10 Fintech Trends from Brazil
By Travis Foxhall and Pete Casella
At Point72 Ventures, we’ve been active investors in fintech startups across both developed and emerging markets including Asia, the Middle East, and Latin America since 2016. Coming out of this year’s Web Summit in Rio de Janeiro, here are 10 key trends we observed in Brazil:
1. We have never felt better about investing in Latin America
Latin America experienced a funding boom in 2021 with record venture capital inflows to the region. While this was a great vote of confidence for a historically under-capitalized tech ecosystem, the influx resulted in frothy valuations as many investors underwrote entry pricing and exit outcomes in line with developed market comps. Pricing for startups has come back down to earth since then as publicly traded fintechs from the region such as digital bank Nubank, cross-border payments platform dLocal, and others have traded downward. As funding in Latin America dried up in response to public markets volatility and macro headwinds, most startups have responded by cutting costs or raising bridge financings to extend runway or find a path to profitability.
Despite these headwinds, we believe the quality of founding teams at the seed stage has only gone up, because difficult environments demand the determination that we typically see in more seasoned entrepreneurs. Meanwhile, venture capital funds in both the US and Latin America still have significant dry powder to deploy, albeit that investments must meet a higher bar than in the past. We believe the confluence of these factors – a return to reasonable pricing, high quality founding teams, and a captive pool of capital ready to be deployed to the best companies – is likely to result in one of the best venture capital cohorts in Latin America to date.
2. Favorable regulation from the Brazilian Central Bank is creating opportunities for fintechs
The Brazilian Central Bank has been highly proactive in introducing new regulation and licenses with lower capital requirements to increase competition in the financial system.
For example, new licenses were first introduced to end the merchant acquiring duopoly held by incumbents Cielo and Rede, enabling StoneCo and PagSeguro to take share and eventually go public. Likewise, digital bank Nubank would not have been able to break up incumbent banks’ oligopoly without the introduction of a new electronic payments license, and the same is true of secured lender Creditas benefiting from a new direct lending license.
We believe ongoing regulatory changes from the Brazilian Central Bank will sustain this trend, opening previously un-tapped profit pools to digital entrants and producing the next wave of fintech winners in the country.
3. Instant payments are ubiquitous in Brazil, but the underlying infrastructure has growing pains
Brazil’s real-time payments network is seemingly everywhere – on a recent trip, we even saw the Pix logo emblazoned on the shirts of sellers hawking beers and sunglasses on the beaches of Rio de Janeiro. Adoption has exceeded expectations, with Pix outpacing India’s equivalent UPI launched only a few years earlier.
Notably, Pix brings benefits over legacy rails – the network rolled out by the Brazilian Central Bank is free, available 24/7, and can be used by both consumers and merchants. However, it does come with some pain points – for example, offline merchant acceptance is still cumbersome, with many consumers opting to use physical cards or NFC at the terminal, and fraud remains a major concern.
While the Brazilian Central Bank is in the process of rolling out additional features to the network including automatic debit and installment functionality, we believe fintech startups have a compelling opportunity to build on top of or solve for gaps in Pix’s functionality.
4. Brazil is positioning itself as a global crypto and digital assets hub
Even as other countries have increased regulatory scrutiny of digital assets in the aftermath of the downfall of FTX, the president of Brazil signed a bill in January 2023 enabling crypto payments, and in December 2022 the Brazilian Central Bank announced plans to launch its own digital currency, known as real digital, as soon as next year.
We are most excited about business models that will enable the roll-out of the real digital, as well as platforms focused on digital asset tokenization, reducing bureaucratic intermediaries responsible for packaging assets ranging from real estate to agriculture receivables.
5. Once highly opaque and inefficient, Brazil’s credit markets are going fully digital
A recent regulatory change by the Brazilian Central Bank mandated acquirers to register all merchants’ credit card receivables into centralized registrars such as Nuclea and CERC.
Following the major accounting scandal at Brazilian retailer Americanas, we believe regulators are likely to expand the scope of the registrars even further to encompass other receivables, known as duplicatas, including supply chain finance. In tandem with this trend, we anticipate many of these receivables will also eventually be tokenized via the blockchain as well.
We believe this will create new use cases for fintech, and for digital assets startups looking to package and provide liquidity against these tech-enabled assets. Likewise, we believe fintechs can also create more efficient back-office infrastructure for originators managing complex credit operations, including orchestration across multiple receivables registrars.
6. The confluence of embedded fintech and open finance is creating novel business models
We believe Brazil has a mature ecosystem of fintech infrastructure startups providing a variety of modular financial services from embedded banking to insurance, as we described in a prior blog post. At the same time, the Brazilian Central Bank has been pushing a progressive open finance agenda, mandating that banks open up data aggregation capabilities and enable payments initiation.
We believe this unique confluence of modular fintech capabilities and open finance functionality is enabling startups to launch new products quickly and at low cost, or even create entirely new business models that aren’t possible in developed markets due to a lack of enabling infrastructure or regulatory constraints.
7. Consumer fintech is over-saturated, while the B2B space is just getting started
Consumer fintechs such as digital bank Nubank and secured lender Creditas paved the way as first movers, with a number of competitors launching shortly after to fill the product or demographic gaps left by market leaders. Compared to the consumer fintech market, we think the B2B space in Brazil is still early days and presents a greenfield opportunity.
Against this backdrop, it remains to be seen which fintechs will win the race to serve small businesses and enterprises in Brazil. We have seen startups tackle this segment with different initial wedges – some led with digital banking as the hook, others with spend management software, verticalized capabilities such as FX for import / export businesses, and others touting AP / AR and cash management as the winning formula. We are monitoring this space closely and are excited to see who comes out on top.
8. Entrepreneurs are expanding beyond copycat models to solve local pain points
Many early movers in Latin America tropicalized business models from US or Europe, and we have seen quite a few startups approach fundraising by pointing to successful international comps. While this copycat strategy has proven fairly successful, most of the obvious models have already been attempted. As such, we anticipate more entrepreneurs to develop home-grown solutions that target unique pain points in Brazil.
Examples include the digitalization of meal cards, known as vale refeição, new takes on payroll lending, or crédito consignado, easy loan and direct deposit switching, or portabilidade, tech-enabled alternatives to Brazil’s notoriously bureaucratic notaries, called cartórios, and super-charging legacy investment advisors, known as agentes autónomos. Some spaces remain relatively untouched, such as the private pension space, or previdência, and lending circles, known as consórcio.
These unique approaches are fondly referred to as jabuticaba by entrepreneurs, which is a fruit that can only be found in Brazil. They are often associated with some of the largest remaining profit pools in the country that have yet to experience tech-enabled disruption. We believe they can be compelling opportunities for those investors who take the time to understand the local nuances.
9. Generative AI adoption is a global phenomenon, including in Latin America
The generative AI phenomenon is not constrained only to developed markets, with major platforms such as OpenAI’s ChatGPT also available in Brazil.
While we think the next set of foundational models are more likely to be developed and refined in the US or Europe, we are already seeing early movement from teams in Latin America building or incorporating compelling use cases at the application layer.
In a region where many business functions are highly people-intensive due to cheaper labor costs and a lack of automation, there is interest from financial institutions, corporates, and startups in the region to incorporate generative AI, tackling use cases ranging from streamlined customer service to synthesizing legal documents.
10. Brazil is primed to become a leader in climate tech and decarbonization efforts
Home to the Amazon rainforest, Brazil has an opportunity to be a leader in climate and conservation technology. Startups are enabling both local and international companies to calculate and offset their carbon foot print with certified projects in Brazil, and many have global ambitions. We think that this space, though in its early days, has major fintech product implications, and is certainly worth watching in the coming years.