Monolith Reflects: the story of Brazil’s fintech revolution
We recently announced our plans to launch a new product called token.com. We’ll be building a simple, easy-to-use app that makes DeFi accessible to the world, and we’re heading to Brazil to launch it. A number of factors make Brazil the perfect place to begin the next stage of our journey, including its flourishing fintech scene. Brazil is home to the biggest fintech hub in Latin America, with around 800 startups in the industry today. But it wasn’t always this way. It’s only in recent years that Brazil’s fintech scene has exploded, and we think crypto and DeFi will be the next sectors to see exponential growth. This feature tells the full story of Brazil’s fintech revolution.
Legacy banking in Brazil
In Brazil, five banks dominate the country’s financial system. Itaú Unibanco, Banco Santander, Banco Bradesco, Banco do Brasil and Caixa Econômica hold an 80% monopoly of the credit market, which has left little room for competition or innovation. As a result of this landscape, the market suffers from inefficiencies. Customer complaints are common. And lending rates are as high as 37.5% — the third highest in the world behind Argentina and Madagascar.
Brazil’s banking system is often described as bureaucratic. The system is run by institutions, and people have little say in how things are done. Because the lending rates are so high, many can’t afford to take out a loan for expenses like houses or cars. Starting a business is also a big challenge.
While Brazil’s testing climate had long stifled innovation, regulatory adjustments have fostered a favourable environment for new fintech businesses in recent years. In July 2017, the Brazilian Securities and Exchange Commission changed its rules on investment-based crowdfunding, allowing platforms to offer their own securities. The following year, regulations were introduced to authorise peer-to-peer lending. Until that point, companies had to go via one of the legacy banking institutions. Throughout 2018 and 2019, new startups began to emerge amid a change in the tide.
The shift has become more apparent in the last twelve months: thanks to Coronavirus-induced lockdowns, Brazil’s leading banks have faced branch closures and mass redundancies. In the same period, interest rates have gone negative for the first time. Responding to the precarious conditions, Brazil’s central bank has begun to roll out a new open banking initiative focussed on encouraging innovation and fast-tracking the digitisation of the financial system. The move aims to increase competition within the sector. In November, the central bank launched Pix, an instant payment system allowing for instant 24/7 transfers between e-wallets.
Nubank’s meteoric rise
Of all the companies that have benefited from Brazil’s changing financial climate, one stands out from the pack: Nubank. Focused on giving Brazilians control over their finances, the digital banking firm is valued at $25 billion today. It offers customers a digital account, a credit card, loans, insurance and the Pix payment system without the hassle of dealing with traditional banks. Nubank was founded in 2013 as a fight against Brazil’s financial bureaucracy, and it’s had enormous success: its user base is over 34 million, which is more than Barclays, Natwest, RBS and Lloyds combined. Nubank is one of eight fintech unicorns in Brazil. Similarly to neobanks like Monzo and Revolut, it’s established its name by focussing on the customer experience and solving the issues many people have with the legacy system. In a country where fees and lending rates are so high, Nubank is a symbol of a new, better approach.
Many of the other startups that have followed Nubank’s lead in frontrunning Brazil’s fintech boom operate in the payments and remittances and enterprise financial management spaces. Combined, both sub-sectors make up over 40% of Brazil’s fintech startups. Several Nubank competitors have also emerged as Brazilian attitudes towards banking have changed. Dissatisfaction with the old system has helped neobanks thrive, and the disparity between the two worlds has become more apparent as new companies burst into the market.
The growth of crypto
Brazil’s fintech revolution has dramatically shaken up the banking sector, but the industry is yet to see significant developments in the most disruptive finance-related space. Crypto companies represent only 2% of Brazil’s fintech startups. While the growing interest in cryptocurrencies has spread to Brazil, it’s mostly been limited to Bitcoin to date. Crypto enthusiasts typically buy Bitcoin and other digital assets on centralised exchanges like Mercado Bitcoin. There are very few options that provide an interface to use the technology to its full potential.
Most notably, Brazil is yet to discover DeFi. The leading exchanges sell ETH, but there are few projects that tap into the magic of Ethereum. DeFi creates a way to lend, borrow, save, earn, trade digital assets and more, and it’s entirely permissionless and trustless. In other words, it offers significantly more freedom than the traditional financial system Brazil is used to. DeFi’s favourable interest rates for lending and borrowing assets are of particular importance given Brazil’s problematic credit market. DeFi recently surpassed 1.5 million users. The total value locked in protocols on Ethereum, meanwhile, hit $60 billion. That’s up 100x from January 2020. The rate of growth is overwhelming even to crypto insiders following the space daily. DeFi’s rapid expansion, coupled with its suitability for the Brazilian market, means that it won’t be long until the space starts to flourish. We will be the project to make it happen.
Brazil is going through a period of change. The legacy finance system, best known for its inefficiencies and lofty lending rates, has started to lose its standing amid regulatory developments and the move towards a digital world. That’s what has helped the likes of Nubank succeed, as Brazilians start to seek more accessible alternative ways to handle their money. Decentralised finance will come next. The Ethereum economy offers a radical change to the way humans will understand, interact with and exchange value. DeFi has created a new, magical reality in which anyone can watch their money grow in real time. And it’s already here. Like the rest of the world, Brazil will soon start to embrace its potential.
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