Stiff competition

Stiff competition

Game-Changers Features

Five and a half years ago, Cristiana Junqueira, then an executive at Itaú Unibanco, received the largest bonus of her career. She was the credit card portfolio manager for Itaucard and part of a group responsible for developing a digital strategy for the Brazilian bank. “We were looking into how to make online channels work and partner with digital retailers,” she recalls.

Yet she grew frustrated with seeing complacency prevail at one of Brazil’s dominant banks. “There was no compelling reason for them to do the things I suggested because no one was chasing them,” she says. “Their brains were not wired to think about competitors.”

Today, Junqueira is the co-founder and vice president of one of Brazil’s fastest-growing finance technology firms, the digital credit card provider Nubank. Since its founding in 2013, Nubank has become the sixth-largest credit card issuer in Brazil, with more than 4 million card holders. On a July morning, half a dozen new employees waited in the startup’s lobby to pick up their identification badges, indicative of a hiring spree.

Brazilian fintechs like Nubank have ignited the competitive spirit of their more established competitors. Several of Brazil’s big banks now have competing products, their own startup incubators and even venture funds. “I think they’re now paying attention,” Junqueira says. “That is a big change compared to five years ago.”

Still, the upstarts continue to thrive. Nubank is among a wave of Brazilian fintechs that are gaining strength, even as the country’s traditional banks fight back. Fintechs have raised increasing amounts of capital to fuel expansion and are also tapping the capital markets to broaden their financing structure.

Nubank has become the first fintech company from South America valued at more than $1 billion, according to the research firm CB Insights. Earlier this year, Nubank raised $150 million in a financing round led by venture capital firm DST Global. Overall, the company has raised a total of $330 million from investors that include Founders Fund, Redpoint eventures, Ribbit Capital and QED.

During the first quarter this year, fintech companies in South America, led by Brazilian firms, raised $271 million through 13 financing deals, a sharp increase from $35 million in six deals during the same period last year, according to CB Insights. 

Recent IPOs have also reflected the growing interest from investors in Brazilian fintechs. Payments processor PagSeguro raised $2.6 billion in a New York-listed IPO in January. The online lender Banco Inter became the first fintech company to go public on the B3 stock exchange in São Paulo. It was also the first retail bank to carry out an IPO in nearly 10 years.

More fintech companies are expected to go public or become acquisition targets in the coming years. Credit card processor Stone Pagamentos, which is backed by the São Paulo-based venture capital firm Arpex Capital is expected to launch an IPO in New York later this year.

“We believe that the majority of the IPOs and M&A activity in Brazil will come from this market,” says Renato Mazzola, a partner with BTG Pactual.

Other companies, like the financial planning app GuiaBolso, have raised cash through the local debt market by issuing receivable funds called FDICs. The Brazilian newspaper Valor Econômico recently reported that more fintechs may also issue FIDCs, including Nubank, Creditas, Lendico and Nexoos.

Changing times

The industry’s growth prospects are encouraging veteran banking executives, like Junqueira, to make a career change. Three former BTG Pactual executives left the firm recently to start their own digital bank called C6, which is currently awaiting central bank authorization.

Other bank executives have started investment firms that are putting money into fintechs. Last year, Marcelo Kayath, a long-time executive at Credit Suisse, started the investment firm QMS Capital. One of its first investments was in Neoway, a big data startup in Florianópolis that previously got money from Accel, an early investor in Facebook, and São Paulo’s Monashees, an early-stage venture capital firm.

Brazil’s big banks have not stood idle as Nubank and others have grown. Last year, Bradesco launched a digital card called Next and earlier this year it started offering a digital checking account without fees. Santander and Itaú have come out with similar products.

Brazil’s banks are also trying to cultivate new companies through their own incubators. Itaú created the Cubo joint venture with Redpoint eventures in 2015, while Bradesco formed InnovaBra in 2014 and the investment bank BTG Pactual launched BoostLab this year.

“We wanted to get connected to the startup environment,” says Frederico Pompeu, a partner with BTG Pactual who oversees the initiative. “We understood at that point that we did not have a lot of knowledge or connections.”

For the retail banks, it is a sign that they now recognize they are being challenged. Marcelo Frontini, head of digital channels at Bradesco, says that one reason the bank launched InnovBra was to face future competition beyond its usual rivals.

“We always say that our biggest competitors in the future will be the ones that we don’t know about today,” he says.

Indeed, few people could have foreseen the rise of Nubank — it was created almost by accident. David Vélez, a Colombian, moved to Brazil in 2012 to open an office for the Silicon Valley stalwart Sequoia Capital. As startups were booming then and money was flowing in, the plan was to find entrepreneurs to support in Brazil.

Yet Sequoia could not find what it was looking for — good growth stage investments — and soured on the market. Meanwhile, Vélez, who had previously worked at General Atlantic in Brazil and Morgan Stanley in New York, grew frustrated that he could not find entrepreneurs who shared his idea.

So he decided to start a company himself, quitting Sequoia in 2013 and founding Nubank. Ironically, he got Sequoia to put $1 million in Nubank that year, the US venture capital firm’s first investment in a Brazilian company. Buenos Aires-based Kaszek Ventures also put in money and its partner Nicolás Szekasy joined Sequoia’s Douglas Leone on Nubank’s board.

Other fintechs, like Creditas and GuiaBolso, are also seeing growth. GuiaBolso now originates consumer loans and at the end of last year raised $50 million in a fundraising round led by Sweden’s Vostok Emerging Finance. Creditas has grown from 60 employees to more than 450 since the beginning of last year.

Presenting challenges

Fintechs in Brazil are “going to be a challenge for the banks,” says Goldman Sachs analyst Carlos Macedo.

Yet, big banks “certainly are not wilting under the challenge,” he says. “They’re investing and trying to figure out ways to keep clients and give their clients better products and services and prices.”

As fintechs grow, many of them face additional obstacles from big banks.

GuiaBolso, for one, faces a lawsuit from Bradesco, accused of creating security risks by accessing its clients’ data.

Meanwhile, Nubank contends that when its customers want to pay their credit card bills with money from other accounts at large banks, those banks have made that process difficult.

“It just seemed like such a huge violation of customer rights to not let them do what they wanted to do with their own money,” Junqueira says.

As a result, Nubank filed a complaint with Brazil’s antitrust agency CADE, which found enough merit in the allegations earlier this year to open an investigation into several large banks.

Nubank filed another complaint after it opened the digital savings platform NuConta, alleging big banks made it difficult to transfer salaries from old bank accounts. Customers had to go to the bank and fill out a lot of paperwork to request their salaries be rerouted, Nubank said.

In the NuConta case, Nubank got some help from the central bank, which enacted a new regulation on the “portability of salaries” on July 1, making it easier for customers to deposit their salaries into a new account.

Ironic allies

One of the ironies of the current fintech boom is that regulators may be the greatest ally for the startups in Brazil, a surprise to many entrepreneurs here.

The central bank also issued two other new norms in April that allow fintech companies to directly lend to consumers instead of being an intermediary and needing to partner with banks.

“Our expectation with this measure is to increase the convenience of consumers of financial products and services, facilitate transactions with any authorized institution, and incentivize the entry of new players,” says Otávio Damaso, the head of regulations at the central bank.

Central Bank Governor Ilan Goldfajn admitted in March that the government wanted to see more competition in the consumer loans sector. He also acknowledged that the number of fintechs was growing in Brazil and said, “Why do we like fintechs? Because that’s where innovation comes from and so that generates competition and change.”

Goldfajn’s attitude has surprised many entrepreneurs in the country.

“I’ve been in this business for about 10 years and I’ve never seen such an active central bank,” Junqueira says. “They are taking a lot of steps towards favoring competition and bringing in more efficiency and favoring technology.”

Other government entities have also unexpectedly come to the defense of fintechs. In early July, the São Paulo state finance ministry filed a friend of the court brief with GuiaBolso, arguing that Bradesco’s lawsuit against the startup was “anti-competitive behavior.”

The disputes do not mean that fintechs will shun Brazil’s big banks. But nor does it mean they will work with them. So far, GuiaBolso and Creditas have partnered with mid-sized banks to gain market share.

“For now, our strategy is to work with bank partners,” says Ben Gleason, a founder of GuiaBolso. “They have the advantage of a much lower cost of capital.” LF