Fintech is becoming an increasingly important part of the financial services sector in Brazil. The country produces the most fintech companies in Latin America, with several unicorns having a global presence. Global investors might want to consider exposure to the Brazilian fintech industry through several US-listed stocks.
The top Brazilian fintech stocks trading on the US stock exchanges are Nu Holdings Ltd, StoneCo Ltd, PagSeguro, XP Inc., and Inter & Co Inc. Nu Holdings Ltd and StoneCo Ltd have drawn attention from investors because they are owned by Warren Buffett. They were his best-performing stocks YTD in 2023, returning 134,55% and 113,81% respectively. The other Brazilian fintechs also experienced strong returns for the year: Pagseguro (50,85%), XP Inc (89,36%), and Inter & Co Inc (204,35%).
We will delve into the heart of the digital revolution in Brazilian financial services by turning our attention to the top five fintech players in the country. Our analysis concerns the factors contributing to the appeal of fintech in Brazil, offering a nuanced understanding of the varied facets of Brazil’s fintech landscape.
Key Factors Fueling Fintech Growth in Brazil
Inefficiencies of the Traditional Banking Sector
The Brazilian banking system historically focused on the affluent demographic, given their higher confidence in loan repayment capabilities.
Several long-standing traditional banks upheld the status quo of a saturated market dominated by only a few banks. The country’s five bank asset concentration, a measure of the five largest banks as a share of total commercial banking assets, has long been around 80%. This bank concentration in the US is around 50%.
The lack of competition led to a complacent market landscape and sluggishly operating banks. Performing simple tasks such as opening a bank account proved to be a cumbersome process, with individuals having to endure long queues at physical branches and face extended waiting times.
Large Untapped Market of Unbanked Population
The unequal distribution of wealth in Brazil has left many citizens without access to the banking system. This substantial unbanked population, in need of financial services, has been overlooked by traditional banks. The lack of accessibility has created a considerable opportunity to cater to the needs of this untapped market.
Fintech companies capitalized on the opportunity presented by technology to meet the demand for faster and cost-effective financial services. Millions of Brazilians have managed to get access to banking services thanks to the help of fintech companies.
Increased Adoption of Technology
Consumer behavior has shifted towards digital and mobile solutions, providing a consumer-friendly and convenient alternative to traditional banking. The rapid adoption of smartphone usage is evident, with over half of the adult population now having internet access through a smartphone, constituting 54% of adults. Considering the common practice of families sharing a single device, eMarketer estimates indicate that 120 million Brazilians access the internet via smartphones. This positions Brazil as the fifth-ranked country globally in terms of smartphone usage.
This widespread access to technology has facilitated the growth of fintech solutions, making it easier for companies to reach and serve a broad customer base. With internet connectivity, even populations in remote areas can now be serviced.
Regulatory Support
The Brazilian government showed a willingness to support and regulate the fintech sector. Regulatory frameworks were established to encourage innovation while ensuring consumer protection and financial stability. This supportive environment has attracted entrepreneurs and investors to the fintech space.
Receptive Entrepreneurial Ecosystem
Brazil has a vibrant entrepreneurial ecosystem that fosters innovation, with São Paulo being its economic heart. At times, fintech companies compete directly with traditional banks, yet they also frequently collaborate with these institutions. Such partnerships enable fintech companies to reach a broader customer base and harness the credibility and infrastructure of traditional financial institutions.
Brazil Fintech Giants Listed in the US
Nubank
Ticker: NU
Listing: NYSE
Market Capitalization: $39.47B
Nubank is a Brazilian neobank founded in 2013 to promote financial inclusion in Latin America. The company reinvented financial services through digital innovation, offering financial services such as mobile banking, credit cards, personal loans, and digital payment solutions. Its business model focuses on a customer-centric approach through a user-friendly mobile app that challenges traditional banking models and brings low-cost service, empowering the unbanked in the region. Nubank started its journey in Brazil and expanded to Mexico and Colombia with 90 million customers, becoming a leading technology company on a global scale.
PagSeguro
Ticker: PAGS
Listing: NYSE
Market Capitalization: $3.88B
PagSeguro is a Brazilian fintech company focused on providing payment solutions for businesses. Founded in 2006, it offers a range of services, including point-of-sale (POS) systems, online payment tools, and financial services to 30 million customers. PagSeguro aims to simplify transactions for merchants and enhance the overall payment experience. They also offer their customers a rental-free payment device, called Moderninha, for offline payments.
StoneCo
Ticker: STNE
Listing: NASDAQ
Market Capitalization: $5.60B
StoneCo is a Brazilian fintech company founded in 2012, specializing in providing payment processing solutions and financial services for micro, small and medium businesses (MSMBs). The company streamlines transactions for merchants using cutting-edge technology such as POS systems and mobile payment solutions, this company. They aim to help streamline their clients’ operations, allowing them to efficiently manage and expand their businesses and conduct commerce seamlessly across in-store, online, and mobile platforms.
Inter & Co
Ticker: INTR
Listing: NASDAQ
Market Capitalization: $2.16B
Banco Inter was founded in 1994 and started its journey as a traditional banking facility. In 2017, the company pivoted to become a dedicated fintech player due to the significant increase in digital accounts. Opening used to be a cumbersome process in Brazil with long waiting lines, and Inter managed to fulfill the need for a more efficient and quicker alternative. The company continues to break financial barriers and expand its international operations to the US.
XP Inc
Ticker: XP
Listing: NASDAQ
Market Capitalization: $14.43B
Established in 2001, XP Inc. has evolved into one of the major brokerage firms in Latin America, offering financial services such as investment advisory, brokerage services, and asset management. The XP Platform provides clients access to diverse investment products such as securities brokerage, fixed-income securities, mutual funds, hedge funds, private equity funds, derivatives, credit cards, loans, insurance, and more. In a region where financial literacy remains low, the company strives to empower individuals through in-person and online financial education courses, complemented by a user-friendly platform for trading and managing investments.
Stock Performance of Brazilian Fintechs in 2023
The best-performing Brazilian fintech stock for 2023 is Inter & Co, with a YTD performance of 212.50%. Despite flying somewhat under the radar compared to Warren Buffett-owned counterparts, Inter & Co has seen a remarkable surge in revenue. Originating as a conventional bank, Inter & Co successfully transformed into a digitalized entity, leveraging technological innovation without embracing the high-risk appetite associated with some neobanks.
Despite a generally good year for Brazilian fintech stocks, most of them are still trading below their IPO prices and far from their all-time highs. However, Inter & Co is a standout in this regard, having exceeded its IPO price. This achievement is largely attributed to the fact that the company only recently entered the public market in June 2022.
Challenges Ahead for Brazilian Fintechs in the Coming Year
The Brazilian Federation of Banks (Febraban), representing major banks, filed two complaints with the Central Bank of Brazil. It alleges that fintechs Mercado Pago, PagBank, PicPay, and Stone are engaged in irregular and fictitious operations, discreetly charging consumers interest under the guise of “pirate interest-free installments.” If proven, these practices could be considered unauthorized or fraudulent, raising serious concerns about their legality and potential penalties.
Febraban’s first complaint alleges that PagBank, Stone, and Mercado Pago are using a “buyer installment” scheme, charging interest to consumers while falsely recording transactions as “interest-free installments.” This tactic is seen as a way to shift receivables anticipation costs to commercial establishments, potentially increasing reliance on interest-free installments and contributing to higher credit card interest rates.
Febraban’s second complaint targets Mercado Pago and PicPay, accusing them of engaging in “financial engineering” to provide interest-bearing loans to consumers. The companies allegedly record these transactions as “interest-free installments,” violating credit card brand rules and regulations set by the Central Bank and the National Monetary Council.
Furthermore, credit card usage was considered a tool to empower financially disadvantaged individuals in Brazil. However, many Brazilians have found themselves in a cycle of debt, burdened by high-interest obligations that are difficult to settle. According to the Central Bank of Brazil, the average percentage rate (APR) on consumer credit cards in the country is a staggering 431.6 percent, compared to an average for US cards ranging between 20.7 percent and 24.6 percent.
Brazil’s Congress has passed a bill to control the interest rates charged on credit card debt. The bill limits the amount of credit card debt to 100% of its original amount. This move aims to reduce the interest rates of up to 450% annually currently charged to consumers who fail to make timely payments.
