Fintechs: Do the good results from the beginning of the year persist? – 06/13/2023 – Market

Brazilian fintechs positively surprised the market at the beginning of this year, by delivering solid results in an extremely challenging environment, with high interest rates, defaults reaching record levels, a tighter credit market and challenges of continuing innovation after the initial boom in the segment.

Now, specialists are looking closely at the future of companies like Nubank, Inter, Stone and PagBank —formerly called PagSeguro— to understand whether the good results will be sustained over this and the coming years.

One of the aspects of fintech balance sheets that surprised the market is the customer base of these companies.

While more traditional banks manage to protect themselves by restricting loans to customers who have a high credit rating and therefore have a low risk of default, fintechs have gained strong market share by capturing a slice of the population that is usually more vulnerable to indebtedness.

A study recently released by the Central Bank shows that, in three years, the number of credit card customers in Brazil with a debit balance increased by 30.9%.

According to BC, this growth can be explained by the entry of new “players” in the market in recent years, “which meant that a significant portion of the Brazilian population now has access to one or more credit cards.

But even with a more fragile customer base, in general, fintechs are managing to grow in the market, delivering profitability, and with low growth in defaults. “The pace of average revenue per customer has grown at a high level”, says technology and media analyst for the financial sector at XP, Bernardo Guttmann.

On the other hand, analyst Hugo Queiroz, partner at L4 Capital, draws attention to the fact that the risk of these fintechs has increased along with the growth of the credit portfolio. Nubank and PagBank, for example, increased in one year more than 70% of their provision for bad debts, that is, the bank’s reserve in case customers do not pay the amounts due. This impacted the companies’ profit.

But there is also an opportunity for improvement there. Once risks in the credit market subside, these companies can increase profit as they need to provision less.

Another positive point of these fintechs, according to experts, is the improvement in cost management, in addition to the reversal of losses into profits, which, combined with the growth in market share, created an environment for positive surprises.

LIMITED GAINS?

The question is: after an aggressive advance in the credit market, with a large expansion of the customer base, what solutions will these fintechs come up with to continue expanding?

“The bulk of gains with technology that these companies could obtain have already come. Now, they need to compete, structure themselves within their sectors and monetize themselves”, says the director of resource management at Nova Futura Investimentos, Pedro Paulo Silveira.

In Silveira’s view, after fintechs were able to turn losses into profits this quarter, they now need to think about strategies to build a more solid future.

For him, Cielo can be a good example for other fintechs, after the company advances in the area of ​​prepayment of receivables, and manages to grow in profitability in this market.

Experts don’t expect digital banks to catch up with banks

Experts consulted by Sheet are more skeptical about digital banks, due to the business model of these companies.

Silveira explains that, as these institutions do not earn revenue from services and there has already been a significant increase in the credit market, including a customer base that is still dubious due to the current macroeconomic cycle, in his opinion, it will be difficult for these fintechs to be able to grow sufficiently to compete with traditional banks.

In this sense, Queiroz draws attention to Nubank. The bank is in a period of strong growth and profitability is under construction. According to the expert, Nubank’s implicit growth is at 67% over the next ten years. And then there is a discussion in the market. If the institution accelerates its leverage, that is, the increase in profitability based on debt, it will fight head-on with the banks, which could be a problem.

“I don’t see Nubank on an equal footing to fight with the traditional ones in services, in credit and much less in security”, he says. The specialist sees a good perspective for the bank, although he expects a challenging environment.

Inter’s case is similar. Queiroz analyzes that, as they are digital banks, they will have to constantly invest in technology and marketing to stand out and find solutions, which will always impact the profitability of these companies. “I can’t see this bank model reaching profitability for Bradesco, Itaú, Santander, Caixa and Banco do Brasil. Precisely because of what I said and because of the difficulty of monetizing customers”, he points out.

With regard to Inter, Bernardo Guttmann, from XP, draws attention to the fact that the bank has presented, in the last results conference call, an ambitious plan for the next five years. “But revenue growth in the first quarter was short of the company’s ambition,” he argues.

The specialist explains that Neobanco is adopting a different strategy from Nubank, in the sense of seeking a monetization path greater than market share growth. Guttmann says that now it is necessary to observe the future of the two banks to understand if the positive numbers for the quarter will be sustained.

For Silveira, from Futura Investimentos, investment platforms can be a bold way out for these companies.

Machinery segment is improving, but will face challenges

Speaking of Stone and PagBank, Queiroz says that they should accelerate their degree of leverage in the coming quarters, which should generate acceleration in profitability, if they manage to maintain the dynamics seen at the beginning of the year, with a much greater increase in revenue than that of expenses.

This happens because both companies are managing to diversify their operations, expanding their customer base and growing more in revenue due to their entry into the credit market.

Part of this strategy was reflected in the change of name of PagBank, previously called PagSeguro. According to the disclosure material for the first quarter results, the company decided to converge its various brands into one, adopting the single name of PagBank, previously just an arm of the company, to simplify its communication.

In the case of Stone, the company was able to advance further in this regard, according to Queiroz, because the company returned to banking activities, working on a new model and way of operating.

At the same time, Queiroz draws attention to the fact that the segment of card machines has improved, with both companies betting on a more prudent and conservative environment.

Still, Silveira sees challenges for acquirers. “There was a rush by these companies to recover their balance sheets after performance problems in previous quarters”, she points out.

The expert believes that, as with neobanks, after growing rapidly and reversing losses, these companies still face the challenge of continuing to deliver results in the complex environment of the current economic cycle.