By Isabela Fleischmann and Ana Carolina Siedschlag
The growth of unsecured credit lines, especially credit cards, has been a source of pressure for traditional financial institutions, digital banks and card companies in Brazil.
The situation has affected the credit quality and profitability of the companies, which is an additional challenge at a time when the government is seeking alternatives to reduce the interest rate on revolving credit card operations, amid rising defaults and the high Selic rate.
On Monday (17), the Minister of Finance, Fernando Haddad, met with the presidents of Itaú Unibanco, Bradesco, Santander Brasil, Nubank, and the Brazilian Federation of Banks (Febraban), to discuss the issue.
According to Isaac Sidney, Febraban’s president, the government intends to create a working group to evaluate the causes of high interest rates in the country in revolving credit card operations – a theme discussed for more than a decade in governments of different parties.
The team will include representatives from companies, the government and the Central Bank.
Data from the Central Bank indicate that, on average, the interest rate charged on revolving credit cards was 417.35% per year in February (latest data available), the highest since August 2017.
The indebtedness of families in the country is equivalent to 48.8% of income accumulated in 12 months until February, while default reached 4.1% of credit operations for individuals in February, the highest level since October 2016.
It is a scenario that challenges fintechs in particular.
A recent report by Fitch Ratings pointed out that lower-income customers accounted for nearly half (48.8%) of credit card debt at non-bank financial institutions by the end of 2022, compared to 23.9% for large banks.
The higher risk willingness of fintechs and digital banks relative to incumbent banks, coupled with a relatively low barrier to entry, has facilitated the growth of credit cards in Brazil.
The market share of fintechs in the credit card segment was 16.1% at the end of 2022, compared to 9.9% at the end of 2019, according to Fitch’s report.
The market share of mid-sized digital banks also increased to 14.9% at the end of 2022, compared to 13.5% in 2019, while the market share of banks considered systemically important lost ground, falling to 67.3%of total credit cards at the end of 2022, compared to 75.6% at the end of 2019.
Fitch pointed out that over the past three years, credit card origination volumes have increased 71.6%, according to Central Bank data, while the outstanding balance grew 77.7%, representing 15.5% of total consumer loans in Brazil (13.9% at the end of 2019).
According to Fitch, the pressure on credit quality will be more evident in smaller or less diversified companies.
The rating agency expects digital banks and fintechs to lower their appetite for lending in the coming months, focusing on customers with better credit quality, a segment where competition from large banks is greater, while also implementing collection strategies to recover their stressed portfolios.
PROVISIONS AND THE IMPACT ON MARGINS
In addition to the economic challenges of inflation and interest rates, the increase in credit card delinquencies in Brazil is related to high unemployment rates and a decrease in government stimulus measures.
Ceres Lisboa, Moody’s director for bank analysis in Latin America, explained that credit is more expensive.
Linked to this, inflation has been consuming a significant part of family income.
“There has been a compression of the available part of income to pay the debt,” she said.
This brings about greater defaults.
Credit card delays of up to 90 days have continued to grow since mid-2021, reaching 8.2% at the end of January 2023, the highest level in more than a decade, compared to 7.8% at the end of 2022 and 6% in 2019.
Lisboa said he believes that the delinquency rate should be pressured upward in these next few quarters.
“But the banks have not been sitting around waiting for that.”
“They have been doing their homework for a long time, increasing provisions, the cushions that will support absorbing these losses.”
And, simultaneously, they have been reducing credit concession, especially in the last quarters,” she said.
Although the rating agencies are attentive to the banks’ risk notes in this period, it does not mean that they will stop giving credit, since it is an adjustment given to the default cycle, according to Lisboa.
“Banks also have a high funding cost,” she said.
But for fintechs, high funding costs also represent a competitive disadvantage for the sector, and the significant reduction in market appetite for risk financing adds further pressure in terms of the results and capitalization of these companies, according to Fitch.
“The margins of fintechs are expected to come under pressure this year because of higher provisioning requirements and funding costs,” the agency said in a report.
In the report, Fitch also pointed out that digital banks and fintechs have higher growth among lower-income customers, with the share of customers with incomes below two minimum wages (including customers with no proven income) growing 95.4% and reaching 27.8% of the outstanding balance of all credit card debt at the end of 2022, up from 25.2% at the end of 2019.
For fintechs, growth in riskier customers has been significantly higher compared to banks, 235.8% for fintechs versus 66.9% for banks, indicating that these startups will remain more vulnerable to eventual recession in 2023, according to Fitch.
According to the agency, the credit quality of digital banks, fintechs, and card companies in Brazil may come under further pressure because of their relatively short track record, smaller scale, and operation in riskier customer segments.
ALTERNATIVES
Latin American fintechs have adopted different strategies for credit origination in a scenario of increased risk in Brazil with high interest rates combined with higher household debt.
There are also pressures caused by the judicial reorganization of Americanas and the fiscal instability with the new government’s measures.
Nubank said in a conference call with investors about last quarter’s results that it intends to accelerate the origination of personal loans this year, while Mercado Livre said it will still wait to see how the macroeconomic scenario will behave.
Both fintechs slowed down origination in 2022.
PagSeguro said it is strengthening and developing its risk and fraud prevention framework so that, “at an opportune time this year,” it will start originating unsecured lines of credit again, as CEO Alexandre Magnani said in an interview with Bloomberg Línea.
Stone, which faced problems with small and medium-sized business defaults in 2021 and decided at the time to suspend its credit operation, said that in 2022 it worked to rebuild product and systems, rethinking risk policies.
The company, which has its financial services business beyond acquiring, plans to relaunch the credit product in the second half of the year, but the speed of origination will depend on the economic environment and the fintech’s risk appetite.
“In the last quarter of 2022 we start testing these systems that we have built with a few customers.”
“We will scale up the size of that test in the first half of the year and our focus is to be in the position to relaunch [the working capital and credit card product for small and medium entrepreneurs] in the second half of the year,” said Lia Matos, Stone’s chief strategy officer.