Neobanks in Brazil are finally making inroads into the country’s $1 trillion credit market.
According to new data from the central bank, they now represent almost 6% of all loans to individuals in Latin America’s largest economy.
Over the past decade, digital banks have spawned in Brazil, rising to challenge incumbents at their own game. With lower fees and user-friendly interfaces, they have succeeded widely in drawing clients.
Nubank now boasts over 80 million customers in the region. Others, such as Banco Inter, PicPay, and Mercado Pago, have also signed up clients in the millions.
While many digital lenders thrive at acquisition and cost to serve, most still fail to make a dent in the country’s highly profitable yet extremely competitive credit markets.
According to market share data, however, that is gradually changing.
Fintechs and digital banks expanded their share in the Brazilian credit market during the second half of 2022. Digital banks now represent roughly 6% of all loans to individuals in Brazil. That is up from 4.8% by the end of 2021 and virtually nothing five years back.
Albeit from a low base, digital banks have been the sector growing the loan book the most since 2020. It grew at a 40% pace during 2022, doubling the system’s average. During the pandemic, neobanks even saw records of 100% growth rates.
“Concentration in the Brazilian bank loan market has been reduced in the past few years,” the central bank noted in its latest financial stability report. “Digital entities and credit unions are increasing their share in the loan portfolio to the detriment of both state and private banks.”
Neobanks want to get into credit to boost revenue
For digital banks, credit is a crucial element in driving revenue. The loan market in Brazil is one of the most profitable worldwide. Interest rate spreads stand at almost 30%, one of the most attractive even among emerging markets.
In that regard, fintechs such as Nubank have made a case for growing more heavily into credit.
The digital bank saw loans rise 54% yearly in the first quarter of 2023, up to $12.8 billion. Both unsecured lending and payroll loans are critical parts of its strategy to boost income this year.
To be sure, fintechs still have a long way to go. Banks’ dominance in the market is still tightly held. Both public and private banks make for almost 80% of all loans, with just a handful of lenders accounting for nearly all of those.
Moreover, fintechs have yet to blaze a trail into company credit, where their presence is virtually inexistent.
“While our customer penetration in Brazil is significant, when we delve into the market share we actually own, it is clear that we still have substantial room to expand our presence,” David Velez, CEO and Founder at Nubank said.
High-risk strategies could backfire
While loan growth has been significant in the past few quarters, it has not come without risk.
According to the central bank, default risk increased during the second half of 2022. Pressed by rampant inflation, the regulator was quick to raise interest rates. It did so in one of the world’s most steep cycles, quickly taking the benchmark rate from 2% to 13.75%.
With these new conditions, all players — from fintechs to banks — showed increases in non-performing loans. But the neobanks credit segment was one of the most affected, the central bank noted. This is especially true since fintechs tend to concentrate on high-risk unsecured loans such as credit cards or personal loans.
“Moments of crisis like this represent a great test for new players,” Bruno Diniz, a fintech adviser in Brazil, told Fintech Nexus. “This is a complex and turbulent period for credit, with a significant increase in defaults.”
According to the central bank, delinquencies in the segment rose over 10% over the end of 2022 as inflation ticked upwards. This was a steep rise from roughly 6% a year ago. Private banks averaged 9%, not too far off from fintech lenders.
“Some of the fintechs that expanded their operations last year with loose criteria are suffering the effects today,” Diniz said. “Undoubtedly, there is a learning curve here. As bankers usually say: “Giving out credit is easy. It is getting the money back that is difficult.”
