The Fintech Shake-Up in Latin America: Winners and Losers

The figures sound almost implausible. As Brazilian consumers fall behind in paying their debts, they shake a number of fintech startups In the largest economy in Latin America, a company continues to grow.

Nu Holdings Ltd. has built enough customers—more than 85 million and counting—to rank among the largest financial companies in Latin America. The online bank and credit card issuer, whose early investors include Berkshire Hathaway Inc., owned by Warren Buffett, has seen its shares grow more than 90% this year, giving it a 200-fold market value. higher than your reported profits in the last 12 months. And to protect those profits, the company has skyrocketed interest rates on its cards, reaching 790% in some cases.

Welcome to the debacle of the fintech sector in Latin America, where economic turmoil threatens to topple thousands of startups across the continent to let a few dominate. It is an abrupt turn in a decade-long career for venture capitalists in the region, and it speeds up the process of deciding winners and losers.

Nubank is among a handful of platforms, such as Mercado Pago, the fintech arm of e-commerce giant MercadoLibre Inc, that have managed to reach significant size. and stay ahead of economic shocks, while others merge to strengthen their market position. Many more are downsizing, putting their ambitions on hold or, in some cases, selling assets, suspending payments or closing operations.

In one of the starkest signs of the debacle yet, a report to be published by data provider Distrito later this month shows that the number of fintech startups in Latin America it has dwindled to just half a dozen this year, down from a high of 290 in 2018.

“With less available capital, less fintech arises,” says the executive director of the District, Gustavo Araujo. “Before, with interest rates close to zero, investors were looking for growth at any price. Now, with higher rates, investors are looking for healthy companies capable of expanding sustainably.”

Even so, Analysts are increasingly asking whether the largest fintechs will be able to sustain their staggering profitability and continue to expand.

Startups that got their start catering to lower incomes are likely to face stiffer competition as they try to lure middle-class customers away from traditional banks. In other major markets, such as Mexico and Colombia, there is now a lot of competition and tighter credit spreads.

At the end of June, in Brazil, almost 72 million people were late in paying their debts at the end, to which they have responded with an increase in interest rates on loans. By the middle of that month, average rates on revolving credit lines reached almost 350% at Nubank and 560% at Mercado Pago, according to the Brazilian central bank. Rates for individual borrowers can vary widely, and in some cases are hundreds of percentage points higher.

That is fueling a political debate

The card rates are “stratospheric”, the Finance Minister, Fernando Haddad, complained at the beginning of the year, who raised the possibility of imposing a cap. Initially, Nubank and its traditional banking rivals managed to silence the debate, after arguing that it is the only way for lenders to keep credit available in the current environment..

But last week Haddad raised the issue again, calling the commissions “disgraceful” and vowing to take action on them.

The enigma, central bank chief Roberto Campos Neto added on Thursday, is that if rates are capped, lenders will close card accounts, which could curb spending. “It’s something that you know how it starts, but not how it ends,” he said.

The reality, according to the executive director of Nubank, David Vélez, is that fintech companies are forcing banks to lower their commissions. He estimates that his company has saved customers 39 billion reais ($8 billion) than they would otherwise have paid.

When his company was founded in 2013, “financial services was a market outside the ‘realm’ of entrepreneurs, a market until now dominated by the largest companies in Latin America,” Velez said in a statement. “We broke the glass ceiling and allowed other entrepreneurs to enter this market, in different verticals. In a way, we were leaders in this industry revolution, and we are very proud of that.”

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