Is Brazil the epicenter of fintech?

In a word, yes.

In December last year I and my cofounder spent a week in Brazil & Argentina; Our goal was to meet some of fintechs we had read about over the years and see what lessons we could take back for Carbon, a credit-led digital bank we co-founded, and the Nigerian fintech ecosystem. It probably wasn’t the best idea to time our visit in a week when Brazil played two World Cup matches and I will never forget the experience of trying to get an Uber in Sao Paolo 90 minutes before a Brazil match. But the most lasting memories will be of a fintech ecosystem set up for all parties to win; startups, regulators, economy and most importantly perhaps, customers.

Brazil has a history of hyperinflation and severe economic shocks and it could be this environment that has influenced the type of finance ecosystem that exists today. In this article I would give examples of why I expect to see a lot of fintech innovation spurred on by the Brazilian Central Bank in partnership with other regulators. They have deliberately worked to build a thriving financial system that has promoted competition whilst increasing customer value, established an innovative licensing system that allows for appropriate risk taking whilst protecting the consumer.

Payments is such critical infrastructure that its no surprise that across the globe, many of the largest startups are companies that enable payments. The role of the regulator is key in the development of fintech especially with payments as fundamental infrastructure. The fortunes of companies and ecosystem have been linked to acts of (c)ommission by local regulators. Witness Alipay's canceled IPO, or Paytm's explosive growth and you will see the direct hand of a regulator behind.

On the other hand, the lack of regulatory clarity can also inhibit an industry and the prime example is the Untied States where many leading crypto practitioners and companies have been begging the government for guidance. Sudden unexpected regulation can also backfire - India’s redenomination of the rupee is one example that comes to mind that arguably set back the ecosystem whilst inflicting significant damage; or the granting of PSB licenses that were returned by most practitioners.

The System

The Brazilian Central Bank seems to have taken a Little Red Riding Hood approach with regards to regulation (not too hot, not too cold) that most participants would describe as fair, and perhaps has the most innovative framework globally. The Brazilian financial system has been able to foster competition and innovation thanks to an innovative approach to licensing that allows new companies to provide financial services quickly without overbearing regulatory requirements at the early stages of the company's life. The result is increased competition across all verticals which benefits customers but also an environment where new ideas can flourish without a need for disproportional capital requirements.

Innovative Licensing

The most successful example is Nubank. Probably the most successful digital bank from Brazil and now listed on the New York Stock Exchange, Nubank started with an e-wallet (pre-paid) license which required regulatory capital of $400k, then acquired a post-paid license with another capital minimum of $400k. Both licenses fall under the "Payments Institution" framework in Brazil; Rather than a requirement to hold shareholders fund according to Basel Accords like traditional banks, all Nubank had to do was ensure its equity was greater than the 2% of the average transaction volume in the preceding 12 months. Nubank would provide credit facilities, through a partner bank, and then buy these loans back onto its balance sheet.

Nubank then acquired a third license (Financeira) [under the Financial Institution Framework] with a $1.5mm regulatory minimum to allow it take time deposits, lend directly and take on leverage. None of these three licenses are banking licenses but together allowed it to provide equivalent services to legacy banks in which it was in competition.

Consumer Protection

The Brazilian system shines in the way it protects customers. In payment institutions which have lower regulatory requirements, all customer deposits must be invested overnight in government bonds thus preventing misuse of customers funds that is commonplace in many markets.

Perhaps more draconian is the requirement that the owners of banks have to provide personal guarantees as a precondition for a license. I am sure you will agree that there is no greater alignment between customer and shareholders.

Forward looking

In December 2022, Brazil signed a regulatory framework governing the use and regulation of bitcoin and providing clarity into the governments views crypto as an asset or potential medium of exchange. This is in sharp contrast to other markets, particularly the United States, where industry players cite the lack of clear regulation as a reason why the development and growth of the crypto industry is moving to emerging markets and/or Asia.

Brazil's doors are open to the world with minimal restrictions on foreign participation. There are rules on establishing a presence in Brazil but today I as a Nigerian could set up a credit card issuing operation in Brazil. I wouldn't because the big dog that is Nubank would bite my head off but you get the point.

A great example of the co-ordination by the Brazilian Central Bank is the way in which in bad debts can be securitised and sold to both local and foreign investors via a Receivable Investment Fund (FIDC). This allows financial institutions exchange their loan assets for cash today and focus on their core business of lending without having capital stuck with borrowers. Investors in these securitized consumer loans are taxed at 15% on capital gains giving them an added incentive to participate in the Brazilian market. No surprise then that the likes of Goldman Sachs are very active investors in the Brazilian market. Low taxes on high yielding emerging markets debt? Yum yum 😋

A massive market

You can have a great financial system but who cares if the addressable market is small? Brazil is the 12th largest country by GDP and 6th by population. Its GDP capita however is only $7,500 which puts it outside the top 100 countries!!! This for me though is the opportunity and what the fintech revolution taking place can contribute significantly to. And as the giant of Latin America, strong players in Brazil will be able to achieve more scale across the continent where there are already well established trading agreements under Mercosur.

Bringing it home

There are many parallels between Nigeria & Brazil beyond our love of football. A large population and GDP, relatively low GDP per capita but a huge opportunity to achieve scale across Africa. Nigeria can be a hotbed of innovation but the ecosystem around local capital & investment will be critical for institutions to achieve scale. Brazil is a good example of how a Central Bank can balance the need for innovation to foster competition and customer value whilst protecting these same consumer as well as the financial system. The recent announcement of the regulatory sandbox by the Central Bank of Nigeria is a great step in the right direction and there are other lessons to be drawn from the Brazilian model.

And in fairness, there are things to learn from Nigeria. As an example Brazil's government sponsored instant payment system, Pix, was launched in 2021 to wide acclaim and now dominates over other platforms. In Nigeria, NIP, which plays a similar role was launched a whole decade before!!

Perhaps the message is more around the exciting opportunities that exist in large emerging markets like Nigeria & Brazil. With a lot of gaps in existing infrastructure, the role for fintech and other tech startups is significant especially in leapfrogging old or redundant technology.

Picasso is reputed to have said "Good artists borrow, great artists steal". In the same way that startups globally copy & paste, I hope that regulators in emerging markets are looking to steal innovative ideas from one another. I am all for that!

Special thanks to Julia de Luca, Bruno Balduccini, Fernando Gomes, Rafael Ferraz and Pedro Leduc for their insights into Brazilian regulatory regime.

Any factual errors in the article are mine

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