The phony war has been long, but the first real battle has now begun in Brazil’s fintech space.

The growth of fintechs in Brazil has been closely monitored by market participants for years. The narrative is well established: the high adoption of digital technologies (71% of the population has a smart phone) in the huge, entrepreneurial economy has led to a wave of fintech innovation.

According to a recent report by McKinsey & Company, there are now around 400 fintechs operating in Brazil which are growing at a compound annual growth rate of 96%. However, to date the growth has been largely alongside that of the banks.

These incumbents have responded to the appearance of the fintechs by adopting a mixture of digital innovation of their own, buying or working closely with fintechs to lessen competitive dynamics, and at times simply ignoring those niches where the nibbling away of profit margins barely registered on the broader profitability of the bank’s operations as a whole. That uneasy truce is over.

In April the first real shots in the war were fired by the banks. And it is no surprise who the first target is: the payment fintechs, which represent 20% of the total.

Payment services were always likely to the first theatre of Brazil’s fintech war. After all, it’s an area that has been ripe – and successful – for fintechs. Some of Brazil’s first ‘unicorns’ have come from innovators in the payment sector, with PagSeguro and Stone both valued at more than $1 billion dollars and having already completed successful IPOs on North American stock exchanges.

Payments are capital-light and profitable. Well, they were profitable. Even before the developments of April (which I will come to shortly), competition was depressing profitability. Cielo – the payments company of Banco do Brasil and Bradesco – recently announced a 45% fall in its profit for the first quarter of the year (and a 25% fall compared to the fourth quarter of 2018), and blamed the intensity of the competition in its operating environment as the leading cause.

So, while competition has been ramping up over the past year it has recently sparked into fire. Getnet, Santander’s merchant card payments product, announced a reduction in its receivables advance rate to 2%, and harmonized credit and debit charges. The industry average had been around 4.5% so this was an aggressive cut. Safra has also cut its rate (to 2.99%) on its SafraPay card. However, Itaú has upped that ante – zeroing the rate on its Rede card system from May, for both new and existing customers with annual sales of up to R$30 million.

For the full article visit Euromoney’s website 

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