Bloomberg — Andre Street and Eduardo Pontes enjoyed a meteoric rise since founding StoneCo Ltd. less than a decade ago.
The pair transformed the way businesses across Brazil handle payments, emulating Jack Dorsey’s Square Inc. They attracted investors including Warren Buffett’s Berkshire Hathaway Inc., Jack Ma and the Walton family and were billionaires before reaching age 40.
Their success also fueled ambitions of changing the way banking was done not just in Brazil, but as far away as Portugal, the U.K. and the Middle East.
Then everything started to go wrong. And then, quickly, very wrong.
After mastering payments, Stone set its sights on what promised to be a more profitable enterprise: lending. Over the past few years, the company started doling out money to small and midsize clients across Brazil. But it underestimated the risks: Surging inflation, a global pandemic, a series of aggressive central bank interest-rate hikes and an economy veering back toward recession. Delinquencies soared, forcing it to stop making loans last year.
Since then, problems have grown worse -- and investors more impatient. The Sao Paulo-based company’s shares tumbled 88% in the past year through Thursday in New York trading, erasing $25.6 billion in market value.
What was once one of the world’s fastest-growing payment technology firms has become a cautionary tale about the dangers of trying to outsmart old-school banks in markets they’ve dominated for decades.
“It’s a lesson for all digital banks and similar platforms in Brazil,” said Malcolm Dorson, a portfolio manager at Mirae Asset Global Investments in New York. Stone had been “best in class” among Latin America’s fintechs, but “recent struggles hurt the company’s credibility,” he said.
Other Brazilian payment upstarts are being pummeled as well. Stone’s biggest rival, PagSeguro Digital Ltd., is down 73% over the past 12 months. The company, which has also expanded into banking, is controlled by 58-year-old billionaire Luis Frias.
While technology has reshaped finance around the globe, its effect was particularly important in Latin America. The region, with just over 8% of the world’s population, is plagued by expensive banking services and dominated by conglomerates. Global investors including SoftBank Group Corp. and Buffett’s Berkshire helped fuel the growth of upstart competitors.
Stone first made headway by offering a cheaper, easier-to-use method for businesses to accept card purchases. It provided a window into how much those companies make, which allowed Stone to estimate their future revenues and hand out loans based on those projections. In return, credit-card receivables would be used to settle the debt.
For Stone, it seemed like an easy way to squeeze more revenue out of its more than 1.4 million clients. But it quickly backfired as Brazil was hit by a combination of Covid-19, rising interest rates and persistent inflation.
Meanwhile, businesses started jumping to other payments firms, meaning Stone no longer had access to their card purchases. Additionally, an industry-wide system that Stone believed would act as a failsafe didn’t work properly, Chief Executive Officer Thiago Piau said in an email.
“Lockdowns pressured businesses’ cash flows and several sought ways to not pay back their loans,” Piau said.
The firm disclosed the damage in August during its second-quarter earnings and halted lending. Piau said the opportunity for making loans “remains intact” and adjustments are being made to resume again.
Still, it won’t be easy, as competitors get more aggressive and Brazil’s economy heads for a possible contraction in 2022.
For both Street, 37, and Pontes, staging a comeback involves more than their personal fortunes.
The pair have used proceeds from numerous share sales since Stone’s 2018 initial public offering to fuel other payment ventures, such as SaltPay, which operates in Europe and South Africa and is expanding into the Middle East. Pontes is CEO of the company, which was valued at almost $9 billion during a recent fundraising round, according to a person with knowledge of the matter.
Street and Pontes had relinquished day-to-day roles at Stone in recent years and moved on to the company’s board, with Street serving as chairman. But when the crisis hit, he took charge of key investor meetings and said the firm had jumped the gun on lending, the person said.
“Stone’s facing a perfect storm, but it should have done a better job in communicating,” said Jose Augusto Albino, founder at technology-focused asset manager Catarina Capital.
Some long-time Stone enthusiasts are now starting to have doubts. Analysts at Goldman Sachs Group Inc., Banco BTG Pactual SA and UBS Group AG had rated the company a “buy” since its IPO three years ago. All downgraded it in recent months, slashing earnings estimates.
“The road will remain bumpy over the next twelve months,” BTG analysts led by Eduardo Rosman wrote in a Nov. 28 report. “Recovering trust takes time, and it needs to be in small steps.”
Piau said Stone’s shares reflect “Brazil’s business environment, with higher rates and a challenging economy, and have nothing to do with the credibility of our founders.”
But more than that, Stone’s debacle has made some investors more broadly skeptical about Latin America’s fintechs. After years of breakneck growth and luring customers regardless of the costs, will startups be able to sell those clients more profitable products, like credit?
“We’re seeing that is easier said than done,” Mirae’s Dorson said.