Financial services in Brazil are primed for disruption. Here’s why.

Published in

MAR ventures

10 min readAug 1, 2018

Silicon Valley tends to come to people’s minds when they think about tech. However, as true as it may be that some of the world’s most promising technological developments are conceived in California, emerging markets (EMs) are the center-stage of many disruptive solutions.

Brazil proves the point both as the world’s 9th largest economy and as an up-and-coming player in the tech scene. Recently, the Brazilian startup ecosystem has been heating up with rise of Latam-focused venture capital firms, as well as an increasing number of IPOs and big funding rounds from global top-tier VCs.

What gets VCs excited about emerging economies like Brazil is that these markets offer big chances for asymmetrical plays. By investing in early stage startups, funds can diversify their portfolio (and thereby dilute risks) at a reasonably cheap price while putting their money into businesses with significant potential returns.

Even amidst an unstable economic scenario, VC investment in Brazil rose from $279M in 2016 to $859M in 2017 — a whopping growth of 208%. Moreover, capital deployment in later stage companies also showed a significant increase last year.

Capital deployment per stage in 2017 (in millions). Source: Diego Gomes and Dealbook

The case for fintech

As the most populous country in South America (with over 200 million people), Brazil accounts for 35% of Latin America’s GDP and is a huge market for startups. What investors and entrepreneurs should have in mind, though, is that many industries in Brazil are plagued with inefficiencies — primed for the emergence of new, more competitive players.

Financial services happen to be a perfect example of a sector begging for disruption. As of now:

Brazil’s top five banks, excluding development banks, hold 84 percent of total loans.
The country has one of the highest spread rates in the world.
People in Brazil pay an average of more than 300% a year for unsecured overdraft.
More than 30% of the Brazilian population remains excluded from traditional banking services.
The more than 50 million brazilians without access to financial services represent a potential market of about $169 billion as of July 2018.

Spread rates in Brazil are among the highest in the world. Source: World Bank

And there’s more: according to research done by the consultancy firm Minsait, people in Brazil pay about 9 times more to have a bank account in a traditional institution than in a fully digital bank (considering costs related to withdrawals, maintenance fees, bank statements and money transfer fees).

Traditional banks are far more expensive than their digital counterparts. Source: Minsait

For a long time, big banks got away with all of this, but things are changing fast. More affordable and user-centric players in the Brazilian financial sector are showing up with solutions aimed at increasingly digital consumers, with ever growing demands for practicality, transparency and customized services. Examples include companies like GuiaBolso and BeeTech.

Also, it should be noted that traditional banks in Brazil aren’t very tough competition when it comes to the quality of their services. In the second quarter of 2018 alone, Brazil’s Central Bank has registered 10.110 complaints about financial institutions, including issues regarding inadequate information about products and services, undue expenses and irregular changes in investments.

With all this in mind, Goldman Sachs predicts that Brazilian companies aimed at financial tech should generate a potential revenue pool of about $24 billion over the next 10 years.

The forecast looks bright: Brazil stands out as the country with the most (and biggest) fintech initiatives in Latam. Since 2016, the number of Brazilian enterprises in the financial technology sector has tripled and there are now about 300 fintechs in Brazil. What is more: three out of four of the country’s unicorn companies are aimed at financial technology — NuBank, Stone and PagSeguro.

New regulation, new opportunities

This boom in brazilian fintech has been favored enormously by new regulations put in place by the Central Bank of Brazil in order to encourage competition in the financial sector and reduce interest rates.

A few changes worth mentioning are that companies in financial tech can now lend money without the intermediation of banks and, ever since 2010, the former oligopoly of the payments sector has been broken up. Still, there are more initiatives underway regarding cryptocurrencies, tokens and forex.

All this is very exciting because, as we’ve mentioned, financial services in Brazil offer serious opportunities in many sectors:

Loans: Sebrae expects that by 2022 there will be 17,7 million small businesses in Brazil — that means more than a million enterprises are expected to show up every year in the country. This is extremely relevant because small businesses account for more than 27% of Brazil’s GDP and SMB loans reached the R$1,4 trillion mark in 2017, which provides an immense opportunity for fintech.

Payments: In 2017, payments with credit and debit cards in Brazil surpassed cash withdrawals for the first time and ABECS estimates R$1,56 trillion will be transacted via plastic money in 2018. This sector is so heated in fact, that all three of Brazil’s fintech unicorns offer services related to payments.

Foreign exchange: Among financial services, forex is an especially untapped market — despite being a 1,9 trillion dollar sector in Brazil, there were only 9 fintech initiatives dedicated to foreign exchange in 2017 according to Fintechlab. This means there’s a lot of space for new players in the forex game, especially considering forex operations have grown significantly since 2010 as a reflex of the expansion of foreign trade, the growth of direct investments and record volumes of exchange reserves.

The digitalization of financial services

Mobile Banking is real and has already shown itself to be the preferred channel for financial services in Brazil, accounting for 34% of all transactions made in the country according to data from FEBRABAN, the Brazilian Federation of Banks. This percentage should grow, considering the progress of technological developments and that 1,6 million mobile banking accounts were opened in 2017, triple the amount of 2016.

Digital channels now account for 57% of all transactions in Brazil. Source: FEBRABAN

Next, Original and NuBank are some of the new enterprises leveraging this digital and mobile-first trend. With no brick and mortar branches, these companies are changing the game with fully digital services that make use of great UX and responsive CRM.

This approach has proven to be effective in Brazil due to the country’s considerable internet and mobile penetration. NuBank, for instance, just raised $150 million in the first quarter of 2018 and more than doubled its customer-base from about 1,3 million in 2016 to 3 million users by the end of 2017.

Anyhow, the true disruption of financial services resides in what is underway. As pointed out by Forbes Insights: Leaders from all sectors of financial services are finding ways to harness the fast-maturing capabilities of technologies ranging from big data to machine learning and artificial intelligence (AI).

What’s happening right now

Let’s face it: traditional banks, both in Brazil and the world over, have been dethroned as the sole gatekeepers of financial services. Seizing this as an opportunity, many big players are betting in fintech. Among the many examples worth mentioning are fintech-focused funds such as Ribbit Capital, QED Investors and Pantera Capital, as well as strategic investors like Morgan Stanley, Goldman Sachs, MasterCard and American Express. Below are some of the Brazilian fintech companies that have raised serious amounts of money from funds, strategic players and IPOs.

Source: CB Insights

Traditional banking institutions, for their part, are worried and rushing to keep up with emerging consumer demands. According to FEBRABAN, the Brazilian banking industry diversified its services in 2017, having invested R$19,5 billion in technology — a 5% year on year increase and a very relevant figure considering the country’s current restrictive economic environment. This trend should bring about important improvements in the services offered by banks.

In fact, many Brazilian banks have launched initiatives and incubation programs aimed at fostering innovation, like Bradesco’s InovaBra, Itaú’s Cubo and BTG Pactual’s boostLAB.

Overall, the oligopoly of big banks may soon be coming to an end, but new and old players in the financial sector alike will only thrive if they can sustain scalable value propositions. In doing so, technology is most certainly a strategic imperative.

Challenges faced

Fintech is a vertical market that demands high levels of expertise from new entrants. More so than most startups, financial tech companies need to go beyond mastering the process of developing user-centric businesses.

Wherever money is involved, delicate issues like fraud are definitely things to consider and, because of this, ventures in fintech require robust cybersecurity infrastructures and a thorough understanding of the technical aspects regarding the services they offer. Making a company scalable within financial tech also depends on proper legal consulting in order to avoid operating in gray areas in regulation.

With all this mind, entrepreneurs venturing into fintech should be aware of the need to build exceptional teams that can actually make the most out of the many opportunities that are emerging in financial services.

Our initiatives at MAR

Fintech is proving its worth as a lot more than just a way to make big money. It’s also a path toward a future in which consumers are more empowered than ever before. What tech is enabling is the rise of better and cheaper solutions that will ultimately change how we deal with money.

Here at MAR we are extremely driven on our mission to have a positive impact on society by building new platforms that will provide better access for both businesses and individuals to financial services on a global scale. As a venture builder, we partner up with entrepreneurs and operate as a co-founding entity — actively participating in many aspects of the business development process with a hands on approach.

We believe in the potential synergies and cross-selling opportunities provided by our focus on fintechs and blockchain as we operate developing digital platforms in vertical segments of a traditional financial institution with initiatives in forex, credit, payments, wealth management, etc. Below are some of our endeavors:

BeeTech: Co-founded alongside Fernando Pavani, BeeTech is an infrastructure provider for crossborder payment that is creating a global wallet that will connect companies and individuals with financial services the world over.

F(x): Founded by Dan Cohen, the venture is a marketplace that leverages AI to democratize and digitalize the access to credit for SMBs in Brazil and its platform is connected to over 180 financial institutions in the country and over 200 independent consultants.

Mosaico Digital Assets: One of our more recent endeavors is Mosaico Digital Assets, a company that is focused on building a robust infrastructure for the trading of digital assets. Mosaico was founded by Ythalo Silva and Cassiano Silvestre and the venture is a statement of our belief that we are at an inflection point in the tokenization of financial products and the broad adoption of cryptocurrencies.

The Tachyon Protocol: Last but not least, we are investing in the development of Tachyon, a blockchain protocol led by Hamilton “The Algorist” that has reached over 2.3 million transactions per second in its first tests and that is capable of being set up to comply with on chain governance for the most important aspects related to the financial market regulatory framework. Our intent is to provide an infrastructure for privacy and opacity configurations and for AML, KYC and individual identification, with both permission-less and permission-only set up alternatives. Tachyon will also come with a very friendly UX/UI to facilitate general adoption. Initially, we plan to implement the protocol in the payments sector in order to offer real time mobile payments with interoperability among other providers.

Written by Alexandre Liuzzi and Fábio Arruda