Brazil Is Not for Beginners

The depth of innovation required to solve tough regional challenges, combined with Brazil’s high talent density, will increasingly create opportunities to invest in companies that aren’t just local winners, but global powerhouses.

In this photo illustration, the Federal Republic of Brazil flag is seen displayed on a smartphone with an economic stock exchange index graph in the background.
Brazil is Latin America’s most developed ecosystem for technology-enabled financial services. SOPA Images/LightRocket via Gett

“Brazil is not for beginners,” commented Bruno Balduccini, lead fintech partner of law firm Pinheiro Neto. The “Godfather of Fintech”, as he is known in the Brazilian venture ecosystem, was not referring to historical critiques of excessive bureaucracy that gave birth to this local expression. Rather, Balduccini was acknowledging the evolution of Brazil’s fintech ecosystem: the sophistication of the capital markets, the advances of its regulatory regime, and the companies that have transformed the financial services landscape, including Nubank (one of the most valuable challenger banks in the world). 

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Brazil is Latin America’s most developed ecosystem for technology-enabled financial services, and it’s hard to overstate the importance of Brazilian government bodies in boosting financial inclusion by promoting reforms across all areas of financial services. From the unbundling of the banking scheme that started in 2013—which allowed newcomers such as Creditas and Neon to apply for tiered licenses that are quicker and less costly than a full banking framework—Brazil is one of the leaders of the world when it comes to regulation-promoting financial services innovation. More than half of the country’s adult population, a staggering 64 million people, made their first digital payments transaction with PIX, Brazil’s instant payment system designed by the Central Bank. Moreover, more than 18 million accounts consent to share their data in the context of open finance, a 95 percent growth from September to December 2022. And after piloting projects last year, Brazil is in the advanced stages of launching its central bank digital currency, Real Digital, which aspires to leverage tokenization and smart contracts on the blockchain for enabling programmable money. For innovators, change means opportunity.

Brazil’s fintech boom has been anchored in democratization. 

Instead of a zero-sum game for market share, Brazil’s fintech explosion has been centered on expanding the size of the market. Through a combination of regulatory reforms, business model innovation, and technology, millions of previously underserved consumers and micro, small and medium enterprises (businesses often referred to as “MSMEs”) were brought into the formal financial system. As of 2021, 96 percent of Brazil’s adult population had access to digital wallet or banking services, up from 55 percent in 2010. Part of the success in expanding access is building into regulatory reforms the ability of banks and fintechs to maintain positive unit economics (versus eliminating interchange, for example—which other regulators have done), therefore incentivizing participation and accelerating adoption. 

At the same time, opportunity remains. Less than half of the population has access to credit, private health insurance penetration remains under 25 percent, and the MSME credit gap is huge. With one of the most complex tax systems in the world, a large but still mostly analog agricultural sector, an economy insulated from cross-border trade, and the potential to become a leader in climate change mitigation, Brazil remains a fertile ground for the next generation of disruptors. 

Brazilian entrepreneurs are pushing the frontier. 

The greatest business opportunities are about solving big, structural problems. The harder the challenge, the larger the upside potential. Kovi is a case in point: Brazil is one of the largest markets in the world for ride-sharing apps, and while 90 percent of the population would like to own a car, less than 25 percent of Brazilians can access funding for one. Through its innovative car subscription model, Kovi’s approval rate is more than 2x higher than traditional auto financing, allowing it to expand access to car ownership for gig economy drivers and lower-income consumers alike. 

Contabilizei is another highlight. With embedded financial services, the company’s tax and accounting software-as-a-service (SaaS) platform delivers significant value to its small and medium-sized enterprise (SME) customers. On the other hand, Monkey has created a unique anchor-led supply chain financing marketplace, with multiple lenders competing through auctions to provide financing for SMEs. The depth of innovation required to solve tough regional challenges, combined with Brazil’s high talent density, will increasingly create opportunities to invest in companies that aren’t just local winners, but global powerhouses.

Latin American entrepreneurs are battle-tested to crisis. 

Brazil’s largest private bank economist, Itaú’s Fernando Goncalves, recently discussed the balance of the country’s macroeconomic environment, from strong net dollar reserves that provide FX stability, to the challenges in fiscal policy and the likelihood of ongoing higher interest rates. Coupled with the global downturn in venture markets, the bonanza years seen in 2020-21 are definitely over. But for local entrepreneurs, building in a resource-constrained environment is the rule, not the exception. Having scaled one of the most successful tech companies in the region during periods of economic turbulence, Sergio Furio, CEO of Creditas, stated the situation brilliantly. “There’s no such a thing as being a peacetime CEO in Latin America,” he said. “There’s always a crisis in Latin America, and that’s probably the beauty of it.”

Vibrant capital markets are stimulating innovation. 

With more than 28,000 investment funds, 25 million quota holders and $1.5 trillion assets under management, Brazil has highly developed capital markets. Flexible financial instruments backed by pools of different types of receivables, such as invoices, real estate or agricultural receivables (known as FIDCs, CRIs and CRAs, for example) are popular fixed-income investment alternatives that are widely used by fintechs to fund their business in capital efficient ways. This kind of off-balance sheet financing—not available in many other emerging markets—lowers the cost of entry and allows for greater leverage on investment in new businesses.

As a testament to this force, structured funds in the country encompassing credit, real estate and equity have grown at an impressive 21 percent compound annual growth rate (CAGR), a factor of 6.5x, in the past 10 years. Companies like Kanastra, an asset management as a service platform providing end-to-end infrastructure for originators and investment vehicles raising funds, are surfing this tailwind.

Brazilians are cultivating south-to-south cross-pollination. 

Fernanda Carmago from Wright Capital shared how prevalent learning exchanges have become among emerging market peers, as there are both successes to emulate and similarities to leverage. Kovi co-founder Adhemar Milani Neto is a former executive at 99, which was acquired by Didi, a major Chinese ride-hailing company. PIX, Brazil’s instant payment system, was modeled after India’s Unified Payment Interface (UPI) implemented to accelerate digitization and financial inclusion—and since then has inspired other Latin American countries to follow, including Mexico with CoDi, Colombia with Transfiya, and Peru with Yape. 

Joy is palpable and unquenchable. 

Perhaps the least surprising is how much the Brazilian spirit has maintained, in spite of the country’s challenges. 

There is indeed a lot to celebrate.

Brazil Is Not for Beginners