Happy New Year!
TL;DR
“Your margin is my opportunity”: Brazilian fintechs are rapidly taking market share away from entrenched Brazilian banks and payment processors. But it’s not a zero-sum game; this activity is expanding economic activity in Brazil. It’s a greenfield situation. Tailwind is policy makers that are dovish to fintechs.
END TL;DR
I’ve been on a quest to find a category of company that is not as well understood by Mr. Market, is “knowable”, is accessible/liquid AND contains multiple, specific companies that meet this board’s investment criteria.
I think I’ve found one: Brazilian fintechs listed on NASDAQ/NYSE:
- Liquid, because they are listed on prominent exchanges and have decent trading volume
- Less understood, at least by most American retail investors
- “Knowable” in that information necessary to form an investment thesis is reasonably available
- And: there are several Brazilian fintechs that I think are putting up numbers that are potentially compelling to this board
If enough investors are under-informed about Brazilian fintech, then we might have ourselves an exploitable inefficiency in the market!
The purpose of this post is to provide evidence that there are compelling opportunities in Brazilian fintech that justify the time necessary to learn about them. To that end it is
necessary to provide some background information on the history of, current state of and future of Brazilian fintech. At the end of this post I briefly discuss some specific companies.
So here we go!
During the decades leading up to 2010, the Brazilian economy was artificially constrained by oligopolistic and duopolistic strangleholds on banking, payments services and related financial services.
The situation motivated the Brazilian government to implement regulations which have alleviated bottlenecks (…at least, partially), FACILITATED fintech innovation and BOOSTED economic activity.
Specifically: In 2010 the Brazilian government initiated a successful and still-ongoing series of aggressive law/policy/regulations changes that
- Opened the Brazilian banking and payments markets to innovation and competition
- Achieved remarkable and sustainable economic benefits (…beyond just banking and payments) for new fintech companies, their customers and for the overall Brazilian economy
- Spawned a still-expanding gold rush of fintech innovation in Brazil that extends far past banking and electronic payments
A ton of quality background information can be had with a Google search on “Brazilian policy fintech”, but here is some condensed information:
BEFORE 2010
- Oligopoly in banking consisting of FIVE banks that had a stranglehold on the majority of banking assets and activity
- Duopoloy in credit card acquirers: one bank owned Visa, the other owned Mastercard. Merchants thus were forced to maintain TWO POS systems.
- 66% of credit card transactions (…and 77% of debit card) concentrated in only FOUR banks
- LOTS of follow-on ramifications of 1) and 2) above. Too many evils to detail here, but they include banks having an exclusive lock on customer data, lack of competition for customer debt, usury spreads between what banks paid for money and the rate they lent it out, clunky, expensive and inconvenient payment methods (“Boleto”, expensive wire payments), half the population was unbanked because the banks only serviced rich people, credit card rates at 160%, it goes on and on.
Partial list of innovative and/or proactive and/or aggressive regulatory changes implemented by the Brazilian government:
- 2004: “Banks for All” program launched: new bank locations extended into remote areas, increased “banked” population by double-digits
- 2010: Acquirer market opened to new players; Cielo and Rede no longer had exclusitivity on Visa and MC payments
- 2013: Brazilian Central Bank (“BCB”) empowered as a Regulator with the objective of rationalizing the interests of banks/acquirers vs. merchants/customers
- 2013: Banking license was “un-bundled” via a new regulatory framework to alter compliance rules for “Payments Institutions” such that more-narrowly-defined fintech licenses were created. Thus, businesses could provide subsets of financial services without having to get a full banking license (…which is practically unattainable in Brazil, or was at the time). This opened up new opportunities in “prepaid” electronic money issuers
(…food vouchers for example), postpaid (…credit cards accounts) and payment acquirers - 2016: a financial-services-reform-roadmap called “Agenda BC+” was published by the Central Bank of Brazil
- 2018: Two new fintech licenses were made available: a “Direct Credit Institution” license empowering a business to lend with their own capital, and a “Peer to Peer Institution” license empowering a business to act as an intermediary to connect investors and borrowers in P2P arrangements
- 2018: Presidential degree published recognizing the Brazilian Government’s interest in attracting foreign capital participation in Brazilian fintech companies
- 2020: framework extend to accommodate “payment initiators” e.g. businesses that enable users to initiate payment without leaving an electronically-defined “payment environment” e.g. WhatsApp Pay
- 2020: BCB launched “Open banking” policy with the objective of enabling new fintech entrants to price credit by alleviating the stranglehold big banks have on financial records. And making the data portable.
- November 2090: BCB launched “Pix”, a wildly successful instant-payment platform that is already ubiquitous in Brazil. It allows instant payment between individuals, compaies and Government (P2P, P2B, B2B, B2G)
- 2021: BCB launched “Open Finance” policy aimed at giving consumers better control over their own data, which previously was basically owned by the banking oligopoly
- 2021: creation of “Registration Entities” to level the playing field for negotiation of purchase of customer debt. It turns out that in Brazil, installment payments have long been a standard practice, and merchants often have to sell their customers’ payment
obligations at a discount to get quick access to working capital. Until now, the payment acquirer had an exclusive lock on buying this debt. So regulations were introduced to open the purchase of this debt up to competitive buyers. - 2022: eFX “electronic Foreign Exchange” created, and policy changes aimed at supporting international (“cross-border”) payment and transfer options and opening related business to fintech companies
Partial list of initiatives yet to be implemented:
- Expand scope of consumer data sharing protections and privileges to include foreign exchange, insurance “and more”
- Brazil is in the final stages of launching “Real Digital” which aspires to launch programmable money based on blockchain
- “Scheduled PIX” for scheduled payments, “International PIX” to enable transfer to/from foreign bank accounts, and other PIX add-ons
SO IS IT WORKING? “YES” IT’S WORKING:
- Banks-for-all program successful at increasing bank deposits and bank credit, increasing the nunber of businesses and increasing demand for labor, and increasing wages
- Explosion of fintechs in Brazil is rapidly dis-intermediating the banking oligopoly, narrowing the interest rate spreads customers pay and expanding financial activity
- As of 2022 Brazilians’ access to financial services had increased from 57% to 86% e.g. 75 MILLION customers brought into the banking system
- As of 2021, 96% of adult Brazilians had access to a digital wallet, up from 55 percent in 2010
- Rapid fintech innovation is rapidly creating new business models with corresponding new benefits to merchants, businesses and customers
SOME FUN FACTS
- By 2022, PIX accounted for 27% of all payment transactions and 11% of payment value in Brazil
- Fintech Nubank is now the largest neobank in the world, has 33 million customers
- Brazil is WhatsApp’s second biggest market, where 120 million users use it to text, shop and pay
THERE IS STILL A LOT OF GREENFIELD IN BRAZILIAN FINTECH
- A lot of progress has been made, but centuries of a hostile banking dynanic take time to address, and Brazil is still in the beginning stages imo
- For instance: as of 2021, 70% of all payments were still made with cash! And Boleto is still in use despite its many disadvantages. For lots of Brazilians, the default is still to buy online, then pay IN CASH at a STORE!
- As of 2021 80 percent of Brazilian bank deposits are still with the banking oligopoly
- ROE of Brazilian banks in 2021 was still a way-too-high average of 18% (…twice that of American banks).
TL;DR
If “your margin is my opportunity”, then there is still a LOT of opportunity for Brazilian fintechs.
WHICH Brazilian fintechs are good investment candidates?
- Discussed on this board, and in my portfolio: $STNE (small position), $MELI (small position), $NU (micro position)
- Also in my portfolio: $PAGS (small position)
- Probably several others! At least! Please chime in!
I’ve already posted some thoughts about $STNE; I started with a large-ish position but returned it to a small position. I hope to follow up with more detailed thoughts on some or all of $STNE, $MELI, $NU and $PAGS
For now, here are my condensed thoughts on these companies:
$STNE
- Primarily a POS provider for small/medium businesses, though they are attempting to muscle in on micro businesses.
- Their POS solution is superior to incumbents’ because only ONE POS platform is necessary for basically any/all payment methods.
- They provide a differentiating high level of hand-holding and service to their customers including “hubs” where Merchants can talk in-person with customer service personnel.
- They have not yet proven themselves (imo) in adjacent areas in which they aspire towards, which include
- Business software-as-a-service and integration of BaaS integration into their Merchant-verticals solutions
- “Omnichannel” solutions that aspire to provide a $SHOP equivalent
- Migrating their customers into their banking and investment solutions
- For now, they are a “greenfield” POS company that aspires towards sustainable growth via adjacencies
$PAGS
- Primarily a POS provider for micro businesses, though they are attempting to muscle in small/medium businesses
- …I don’t know much more than that; I’m just learning about $PAGS.
- I think though that for now, they also are a POS “greenfield” company that aspires towards sustainable growth via adjacencies.
$NU
- Neobank that is rapidly closing in on the market capitalization of the established oligopoly banks
- …I don’t know much more than that; I’m just learning about $NU.
$MELI
- $AMZN equivalent that is rapidly expanding into other areas…and other countries!
- …I don’t know much more than that; I’m just learning about $MELI
- …that said, I think they have already demonstrated that they can move into adjacent opportunities, so their durable-growth profile looks pretty good to me so far.
TAKEN AS A WHOLE, imo, collectively these four companies are
- Crushing it
- Well-represented by investors I respect
- Under-represented in American retail investor portfolios.
I took my position in these companies several months ago using a “shoot now, ask questions later” approach and I spread my risk by buying small amounts in multiple prominent players. Meanwhile I’m in “catch-up” mode to learn more about these companies so I can determine how to proceed from here.
I hope to have piqued your interest in Brazilian fintechs as a category; please let me know whether I have succeeded!