Large fintechs in Brazil are taking a cautious approach to credit, despite its potential to generate more significant income, in the face of rising pressures on households.
Companies such as Nubank and Mercado Pago are limiting how much credit they give out in the face of a more complex scenario in Brazil and the rest of Latin America. Banks, as well, are tightening requirements as Brazilian families fall behind in loan payments.
Slower economic growth and higher interest rates in Brazil exact a heavy toll on citizens. It is leading lenders to pivot to secured lending as delinquencies are expected to rise.
For fintechs, loans are a way to maximize revenue per customer. This could mean a longer path to profitability.
Delinquencies on the rise
In the most recent report, the Brazilian Central Bank pointed to an increase in default rates. While these had remained subdued during the pandemic, the pace of delinquencies is expected to rise.
In 2022, the delinquency ratio for non-earmarked credit in Brazil rose to 4.2% from 3.1% in the previous year. However, it was a strong year for long growth, with loans to individuals expanding at a 17.4% rate.
But with inflation remerging, the central bank undertook one of the most aggressive hiking cycles worldwide. The monetary rate went from an ultra-low of 2% to over 13.75%.
A riskier outlook for lending is also reflected in the increase in household debt during the pandemic. Families took debt at lower costs, and refinancing is much more expensive in the face of higher interest rates.
Household indebtedness reached an unprecedented level in 2022, according to a survey by the National Confederation of Commerce. Data showed that 77.9% of consumers ended the year with some outstanding debt, up from 70.9% in the previous year.
Fintech approach to credit
To be sure, fintechs are taking note of this.
“Delinquency figures should be mitigated by fintech credit risk management,” Aylton Gonçalves, Senior Associate at BBL Advogados, told Fintech Nexus. ” Fintechs will heed the need to constitute guarantees to mitigate the effects of any default.”
Most companies are already taking action. Recently, PicPay, one of the largest digital wallets in Brazil, acquired BX Blue. The latter is a payroll lending company that brokers loans to public servants and pensioners. It is a much safer segment in the eyes of a financial institution. The company acknowledged that the acquisition would allow it to incorporate low-risk products into its loan book.
Nubank, the largest in the country, has also pulled the brakes on its loan book expansion. Even before the end of the year.,
“We have kept our origination and pricing levels relatively constant,” David Velez, CEO of Nubank, said in the last earnings call on Q3 2022 results. “The goal of this moderation is to strengthen credit resilience in light of the more uncertain short-term outlook. The pace in personal loans is closely tied to Brazil’s economy short-term view.”
Trend is not exclusive to Brazil
Indeed, the trend is not exclusive to Brazil. In Mexico, where its central bank hiked rates to 10.5% last year, fintechs are also taking a more cautious approach. In an interview with Fintech Nexus, Regina Moreno, a senior manager at Kueski, said the company was applying higher standards to borrowers seeking a loan.
However, analysts still advise fintechs to take their chances.
“The granting of credit is still convenient. It is generally one of the most relevant sources of revenue for a financial institution,” Goncalves said. “The most appropriate strategy, in a scenario of increasing default, is to create guarantees when taking out the loan.”
Fintechs see this as a bump along the way.
“Beyond these short-term dynamics, we remain confident in our ability to expand our lending portfolio,” Nubank’s David Velez said. “The only bottleneck for personal loan growth is our credit risk appetite.”
