Brazil pressures fintechs but maintains a promising environment for the sector

RIO DE JANEIRO, BRAZIL – Rising interest rates and stricter rules imposed by the Brazilian Central Bank have increased the pressure against fintechs, especially small and medium-sized ones. Still, the scenario remains promising for the sector in Latin America’s largest economy.

According to experts, fintechs emerged to offer higher quality financial services. They reached their peak in Brazil with the structural fall in interest rates by the Brazilian issuer and the regulatory incentive.

It allowed a very accelerated development in the last five years, especially in the credit market.

After this period, in which Brazil consolidated itself as a “paradise for fintechs”, with a total of 1,158 companies in 2021, the scenario now seems to slow down, mainly due to the rise in rates, and puts pressure mainly on smaller companies, which have less capital and structure to face the current juncture.

RISING INTEREST RATES

As part of an overall trend, the Central Bank has been forced to raise interest rates to 11.75% to combat rising inflation, which accumulated 11.3% in the last 12 months, its highest level in 18 years.

According to specialists, the increase in delinquencies and the fall in demand for credit caused by high rates have caused fintechs to lose money and business opportunities.

They are also forced to pass on this cost increase to their clients or absorb it internally to maintain attractive prices, which requires them to be prepared to face this situation, as in large companies such as Nubank or Stone.

According to Thiago Batista, a financial analyst for Latin America at the investment bank UBS BB, the aggravating factor for fintechs is that they offer higher risk services and have fewer corporate clients, so that delinquencies may be higher than for traditional banks.

“The segments in which they operate are riskier than those of traditional banks, which continue to maintain several provisions well above historical levels, so they have a cushion to absorb better than fintechs the possible increases in delinquencies expected in the coming quarters,” he said.

In addition, according to Batista, the rise in interest rates may result in a fall in the price of companies that have their shares traded on the stock exchange, as it pushes up the so-called discount rate, an indicator that reflects the level of risk of an investment.

“This affects all players but impacts new players more since most of their results are long-term,” he detailed.

NEW CENTRAL BANK RULES

Likewise, the Central Bank announced in March that payment institutions will have to comply, as of 2023, with new rules to be able to operate in the country, proportional to their size and complexity, which, in practice, will mean a higher capital requirement for large companies.

In that sense, Moraes recalled that the fintech market already has large and complex companies that are beginning to interconnect in such a financial system that they offer systemic risk. Hence, the issuer had to take action.

“The problem is that this change occurred at a time of rising interest rates that generate a double cost for these new players, the cost to comply with regulations and the one generated by defaults,” the professor added.

Batista added that the Central Bank aims to increase competition and balance the dynamics between large fintechs and traditional banks, reducing the regulatory and capital gap.

“This need for capital increase was already foreseen, and I don’t see a structural change or disincentive for new players. Nubank, for example, loses a big advantage it had, but it has a lot of surplus capital after the IPO, so over the next four years, I don’t think this will be a gap for fintech portfolio growth,” he explained.

Faced with this new juncture, specialists agreed that fintechs might consider adopting more conservative or cautious postures in the development of their businesses and move to invest more in creating new products rather than the usual growth in the number of clients.

“Brazil is still interesting, but the balance of risk requires new players to have a more conservative strategic vision, focused on specific niches and less complex, to have greater control of the scenario,” concluded Moraes.

With information from EFE