Brazil's central bank policies encourage fintech startups

Brazil's central bank policies encourage fintech startups

Economy & Policy IPO M&A People Brazil Features

Chinese billionaire Jack Ma’s Ant Financial, the dominant Chinese fintech company, and Warren Buffett’s Berkshire Hathaway both invested in the 2018 initial price offering of Brazilian payments firm StoneCo.

Energy and agricultural conglomerate Cosan, which is controlled by Brazilian tycoon Rubens Ometto, is launching its own version of a digital wallet to process payments and money transfers through smartphones.

The former chairman of Brazilian investment bank BTG Pactual, Marcelo Kalim, has teamed up with other former BTG Pactual executives to launch a new online bank, C6.

These are some of the latest examples of the fintech frenzy sweeping Brazil. It’s a boom that not only reflects the ambitions of a new crop of entrepreneurs, but also is the result of a carefully crafted strategy by Brazil’s outgoing Central Bank President Ilan Goldfajn to increase competition and foster innovation in the country’s banking system, where the top five largest banks hold around 85% of all assets.

“We all need to embrace innovation, embrace the future,” says Goldfajn. “This is where we get the benefits of efficiency and competition.”

Under Goldfajn, who was appointed president in 2016 and steps down in March, the bank has implemented regulatory changes that have opened the door to new players in the financial services industry. The first wave of Brazilian fintech companies went public in 2018, some in eye-catching listings. Brazilian payments company PagSeguro raised $2.3 billion in an initial public offering on the New York Stock Exchange, the second biggest IPO in the first quarter of 2018.

Goldfajn says the regulatory shift is intended to ease the burden of heavy compliance regulations and capital requirements that can inhibit startups. Instead, the new regulations have fostered the growth of mobile payment tools and equity crowdfunding. With more entrants into the financial industry, he hopes to stimulate competition and ultimately bring down the high interest rates charged by traditional lenders.

“We have not heavily regulated the fintechs, we allowed them to flourish,” he says. “And I think the emergence of these newcomers could lower the cost of credit for consumers.”

The more accommodative regulatory stance has led to a surge in investment. Investments in Brazilian fintech companies jumped more than three-fold to $160 million in 2017 from $52 million in 2015, and reached $230 million in June 2018, according to the US International Trade Administration.

While lenders only make up around 15% of Brazilian fintechs, that number is expected to grow now that the central bank allows fintechs to run their own banking services like lending and payment collection. Previously, fintechs needed to partner with traditional banks when offering those services.

Under the new regulations, fintechs with a minimum capital of 1 million reais can offer peer-to-peer lending. Although annual loan disbursement by fintechs remains low at around 2 billion reais a year, the new rules are expected to increase loan volume and could help companies seek greater financing from potential investors.

Goldfajn says the regulations were in part a result of a fintech lab initiative set up by the central bank. “The lab brings together experts from fintechs and consultants to advise on new ideas,” he says. He also modelled the new rules after similar regulations in the United Kingdom, where requirements get more stringent as fintechs grow in size and relevance.

The new entrants are clearly shaking up the industry. Bradesco, one of Brazil’s leading banks, has launched an all-digital bank to target millennials. It saw the number of its accounts grow from 37,500 at the beginning of 2018 to a quarter of a million by August, according to the company.

Goldfajn is planning to step down to make way for a new central bank governor appointed by President Jair Bolsonaro. But he says the central bank will continue to focus on innovation and digitalization. “The [regulatory] agenda is the agenda of the central bank,” he says.