Brazilian instant payment system Pix ended 2021 having powered more than 8 billion transactions, according to statistics from the country’s Central Bank. This is quite an impressive figure for an offering only launched in November 2020 and goes to show how ubiquitous Pix has become in the country.
You could describe Pix as “a government-built version of Venmo,” as João Pedro Thompson, founder of fintech Z1, told TechCrunch. However, the analogy doesn’t fully capture the fact that Pix appeals to many more than just digitally savvy teenagers repaying friends for coffee. Otherwise, it wouldn’t be used by six of 10 Brazilians.
In a country where many people are still unbanked and queuing to pay bills is part of daily life, the impact of being able to pay anyone instantly can’t be understated. In addition, Pix now supports more services, such as letting you withdraw cash from businesses.
It’s interesting that Pix is an institutional initiative, part of a wider range of public efforts to transform Brazil’s financial landscape. “The Central Bank has been doing a tremendous job and Pix is one of the most relevant structural changes,” Brazilian VC Bruno Yoshimura told TechCrunch when we wrote about Latin America’s fintech boom.
I’ve lived in Brazil, so this naturally piqued my interest. At the time, entrepreneurs were constantly complaining about bureaucracy, and their highest hope was that institutions would just stay out of the way. But now, VCs and founders are actually praising the Central Bank for its initiatives and the opportunities it has created.
“Both Open Banking and Pix will level the playfield for new challenges, and we expect to see a lot of innovation around them,” Yoshimura said, referring to another of the Central Bank’s projects.
It’s not just Pix, and it’s not only the Central Bank’s BC# agenda either. Brazil’s Superintendence of Private Insurance (Susep) is working on open insurance plans, which means that insurtech could be the next sector to benefit from regulatory tailwinds.
To understand what’s going on with regulations in Brazil, and how this is affecting startups, I reached out to experts with firsthand knowledge of Latin America’s fintech ecosystem.
On the VC side, I got in touch with Amy Cheetham, a partner at Costanoa Ventures, whose recent investments include Rio de Janeiro-based Plug; and Alma Mundi Ventures‘ Javier Santiso for additional thoughts on insurtech. On the startup side, I spoke with CEOs Rodrigo Teijeiro from RecargaPay and Pedro Sônego de Oliveira from TruePay.
Opportunities abound
“The open banking initiatives adopted by Brazil’s Central Bank are absolutely tailwinds for fintech innovation,” Costanoa’s Amy Cheetham said. “As consumers regain control of their data, it creates space for new entrants to the banking ecosystem and creates more competition, giving consumers access to better, cheaper, fairer, and more secure financial products and services. This includes giving fintechs the power to build for previously [underserved] or unserved segments of the population,” she explained.
RecargaPay is one of the startups leveraging the new regulations to expand their B2C services. “Our mission at RecargaPay,” founder Teijeiro said, “is to democratize mobile payments and financial services in Brazil, so open banking and Pix are the perfect recipe to accelerate our mission.”
Teijeiro is particularly appreciative of Pix and its “incredible” trajectory. “What was accomplished in just one year was a tremendous disruption benefiting millions of Brazilians by making their payments easier, faster and cheaper. For this, the Brazilian Central Bank deserves to be recognized as the ‘fintech startup of the year,’” he said, describing Pix’s impact on cash going mobile as “a huge blessing for RecargaPay.”
Pix being a country-wide standard also helps fintechs innovate around it. For instance, RecargaPay lets customers make an instant payment via Pix using their credit card, and pay that amount in installments via its platform.
RecargaPay’s goal is to be a one-stop shop for its clients’ financial needs, including loans, and it obtained approval to operate in lending from the Central Bank last August. The company hopes open banking will help its lending products. “[This] will be especially beneficial to RecargaPay, as it will allow us to have access to the user’s financial history to make better lending products and decisions,” Teijeiro said.
But the impact of the regulations is clearer on new ventures such as TruePay, founded in December 2020.
Having raised a $32 million Series A last November, B2B startup TruePay helps merchants get cash flow based on money they are owed, which is typically a lot, since paying via credit card installments is very common in Brazil.
TruePay’s co-founders, Pedro Sônego de Oliveira and Luis Eduardo Cascão, were formerly VCs — at Kaszek and DNA Capital, respectively. They left their jobs to launch the startup right when the Central Bank adopted a new centralized system for receivables, creating an opportunity for fintechs.
“Prior to the regulation, receivables could be transacted only by the acquirers who originated them. This means merchants had very few options on how to use or access their card revenue. After the regulation, card receivables became more easily accessed,” Oliveira said.
TruePay’s timing was no accident. “We did know when the regulation was coming and had clarity over the fact that even when the market became ‘effective,’ there would be a large productization barrier to unshackle merchants from their previous situation,” he said.
According to Oliveira, Brazil’s Central Bank “is one of the most innovative, forward-thinking state institutions in the world and they are opening the doors so that both startups and incumbents can change the economic trajectory of the country.”
He highlighted two key policy trends: Democratizing access to financial licenses and giving users ownership over their data, including through the open finance initiative. “This means many companies can now access consumers’ data to build truly disruptive financial (and non-financial) solutions.”
Fintech’s sweet spot
A more open framework could benefit any company, but balancing great UX and tech innovation is where startups shine. “More specifically,” Oliveira said, “the first generation of fintech companies such as Nubank and Stone were the first ones to actually prioritize their client’s experiences in Brazil, and it was this movement that opened the door for the second generation of fintechs such as TruePay.”
Nubank, predictably, sees Brazil’s framework as favorable to fintechs, and its parent company Nu Holdings, has been lobbying for it. In its initial F-1 filing ahead of its December 2021 IPO, the company noted that “over the past several years, Nu has been very active in some of the latest landmark regulations for the financial system in Brazil, such as: Brazil’s real-time payment system Pix, open banking, portability of checking accounts, cybersecurity and others.”
Lobbying for friendly regulation is in the company’s interest, but it’s also beneficial to fintechs overall. “By applying our values to regulatory proposals,” Nubank’s owners explained to prospective shareholders, “we believe we can help shape a more competitive landscape for Latin America’s financial sector.”
TruePay’s Oliveira agrees: “The regulator working closely with the market to understand the pain points and needs is a great way to start easing the difficulty of doing business in Brazil.”
One aspect that struck me while researching this piece is how none of these fintechs seem to be worried about competition. This is because they are confident in their moats — and see opportunities to partner with each other.
Is insurance next?
On December 15, the Brazil Central Bank’s open banking initiative entered its fourth and final phase. Phase 4 marked the shift into open finance, which would open up citizens’ financial data, such as mortgages, savings, pensions, insurance and credit, to trusted third-party APIs with their consent, as reported by ZDNet.
Access to data creates opportunities for fintech as well as insurtech, Costanoa’s Cheetham said. “Open banking in its current form will allow insurtechs to access crucial customer data to build financial products that better fit the diverse population of Brazil, and further regulations that allow increased innovation in the insurance sector will only increase the scope of what is possible.”
These initiatives accompany insurtech-specific plans. Brazilian insurance regulator Susep is working on an Open Insurance initiative, set to be progressively rolled out until June 2023. In addition, the second edition of its regulatory sandbox program recently welcomed a new batch of 11 startups.
Investors often look for adjacent sectors to turn to, so I have a feeling that insurtech could be Brazil’s next hot sector. We asked Javier Santiso, who is familiar with the matter; his firm Mundi Ventures recently closed its first insurtech fund of €100 million and is in the process of raising a second one, for which it is targeting €200 million.
Mundi is based in Spain, but invests globally, and Brazil is on its radar. “Brazil is certainly a market to consider, as the ecosystem has developed very strongly, particularly in the fintech and insurtech area,” Santiso said (translation ours). Noting that many unicorns belong to the fintech sector, he predicted that “the insurtech sector will be, by proximity, the next leap.”
However, Santiso also noted two important points: Brazil is only one of several countries Mundi is looking at, even in Latin America, and the regulatory change only “helps to increase” existing interest for the country’s startup scene.
Broader context
Santiso and Cheetham are both based outside of Brazil, which gives them a broader perspective.
Brazil is not the only country taking important steps in the insurtech/insurance space, Santiso said. “For example, without going beyond Europe, the U.K. is doing it.” Cheetham agreed, noting that her firm has “seen similar regulations adopted in Europe and Southeast Asia.” Nubank’s F-1 filing also gave a nod to some positive changes in Mexico — not to mention the “India Stack.”
Brazil isn’t unique, then. But the fact that it is joining the leading pack is yet another factor to its advantage. “I view favorable fintech regulation — and open banking as a key component of that — as a core tailwind to an already exploding financial services market,” Cheetham said.
Brazil’s fintech scene owes its success to factors that The Exchange has already explored, and that Cheetham summed up well: “Brazil has a significant unbanked population … and COVID exposed even more clearly how important digitizing payments and financial services more generally are.”
COVID didn’t simply expose the need for fintech solutions, it drove their adoption tremendously, and open finance could further boost the transformation. This is good for the Brazilian consumer – “the ultimate winner,” in Teijeiro’s words – but it also helps drive VC interest.
I asked Cheetham if, as a foreign VC, regulatory tailwinds somewhat counterbalance some of the negative signals about Brazil’s current political and economic climate. She said yes, adding, “Brazil’s historically tumultuous political climate is certainly a risk, but as they implement more favorable financial services regulations, it gives me more confidence in their ability to foster innovation, support fintech companies and increase competition in the banking sector.”
VCs that are bullish about Brazil’s fintech and insurtech startups shouldn’t have trouble finding deal flow. On December 29, the country’s Central Bank said it had granted 74 fintechs approvals to operate in the lending space. Earlier last month, it reportedly delayed the passing of tougher rules for fintechs, which seems to indicate that Nubank and its counterparts are still well in court.
The neobank’s success with its IPO likely doesn’t hurt: Who wouldn’t want to see more homegrown companies follow its path?
Comment