After a sharp lending slowdown in the past few years, fintechs in Latin America are gearing up once again for credit expansion in 2024 as interest rate pressures fade out across the region and venture capital investment shows signs of stabilization.
In 2022, neobanks hit the brakes on lending as venture capital dried up, and central banks implemented interest hikes to combat inflation. Brazil, in particular, faced stringent measures, with the benchmark rate soaring from an ultra-low 2% during the pandemic to nearly 14% last year.
Both fintechs and traditional banks found lending in this challenging environment increasingly risky. A recent report by PwC and the Brazilian Digital Credit Association (ABCD) highlighted a significant slowdown in credit grants across the fintech space, with loan book growth dropping from nearly doubling in 2021 to a modest 9.1% last year.
2024 will be a “vibrant year” for fintech credit
For 2023, the ABCD predicts that growth will likely mirror the previous year. The central bank has reversed course on its hiking cycle, but while inflation remains subdued, it lingers above the target. However, the outlook for 2024 presents a different scenario.
“2024 is going to be a much more vibrant year in terms of credit,” said Sandro Reiss, president of ABCD, in an interview with Fintech Nexus. He compared fintechs to a “canary in the mine” last year, highlighting their agility in pivoting when the market conditions darkened. With improvements underway, Reiss stated, “Right up our alley is a decrease in interest rates and an expansion of households’ available income. These conditions will help fintechs gain market share in a much more relevant way than it used to be.”
A decade later, fintechs loans represent 6% of the market
Certainly, the ascent of fintechs in Brazil’s vast credit market is noteworthy but falls short of wielding considerable influence. As per ABCD, their market share has surged from virtually nonexistent in 2013, the year of Nubank’s inception, to 6% in the current year.
Despite this growth, the major players, including Itaú, Bradesco, Santander Brasil, Caixa, and BNDES, continue to dominate almost the entire market. Interestingly, the rise in fintechs’ credit did not diminish big banks’ influence. On the contrary, these financial giants expanded their presence in recent years. The shift occurred as mid-sized and regional lenders experienced a decline in their customer base.
Reiss highlighted the transformation. “These banks used to control 25% of the market ten years ago, while the big banks had 75%,” he said. “Nowadays, large banks hold 85%, while mid-size bank shares fell to below 10% of the total credit market.”
Looking forward, he envisions immense potential for the fintech industry as lending conditions evolve. “Fintech’s 6% share could turn into something like 35% in the coming years,” he said. “There is definitely a lot of room to grow.”
Nubank, Mercado Pago place bets in lending
In the escalating competition in the Brazilian market, key players are turning to credit to fortify customer retention.
For years, constrained funding posed a significant hurdle to ambitious loan strategies. “This feeds into fintech’s risk appetite,” said Reiss. “You can’t risk your cash position to expand your loan book if you might not be able to raise capital again.”
With conditions showing slight improvement, major neobanks are intensifying their lending efforts. While smaller fintechs might face challenges in securing funding, dominant players still attract substantial investments. Mercado Libre recently secured $466 million from Citi to enhance credit offerings through its fintech unit, Mercado Pago. The neobank boasts nearly 50 million customers in Latin America. With fintech revenue surging at a 33% pace, the company is gradually increasing the pace of new loans.
Nubank, the largest neobank in terms of customers, is also amplifying its credit initiatives. The digital lender’s portfolio reached $15.4 billion in the third quarter. It primarily comprises credit card loans and a smaller proportion of unsecured personal loans. CFO Guilherme Lago outlined the company’s “low and grow” credit expansion approach, stating, “We see meaningful opportunities to continue to expand our credit portfolio in the future. We have tremendous room for growing credit just by fishing inside of our fish bowl.”
With nearly 80 million active clients, Nubank has ventured into personal loans in Mexico and payroll lending in its home country this year, a strategic move towards increased profitability. Lago noted that Nubank’s customers account for 40% of the total payroll users in Brazil.
Fintech credit: an opportunity for fintechs in secured lending
The trend of payroll lending underscores a growing strategy embraced by fintechs in Brazil. According to Reiss, the post-pandemic period witnessed many firms opting for specialization, with numerous fintechs gaining expertise in collateralized lending.
“These two years of a somewhat downturn created a scenario where many fintechs got more specialized and went deeper into the data,” noted Reiss. “When risk appetite was a strain, companies started to use collateral as a way to mitigate risk. And fintechs are good at using digital rails and collecting data. Managing collateral is actually something that fintechs can do much better than banks.”
While Brazilians may hesitate to offer their real estate or cars as collateral, fintechs have excelled in utilizing “soft collateral” as a guarantee. This involves payroll and credit card receivables. Reiss explained, “Borrowers are much more willing to share their cash flows than hard assets. Now, as fintechs branch out from the unsecured space, fintechs will be in a very good position to take advantage of this as of next year.”