Brazil, the largest fintech market in Latin America (Latam) and the fifth in the world with more than 750 fintech companies, had a glorious year 2020, and the momentum is expected to continue in 2021.

Investment in Brazilian fintech companies totaled US$1.7 billion in 2020, up 86% from US$910 million in 2019. 2020 also saw the fintech sector welcome several important regulatory and infrastructure developments including the new regulatory sandbox, open banking regulation, and the launch of Pix, Brazil’s instant payment system.

Riding on this momentum, fintech funding in Brazil continued to accelerate this year, with two of the top 10 fintech deals in Q1’21 going towards Brazil-based companies: Loft, a digital platform that provides instant offers to sellers and helps buyers find available properties (Mar; US$425 million); and Nubank, a challenger bank serving 40 million customers (Jan; US$400 million), according to CB Insights’ State of Fintech Q1’21 Report.

2021 should see greater adoption of fintech solutions, a surge of interest in insurtech, open banking and embedded fintech, and “hyperspecialization” of fintech products, predicts Bruno Diniz, managing partner of fintech-focused consultancy Spiralem and one of the most influential fintech experts in Brazil.

Pix to boost digital payment adoption and innovation

In a column for Exame, a top Brazilian business magazine, Diniz said he predicts a surge in digital transactions, fueled by the introduction of Pix, the instant payment system launched by the Banco Central do Brasil (BCB), the central bank of Brazil, in November 2020.

2021 should see “an acceleration of the use of digital payments” fueled by new digital habits introduced by COVID-19, and the growth in the usage of Pix as “the new instant payments system gets popular and gains scale,” Diniz wrote.

2021 should also see strong fintech development and innovation building on top of the Pix platform, he predicts, noting that last year, Banco Bradesco, the country’s second largest lender started offering credit via Pix, and that Banco do Brasil, another leading financial institution, began enabling Pix payments through WhatsApp.

The central bank has also started releasing new features and capabilities, including Pix Cobrança, which allows companies to generate a QR code for a transaction at a future date. Other features planned to be released this year include offline transactions, cash withdrawals, and a “salary account.”

Rise of insurtech

Insurtech, a nascent fintech segment, is expected to see strong traction this year on the back of early initiatives by fintech leaders and regulatory developments, Diniz predicts.

Last year, Brazilian challenger bank Nubank launched a fully digital life insurance offering in partnership with Chubb, a major development in insurtech indicative of the rising trend.

This year, the regulatory sandbox put in place earlier by the central bank, in collaboration with the Securities and Exchange Commission of Brazil (CVM), and the Brazilian Superintendence of Private Insurance (Susep), accepted its first projects including Pier, a digital insurer for cars and cell phones, and Stone, a Brazilian startup unicorn which will be testing a digital insurance offering.

“There is much to be done in the democratization of insurances in Brazil and perhaps we are in the ideal time to do so,” Diniz wrote.

Open banking catches interest

Open banking is another segment that’s set to experience strong growth this year, Diniz predicts. In particular, development and interest in the field will build on new regulation introduced in 2020 and the kickoff of the implementation plan earlier this year.

Brazil’s open banking implementation aims to boost market competition and encourage innovation. It’s part of the country’s broader agenda of modernization of the national financial ecosystem.

“Fintechs focused on infrastructure for open banking should also fly high,” Diniz wrote. “Several companies in this segment have entered the radar of investors and banks … [as] most traditional players are not technically and culturally prepared for the changes brought about by an open banking scenario. Therefore, there will be a huge space for companies such as Quanto and Belvo, for example, which are operating in this field.”

Banking-as-a-service (BaaS) providers ride the embedded finance movement

Embedded finance, a booming trend referring to non-financial companies integrating financial services into their core offering, will put Brazilian BaaS providers in the spotlight.

Last year, local fintechs including Fitbank, Iugu, Conductor, Zoop and Swap received significant investment and saw strong growth. The ongoing platformification of the financial market will keep up the momentum.

“We definitely should see more investments and merger and acquisition (M&A) deals in this area, like the acquisition of Hub Fintech, a BaaS provider, by Magazine Luiza that happened in December 2020,” Diniz wrote.

“Hyperspecialization” of fintech products

Amid aggressive fintech pushes from both financial and non-financial companies in 2020, the sector will see fierce competition this year and force companies to “hyperspecialize” on small niche markets, continuing on a trend that had already been visible last year.

Diniz cited the example of Brazilian retailer Via Varejo which owns banQi, a digital banking app that targets the unbanked and underbanked. The app offers free digital transaction capabilities and enables access to banking services through Via Varejo’s retail locations including goods purchases, bill payments, mobile top ups, and more.

In the restaurant industry, leading delivery app iFood started offering digital bank accounts for its partner restaurants in November 2020, providing some 236,000 restaurateurs with services for banking transactions, credit transactions, and acquiring services.

Ambev, a beverage producer, introduced in December 2020 a new digital wallet for bars and restaurants, allowing them to track customer payments and use the available balance to pay bills or make transactions.

In digital banking, neobanks and challenger banks focused on small and medium-sized enterprises (SMEs) and entrepreneurs are expected to pick up steam in 2021 after raising significant funding last year. Key players to watch out for this year, according to Diniz, include Cora, which got its license approved by the central bank in 2020 and recently raised a US$26.7 million Series A funding round, and Conta Simples, which closed a US$2.5 million seed funding round last year.

Featured image: Photo by Raphael Nogueira on Unsplash