Rising rates test the fintechs that have shaken up Brazilian banking

No other moment captured the investor euphoria around Latin American fintech quite like the New York Stock Exchange debut of Nubank.

A first day “pop” in the Brazilian start-up’s shares late last year briefly vaulted it to the position of the continent’s most valuable financial institution, worth almost a staggering $50bn. 

The exuberance did not last long. Today, the nine-year-old company, which counts Japanese technology conglomerate SoftBank and Warren Buffett’s Berkshire Hathaway among its shareholders, is trading about two thirds below its peak.

Without doubt, Nubank is just one of the many casualties of the wider global sell-off in tech equities. But its slump also reflects macroeconomic clouds casting a shadow over Brazil’s flourishing financial technology sector.

The nascent industry has proved a rare bright spot in South America’s largest economy in the past few years. Local brands such as C6 and Creditas have surpassed “unicorn” status, the coveted tag for a privately owned enterprise valued at $1bn. Now, though, high interest rates, double-digit inflation and a weak economic outlook are testing the sector.

“There are doubts surrounding the sustainability of some fintechs,” says Bruno Diniz of São Paulo-based consultancy Spiralem. “Surviving in a scenario of scarce capital while in the growth phase is a big challenge some will face.”

In a country where millions were long underserved by mainstream lenders, app-based providers of loans, current accounts and investments have shaken up a banking oligopoly once infamous for bureaucracy, expensive loans and charging fees for basic services.

But the historically low interest rates that helped them thrive are over. Brazil’s central bank has pursued an aggressive response to price rises, lifting its Selic benchmark rate from 2 per cent to 12.75 per cent in little more than a year.

The concern is that challengers will struggle to pass on increased financial costs to consumers, especially those in lower-income groups. “Now we have this environment of higher interest rates, we do believe they will be challenged to continue gaining market share and competing with banks,” says S&P Global Ratings analyst Cynthia Cohen Freue.

Another worry is that the disadvantaged demographics targeted by certain Brazilian neobanks are more vulnerable to erosion of income, risking an uptick in “delinquency” — when borrowers fall behind on payments.

Brazilian payments processor Stone offers a sobering warning. Once a darling of Nasdaq, it expanded into credit for small and medium-sized enterprises, but then ran into difficulties and last year paused lending.

Two factors could prove key for other fintechs. The first is how well capitalised they are. Those with cushions from recent fundraisings will be better placed to weather any storms — or withstand squeezes on profitability.

Take Neon, which became a unicorn this year with a $300mn injection from Spanish bank BBVA. So far this Brazilian fintech has not repriced credit, according to managing partner Jean Sigrist. “In certain situations we don’t want to compromise growth, so we accept operating with smaller margins,” he says.

The other important element is how credit operations are funded. Many Latin American fintechs have relied on the securitisation of loan and credit card portfolios, or wholesale funding from banks, potentially leaving them exposed to interest rate fluctuations and capital market volatility.

Retail deposits, by contrast, tend to be cheaper and more stable. Nubank touts this aspect of its balance sheet, along with the cash pile from its initial public offering. While its lending rates have gone up, chief financial officer Guilherme Lago says: “We continue to charge no fees and for personal loans, we still price at about 20 to 25 per cent below the industry average for certain risk cohorts.”

Indeed, Nubank’s first-quarter results belied the downbeat share price. Net losses fell to $45.1mn from $54mn a year earlier while revenue more than tripled on the same period a year before to $877.2mn. Although delinquency rose, the company said it was below pre-pandemic levels.

Even if Latin America remains relatively unpenetrated for financial services, in Brazil the competition is cranking up. Televisions and bus stops are full of adverts by fintechs and old-school banks now piling resources into digitalisation. “There may be consolidation,” says Nubank’s Lago. “Maybe some fintechs will have to shut down and stop operating in certain segments”.

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