Fintechs Stung by High Brazil Rates as Big Banks Contain Fallout

The fintech industry, which exploded in recent years with record venture capital investments and public equity sales, is suddenly facing a reckoning, as Brazil’s central bank jacked its key rate up

In this photo illustration the PagSeguro logo is seen.
By Cristiane Lucchesi
April 05, 2022 | 09:24 AM

Bloomberg — Brazil’s massive interest-rate hikes are hampering the business model for financial technology firms including Warren Buffett-backed StoneCo Ltd. (STNE) and PagSeguro Digital Ltd., who had been offering cheaper loans and services than big banks and growing at a furious clip.

The fintech industry, which exploded in recent years with record venture capital investments and public equity sales, is suddenly facing a reckoning, as Brazil’s central bank jacked its key rate up by nearly 10 percentage points in a year to combat inflation. That’s making it harder to offer competitive rates on loans without compromising already tight profit margins.

Financial costs for big banks like Itau Unibanco Holding SA (ITUB4) and Banco Bradesco SA (BBDC4) have not risen as much due to their larger and more diversified base of retail customers, which often leave their money parked at bank accounts in exchange for returns below the basic rate or no return at all -- something big professional investors usually wouldn’t accept. Meanwhile, individuals in Brazil can pay as high as 346.3% a year for credit card loans.

“Fintechs were born with a main advantage for clients -- charging less than bigger banks,” said Cynthia Cohen Freue, top analyst for financial services and banks in Latin America at S&P Global Ratings. “So, for them it is difficult to pass along higher borrowing expenses to clients.”


The pandemic accelerated the digitalization of financial services everywhere but especially in Latin America’s largest economy, where mobile and internet banking already represent almost 70% of the transactions. A record $8.85 billion was poured into startups in the nation in 2021 and the year was capped in December by Nu Holdings Ltd. much-anticipated initial public offering that valued the digital credit card issuer at $45 billion, more than Itau or Bradesco at the time. Nubank, as the company is known, raised $2.8 billion on the IPO.

But the benign rate environment ended abruptly. Brazil’s annual inflation went from below 2% in May 2020 to 10.5% last month. Wary of falling behind the curve, the central bank started hiking in March 2021, taking the benchmark rate to 11.75% in one of the most hawkish cycles globally.

That’s upending balance sheets.

StoneCo, a merchant acquiring and payment-technology firm, more than tripled its financial expenses in 2021 compared to a year before, to 1.27 billion reais ($270 million). Its financial income, meantime, grew just over 14%, to 1.88 billion reais, as it delayed increasing prices to clients.


“We didn’t want to hurt our customers with higher costs, which we felt we could absorb for a while,” said Stone’s Chief Executive Officer Thiago Piau, in an earnings call on March 17. “But, in the end, the impact was too big in our bottom line and so we began repricing in November.”

This strategy helped the company to end 2021 with 1.8 million costumers, surpassing the guidance of 1.4 million, StoneCo said.

PagSeguro Digital Ltd., a StoneCo competitor, reported financial expenses of 790.6 million reais in 2021, more than six fold higher than a year before, while financial income grew about 60%, to 3.7 billion reais, according to filings.

In a statement to Bloomberg, the company said that part of the increase in financial costs was due to growth in payment volumes, which reached 252 billion reais in 2021, 56% more than in 2020. PagSeguro has about 22 million retail clients using its digital accounts and acquired a bank license in 2019 in order to further diversify its source of funding, the company said.


Nubank (NU) also saw financial costs increase more than three fold to $367.3 million, according to filings. But interest income and gains with financial instruments grew almost in the same proportion, to more than $1 billion.

The firm, also backed by Buffett’s Berkshire Hathaway Inc., has deposits from small companies which pay no interest rates and, as any credit card issuer in Brazil, receives payments from costumers ahead of the payments to the networks. Nubank can invest those two sources of cash to generate financial revenue.

By comparison, Itau, Brazil’s biggest bank by market value, saw expenses with financial intermediation actually decrease last year, almost 10%. Bradesco, the second biggest, posted an increase of less than 7%.


Brazil’s slower economic growth poses an additional hurdle to fintechs, as delinquency rates tend to rise and demand for loans fades. While that’s a challenge for the whole financial industry, some newcomers attract clients with lower credit scores than big banks as part of their aggressive growth business strategy, according to S&P Global Ratings. Banks can simple cut credit in tougher environments, while fintechs promise investor they will keep expanding regardless of a possible GDP contraction.

After advancing about 4.6% in 2021, Brazil’s economy is expected to expand just 0.5% this year. October presidential elections that pit former President Luiz Inacio Lula da Silva against incumbent Jair Bolsonaro will also lead to greater volatility in the second half of the year, while Fed rate hikes and the war in Ukraine are adding stress.

Those challenges are affecting prices for StoneCo’s $500 million dollar bond due in 2028 -- its yield has jumped about 100 basis points this year to 7.2%.

The poor bond performance also reflects some of StoneCo’s own challenges -- it halted lending to small and middle-sized companies in October after a bad experience and its adjusted net income fell 79% in 2021. Meanwhile, its main competitor Cielo SA, owned by Bradesco and Banco do Brasil SA, reported a 98% increase in net income.

“The concern is not that interest rates are so high, because Brazilians are generally used to higher rates, but the pace at which they have risen recently,” said Diksha Gera, an analyst at Bloomberg Intelligence. “Fintechs will need to compromise on price if they want to focus on clients expansion.”