While the rest of the world experienced a decrease in investments made by venture capital companies, Latin America received the largest flow of capital ever seen in history and the fintech sector has been the biggest beneficiary.
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According to a survey by Finnovating consultancy, the flow of capital injections into fintech companies grew by 130% throughout Latin America, reaching $2.6 billion. Of this amount, Brazil was the country that received the most funds ($1.3 billion) and hosted the most valuable contributions in the fintech sector: Nubank ($400 million), Inter ($341 million) and Creditas ($231 million). Without a doubt, 2019 was a year to stay in the memory of Brazilian companies but what about 2020?
Banking the unbanked
According to data released in August 2019, by the Instituto Locomotiva, Brazil has 45 million unbanked people. In other words, a population that doesn’t have a record in any of the traditional banks, or that hasn’t made any movements in its account for more than six months. According to the institute, the population moves $189 billion (BRL 817 billion) per year.
In parallel, Brazilian are a highly digitalized group of people. The 2019 edition of TIC Domicílios, a survey that annually analyzes user behavior on the web, identified that 70% of the entire population (the equivalent of 126.9 million people), access the internet on a regular basis, performing activities such as searching for prices, placing orders, or requesting application services.
Combining these two factors makes it easier to understand how offering a financial service through a digital medium is a market with great potential. In fact, the fintech sector witnessed a significant increase in companies during 2018 and 2019: the 377 startups existing in the first year, became 504 companies in the next analysis, a jump of 34%, according to a Finnovation survey.
Bubble or boom in the fintech sector?
Such a significant growth in such a short period could be the beginning of a saturation movement by concentrating a large number of companies providing similar services but that is not the perception of the market. “I can’t believe we’re living in a bubble. I believe that we are experiencing a movement from the banking part of the financial sector. Those who had a large bank account are going to a fintech,” said Cláudio Sertório, leading partner in financial services at KPMG in Brazil.
According to Sertório, the growth of this sector come from a series of factors, such as cost reduction (due to lack of physical space and legacy system), a product created to be used by smartphones and a more user-centered service. “All of this began to combine and open important doors for the financial industry, with the possibility of cost reduction combined with a generation of new consumers who wanted to have a better experience with banks and the financial industry as a whole,” he explained.
All this movement to digitize the banking experience has increased the confidence and use of products marketed by fintech. According to a Brazilian study and the money, from MindMiners, between 2017 and 2019 more than doubled the number of Brazilians using some service from these new companies – from 25% to 55%. Fintechs have established themselves as the most attractive startup’s group by at least one of the following factors: including people who didn’t have access to items like a credit card and also present greater care with the user experience. Despite the good timing, companies in the sector already know that they will need to adapt to a new reality throughout 2020 to remain relevant.
Looking for the plan
The 2019 edition of the Fintech Deep Dive Survey, conducted by the PwC consultancy in partnership with the Brazilian Association of Fintechs (ABFintechs) used the profile of 205 companies surveyed to define the general scenario of this field in Brazil. From the analysis, it is possible to see how the great majority of startups involved in this scenario go through the same difficulties as those faced by any company in another segment.
According to the survey, 62% of the companies are at the beginning of the operation, with clients and revenues below $1 million (BRL 5 million). Of all of the companies surveyed, almost half have a maximum of 10 employees, with 47% receiving no investment and 43% point out the difficulty of obtaining resources as the main barrier to business management. In other words: a scenario not very unequal from that faced by other startups.
When it comes to business models within the fintech market, more than half of the companies operate in only three segments: means of payment, credit (which includes financing and debt negotiation) and digital banks. These services receive the most outside capital. According to information from the study conducted by Finnovating, 51.7% of all money invested in fintech in Latin America was directed to the creation of the so-called “neobanks”; while the credit-focused fintech received 29.68% of this total and the payments division received 8.68%.
However, going down that same path is not a safe bet. All experts believe that small fintech can only stand out in the market if they offer a different service from what is already offered by the best-known companies and good enough to attract customers’ attention.
Being different is essential
“If the company doesn’t have a real added value for the client it doesn’t sustain itself,” said Luis Ruivo, a partner at PwC and one of the people responsible for the research in partnership with ABFintech, “The brand may be attractive at first, but the client needs to see this value.” How can the new startups establish themselves? One way may be to segment your product to a certain target audience.
“I see [that moment] as a matter of wave. The first wave was fintechs providing a quality service to the dissatisfied public with traditional banks. Were on the second wave now, and companies need to focus on a niche to serve the section of the public that is not on the radar.” said Bruno Diniz, co-founder of the financial consultancy Spiralem and founder of the book The Fintech Phenomenon, which explores the expansion of this market in Brazil. As an example of companies heading in this direction, Diniz mentioned Fintechs Linker and Cora, with specialized services to attend small and medium companies, and Target, a digital bank focused on truck drivers.
With the scenario where customization is the keyword, new technologies are gaining more and more space to increase the competitiveness of these companies. According to the Fintech Deep Dive study, investment in artificial intelligence and machine learning models are seen as a priority among businesses, because of the ability of these tools to deliver the most appropriate service for each client’s needs.
“Companies can use them to monitor economic indicators and regulate the client’s portfolio,” explained Ruivo of PwC. “On the marketing side, [machine learning] can create predictive models to understand whether the customer has a propensity to buy a certain product and target campaigns to encourage it. These are examples that generate value.” Despite the considerable challenge of standing out in a disputed market and with consolidated companies, companies operating in the sector have the advantage of being active during a time when the government is about to release services that will promote major changes.
News on the way
Among the new services that reach the financial market, is the Instant Payment System (SPI), whose implementation will begin at the end of this year and will allow the transfer of values between accounts during seven days of the week, 24 hours a day. Another novelty is the authorization for the practice of Regulatory Sanbox, which will allow the experimentation of new products within a regulated environment, and with fewer legal restrictions, in order to foster innovation in the market.
However, it is undeniable that the most commented-on update meets the name of Open Banking (also known as Open Financial System), whose more consistent use will be visible from 2021 onwards. Open Banking will allow the consumer to have mobility about his financial information, being able to use it in other banking institutions besides the one he is a customer and has an account with – and each data exchange between banks only happens with the consent of the user in question.
This “transport” of data will occur through the standardization of APIs (acronym for application programming interface) interfaces that talk to other systems to share data. With all institutions using similar technology, the client will be able to, for example, to hire a product from a bank and allow that institution to access the database that it already has in another company.
For Chen Wei Chi, EY’s partner in Financial Services for Digital Transformation and Innovation, the implementation of Open Banking has the potential to greatly improve the bank’s relationship with its customers, as there will be no imperative need to change banking institutions to obtain a particular benefit. “With open banking, the bank can serve the client in everything. Both in providing services to a part [of the system] where he owns all the revenue and even that part where he is not so good.”
Launched at the end of 2015 in Europe, the Open Banking concept is already applied in some countries. The Global Fintech Adoption Index report, produced by EY, brings as an example the case of Yolt, a service created in the Netherlands and also used by users in the UK, Italy, and France. It allows users to check in a single app their unified financial information, as a balance in each of the banks in which it has account and credit card bills.
The place of the banks in this new moment
Like fintechs, traditional banks will also benefit from the implementation of new technologies. However, they will need to invest in innovations in order not to lose competitiveness, especially after the release of open banking. “What can happen is for banks to become an infrastructure service, in the same way, you buy sanitation or telephone infrastructure,” explained Rafael Pereira, president of the Brazilian Association of Digital Credit (ABCD).
According to the executive, the challenge present within these institutions is to foster an incentive culture that encourages the creation of new products. Mergers and partnerships are not discarded either. “The market has already seen, in other cases, companies grouping together and this will happen in several ways: from fintech to fintech, from bank to bank and between fintechs and banks.”
Chi, from EY, agreed that the moment is one of reinvention for the institutions, but believes that they still have an important space within certain sectors of the population. “There is still an audience, especially the one with the most money and who likes to keep their presence in a more traditional bank.” It also highlights the efforts of the most consolidated institutions to incorporate the best practices created within the te fintechs environment.
“Traditional banks are increasingly adopting [the system of] squads to develop new functions and using design methodologies to create products. Unlike a time ago, when banks created a product and already launched it, they now have the concern to understand the consumer before making this presentation.”
Recently, the rating agency Standard & Poor’s presented a study that analyzed the possibility of traditional Brazilian banks losing market for fintechs. According to the agency’s perception, both sides have forces consistent enough to remain attractive to the local consumer. “New competitors will have a competitive advantage for the coming years, due to their light and agile systems. However, large banks are more experienced in dealing with fraud risk and cybersecurity than startups and fintechs,” explained an excerpt from the report.
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First published in COMPUTERWORLD, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.
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