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In Brazil, Start-Ups Go Toe-to-Toe with Banks on Credit

As Fintech start-ups bloom in Brazil, authorities are faced with the challenge of regulating these new companies, in a way that proves to be safe for clients and without hampering their growth.

Mar 28, 2017 // 12:49PM

The financial world has been taken by storm as new technologies and start-ups compete for market share with traditional service providers, and in Latin America, Sao Paulo has become a hub for such firms.

Fintechs found fertile ground in Brazil, in large part because almost 50 million people are currently excluded from the traditional banking system, creating room for alternative service providers to step in.

This is one of the reasons the number of fintech start-ups operating in the country has risen so sharply in recent years, from about 40 in 2014 to 244 in 2016.

Of the start-ups operating in Brazil, 31% are dedicated to payments & remittances, 15% to enterprise financial management – with collections being an important sub-segment – while lending start-ups (including both P2P and balance sheet lending platforms) account for 12%.

Brazil also has the largest number of fintech companies operating in wealth management, with almost half of them developing automated wealth management services or robot-advisors.

New Challenges for Regulators

So far, the global role model for fintech regulations has been the UK in particular and Europe in general, which have adopted a much more open approach and more flexible standards than other regions, allowing these firms to blossom with relatively little regulatory friction.

These start-ups in Brazil are currently regulated like other financial institutions by the Central Bank, which in its 2016 report included a section on fintech companies. In the report, it highlighted the role these companies have had in creating new, innovative banking solutions, and credited fintech companies with offering financial services at lower costs on average and reaching segments of the population that are typically excluded from traditional banks.

Organizations like Associação Brasileira de Crédito Digital (ABCD) and other similar groups are seeking to protect and promote fintech companies, and have stoked discussion on new ways of regulating the fintech industry without creating barriers – the biggest of which being the cost-prohibitive nature of licensing, the overcomplexity of the exemptions regime, and restrictions around foreign investment in the country’s financial sector.

According to Bruno Diniz, founder of Inner Core, a fintech company operating in Sao Paulo, many fintechs directors are currently in discussion with both the Central Bank and Securities Commission (CMV) on regulatory reform.

“The Central Bank is trying to copy the European model in how to regulated the fintechs.”

For Rodrigo Ubaldo, president of the Associação Brasileira de Fintechs (ABFintech), one of the organization trying to help devise new ways to regulate these companies, Brazilian authorities are still behind the trend.

“The regulatory discussions are still very superficial, as we are still in the process of understanding the disruption they might cause to the sector”.

Diniz also said the Brazilian authorities are not the only ones taking notice of the impact these companies are having in the financial industry; banks are increasingly looking to catch up with their younger, more nimble competitors.

“Financial institutions in Brazil are realizing the importance of investing in technology and they don´t want to be left behind, or be caught off guard like their European peers,” Diniz said.

Fintechnically Not a Bank

These companies are becoming a more attractive prospect for investors both in Brazil and abroad, and have demonstrated an ability to raise funding through capital markets. They are also encroaching on banks’ prized territory: large secured lending transactions.

Creditas, a no-frills secured lending platform provider, raised US$19mn in March this year in equity and debt funding. The funding round was led by IFC, with participation from Napster's Fintech B.V. and existing investors Redpoint eVentures, Kaszek Ventures, QED Investors, and Quona Capital.

Sergio Furio, Creditas’ CEO, said the company is “an originator of high quality secured lending including home equity and auto loans. Once originated, Creditar offers this credit to institutional investors and traditional financial institutions. Creditas also structures funds to securitize the loan originated”.

“Creditas supports its customer loans both through investors and financial institutions, in a win-win partnership that provides efficiency for the entire industry. Core products include a version of home equity and auto loans, in which the borrowers offer their residences or vehicles as collateral for first-lien lending products”.

Furio said that the purpose of the company, which like many comparable platforms, disintermediates borrowers and investors, is to “tackle the high borrowing cost problem of the Brazilian population by reinventing the secured lending experience using technology and data as efficiency drivers.”

With the government looking to stimulate SME growth in Brazil and the banking sector still somewhat distressed, we could see companies like Creditas continue to flourish – but only if the regulatory regime does not impose too high a cost on these companies.

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