Rising rates test fintechs that rocked Brazil’s banking sector
No other moment has captured the euphoria of investors around Latin American fintech like Nubank’s debut on the New York Stock Exchange.
A first “pop” day in the Brazilian startup’s shares late last year briefly propelled it to the continent’s most valuable financial institution, worth nearly $50 billion. dollars.
The exuberance did not last long. Today, the nine-year-old company, which counts Japanese tech conglomerate SoftBank and Warren Buffett’s Berkshire Hathaway among its shareholders, is trading about two-thirds below its peak.
Undoubtedly, Nubank is just one of many victims of the broader global sell-off in tech stocks. But its collapse also reflects macroeconomic clouds casting a shadow over Brazil’s burgeoning fintech sector.
The fledgling industry has proved a rare bright spot in South America’s biggest economy in recent years. Homegrown brands such as C6 and Creditas have risen above “unicorn” status, the coveted label of a private company valued at $1 billion. Today, however, high interest rates, double-digit inflation and weak economic prospects are testing the sector.
“There are doubts about the sustainability of some fintechs,” says Bruno Diniz of Sao Paulo-based consultancy Spiralem. “Surviving in a capital shortage scenario during the growth phase is a daunting challenge that some will face.”
In a country where millions of people have long been underserved by traditional lenders, app-based providers of loans, checking accounts and investments have shaken up a banking oligopoly once infamous for bureaucracy, expensive lending and charging fees for basic services.
But the historically low interest rates that helped them thrive are over. Brazil’s central bank continued an aggressive response to rising prices, raising its benchmark Selic rate by 2% to 12.75% in just over a year.
The concern is that challengers will find it difficult to pass on the increased financial costs to consumers, especially those in lower income groups. “Now that we have this higher interest rate environment, we believe they will be challenged to continue to gain market share and compete with banks,” said Cynthia Cohen Freue, analyst at S&P Global Ratings.
Another concern is that disadvantaged demographic groups targeted by some Brazilian neobanks are more vulnerable to revenue erosion, risking a rise in “delinquency” – when borrowers fall behind on payments.
Brazilian payment processor Stone is issuing a sobering warning. Once a Nasdaq darling, it expanded into credit for small and medium-sized businesses, but then ran into trouble and suspended lending last year.
Two factors could prove critical for other fintechs. The first is their degree of capitalization. Those with cushions from recent fundraising will be better positioned to weather the storms — or weather the pressures on profitability.
Take Neon, which became a unicorn this year with a $300 million injection from Spanish bank BBVA. So far, this Brazilian fintech has not repriced the credit, according to managing partner Jean Sigrist. “In some situations, we don’t want to compromise growth, so we agree to operate with smaller margins,” he says.
The other important element is how credit transactions are financed. Many Latin American fintechs have relied on securitization of loan and credit card portfolios, or wholesale funding from banks, potentially leaving them exposed to interest rate swings and capital market volatility. .
Retail deposits, on the other hand, tend to be cheaper and more stable. Nubank touts this aspect of its balance sheet, as well as the cash pile from its IPO. While its lending rates have increased, CFO Guilherme Lago says, “We continue to charge no fees and for personal loans we are still pricing around 20-25% below the industry average for certain risk cohorts”.
Indeed, Nubank’s first quarter results belied the bearish share price. Net losses fell to $45.1 million from $54 million a year earlier, while revenue more than tripled from the same period a year earlier to $877.2 million. Although crime has increased, the company said it was lower than pre-pandemic levels.
Although Latin America remains relatively unpenetrated for financial services, in Brazil competition is intensifying. TVs and bus stops are full of advertisements of old-fashioned fintechs and banks now hoarding resources in digitalization. “There may be some consolidation,” says Nubank’s Lago. “Maybe some fintechs will have to shut down and stop operating in certain segments.”