facing a reckoning as Brazil’s central bank raised its key rate by nearly 10 percentage points in a year to combat inflation. That makes it harder to offer competitive rates on loans without compromising already-tight profit margins.
Financial costs for large banks such as Itaú Unibanco Holding SA and Banco Bradesco SA have not risen as much due to their larger and more diversified base of retail clients, who often leave their money parked in bank accounts in exchange for below-rate returns. basic or no return at all, something that large professional investors generally would not accept. Meanwhile, people in Brazil can pay up to 346.3% annually for credit card loans.
“Fintechs were born with a main advantage for customers: charge less than the largest banks. Therefore, it is difficult for them to pass on higher debt expenses to clients,” said Cynthia Cohen Freue, leading financial services and banking analyst in Latin America at S&P Global Ratings.
The pandemic accelerated the digitization of financial services everywhere, but especially in Latin America’s largest economy, where mobile and internet banking already account for almost 70% of transactions.
A record $8.85 billion was invested in startups in the nation in 2021, and the year capped off with December’s much-anticipated initial public offering of Nu Holdings ltd., which valued the digital credit card issuer at $45 billion. more than Itaú or Bradesco at that time. Nubank, as the company is known, raised $2.8 billion in the initial public offering.
But the benign rate environment ended abruptly. Brazil’s annual inflation went from less than 2% in May 2020 to 10.5% last month. Fearful of falling behind the curve, the central bank began tightening its monetary policy in March 2021, taking the benchmark rate to 11.75% in one of the most intense cycles globally.
StoneCo, a merchant acquisition and payment technology company, more than tripled its financial expenses in 2021 compared to the previous year, to 1.27 billion reais ($270 million). Its financial income, meanwhile, grew just over 14%, to 1.88 billion reais, as it delayed raising prices to customers.
This strategy helped the company finish 2021 with 1.8 million customers, exceeding the projection of 1.4 million, StoneCo said.
PagSeguro Digital, a competitor of StoneCo, reported financial expenses of 790.6 million reais in 2021, more than six times higher than the previous year, while financial income grew about 60%, to 3.7 billion reais, according to documents.
Nubank also saw financing costs more than triple to $367.3 million, according to filings. But interest income and earnings on financial instruments grew almost in the same proportion, to more than $1 billion.
By comparison, Itaú, Brazil’s largest bank by market value, saw a nearly 10% reduction in financial intermediation expenses last year. Bradesco, the second largest, registered an increase of less than 7%.
Brazil’s slower economic growth poses an additional headwind for fintechs as delinquency rates tend to rise and demand for loans fades. While that’s a challenge for the entire financial industry, some newcomers are luring customers with lower credit scores than big banks as part of their aggressive growth business strategy, according to S&P Global Ratings. Banks may simply cut credit in tougher environments, while fintechs promise investors they will keep expanding regardless of a possible contraction in GDP.
After advancing around 4.6% in 2021, Brazil’s economy is expected to expand just 0.5% this year. October’s presidential election pitting former President Luiz Inácio Lula da Silva against incumbent President Jair Bolsonaro will also generate further volatility in the second half of the year, while Fed rate hikes and the war in Ukraine add stress.
Those challenges are weighing on prices on StoneCo’s $500 million bond due 2028: Its yield has risen about 100 basis points this year to 7.2%.
The poor bond performance also reflects some of StoneCo’s own challenges: It suspended lending to small and medium-sized businesses in October after a bad experience, and its adjusted net income fell 79% in 2021. Meanwhile, its main competitor, Cielo SA, owned by Bradesco and Banco do Brasil SA, reported a 98% increase in profit.