Driven by the swift expansion of local players, interest from foreign digital banks in Latin America has grown in the past quarters, with Brazil standing out as the most coveted market in the region for global fintechs eyeing an international expansion.
U.K.-based Revolut, a digital bank valued at $33 billion, is planning to launch in the country by the end of this year, while German N26, which saw a rapid expansion throughout Europe, is in the final stages of its testing phase and likely to launch as of 2023.
Global neobanks have focused on the regional ecosystem as the fintech sector gained decent size and scale in the past few years. Local players such as Nubank in Brazil, Mercado Pago in Argentina, and Konfio in Mexico have all seen their client bases swell in the past years, as digitization during the pandemic made digital banking services increasingly accessible to its citizens.
Nubank, which launched an initial public offering late last year on the New York Stock Exchange, reported over 50 million customers, raising the stakes for new competitors that want to replicate its rapid success in Latin America.
“Brazil is a very competitive market, with a lot of experienced people and with the proven case of other banks already achieving successful cases,” Glauber Mota, who spearheads Revolut’s expansion into the country, said in an interview. The neobank considers the ecosystem ripe for global players to set foot and is looking to kick off in November with a cross-border remittance product for Brazilians traveling abroad.
Just five years ago, however, Brazil was in a different stage in digitization and fintech maturity.
Regulation had not evolved as much to pave the way for innovative business models to pop up.
Bolstered by lockdowns amid the pandemic, the digitization of the economy has accelerated ever since 2020, driving the adoption of digital banking services further and allowing neobanks to draw clients by millions.
“The pandemic completely moved the needle,” Mota said. When Revolut started in Europe, digital acceptance for financial services in Brazil was in a completely different state. “Now, the average number of apps per user has increased, regulation has evolved, which allows us to get into the market more easily, and technology has progressed as well. Altogether, this makes a completely different level playing field for Revolut to arrive,” he said.
In that regard, the convenience of the instant payment system PIX, championed by the central bank and has grown by leaps and bounds since its inception, has contributed to Brazilians becoming increasingly used to mobile banking services. It has also encouraged innovators across the globe, who now see the fertile ground in Brazil to test disruptive products.
“The fintech sector now has more tools at its disposal than it did a few years ago,” said Pablo Viguera, co-CEO at Belvo. In the case of Brazil, a new emerging open banking infrastructure is also allowing new technology applications “which increasingly enable fintechs to build and scale new financial products faster.”
Next logical step
Brazil could be in the picture of becoming an international bank. When it announced its expansion into the country, German N26 said Brazil was “the next logical step in N26’s mission to become a truly global bank.”
For that matter, the Brazilian digital banking ecosystem allows foreign lenders to accelerate their growth rates by expanding into Latin America. The country has roughly 184 million clients in the financial system, 20 million newly incorporated during the pandemic alone.
But to be sure, competition has grown significantly as well. A study by the Inter-American bank revealed that the number of neobanks in Brazil had quickly jumped from six in 2017 to as many as 22 in the current year. This requires newcomers to focus on their competitive advantages. Revolut relies on its broad international network to offer remittances and cross-border payments, while N26 is planning to introduce the concept of fincare or financial care to help Brazilians do financial planning and alleviate debt burdens.
Growth seen in the past few years has also wooed traditional banks, hoping to play disruptor for once. Earlier this year, Spanish behemoth Banco Bilbao Vizcaya Argentaria announced a $300 million investment into Brazilian online lender Banco Neon to set foot in the region’s largest ecosystem. Previously, U.S.-based J.P. Morgan acquired 40% of Banco C6, another digital bank in the country.
Higher profitability but at greater risk
However, there is a factor that global neobanks and banks used to conducting business in stable and developed markets will likely find highly challenging. That is a standard feature of Latin American markets that domestic banks already know: higher delinquency rates across the board.
For that reason, experts argue, digital banks have shied away from expanding heavily into credit. International players rely primarily on local teams that have experience in dealing with these higher default rates.
But the greater the risk, the better the prize. The large Brazilian banks, which dominate the market by almost every measure, report one of the greatest profitability metrics worldwide. Interest rate spreads in Latin America are typically much higher than elsewhere, allowing the experienced banker to generate highly attractive returns on capital.
“What developed countries see as strange or an anomaly, Brazilians perceive as just day-to-day operations,” Mota said. “If we do proper work here, growing in other places in Latin America would be natural.”