Global investors find in neobanks a point of entry into Brazil

Global financial players are buying into and partnering with Brazilian digital banks to gain direct exposure to the profitable South American market.

Last February, Spanish giant Banco Bilbao Vizcaya Argentaria SA announced a $300 million deal with online lender Banco Neon SA, the latest in a series of investments by foreign banks and investors into the buoyant digital banking industry of Latin America's biggest economy.

Bolstered by the pandemic, the digitization of the economy has accelerated at a swift pace, driving the adoption of digital banking services and allowing neobanks to draw in millions of clients. Banco Neon, the São Paulo-based fintech founded in 2016, reported 15 million accounts and a valuation of $1 billion as of this year.

"Neon represents a new step in BBVA's strategy to enter new markets through investments in digital platforms," the Spanish bank said in a press release. "Brazil is a very attractive market given the size of its economy, and the development of interesting propositions in the digital financial services arena."

While in the past setting up a physical footprint would have been too costly, the rise of financial technology lenders now provides an attractive entry point through acquisition and partnerships.

"It is easier now for these players to expand operations," said Bruno Diniz, a fintech adviser and best-selling author in Brazil. "Now, it is possible to grow digitally and the best way for them to do that is through Brazil's biggest neobanks," Diniz added.

The BBVA deal takes place in a context of technological disruption, especially for digital financial services. Successful initiatives sponsored by the Banco Central do Brasil such as the low-cost payment system Pix have also contributed to the digitization of the economy, expanding the digital clientele as fintechs have grown in size and sophistication.

The Spanish bank's partnership with Neon follows previous similar deals, such as JP Morgan's acquisition of a 40% stake in Banco C6 SA in 2021. JP Morgan already offered a sizable corporate lending service in the country, but through C6 it entered the retail banking segment. It is "fun to be the disruptor" in foreign markets, CFO Jeremy Barnum said at the time.

Previously, Warren Buffett's Berkshire Hathaway Inc. reported investment in Nu Holdings Ltd., the largest digital bank in Brazil. Nubank launched its IPO in U.S. markets last December, tapping some $2.6 billion while attaining a $50 billion valuation.

"They are taking advantage of a large market that tends to continue growing and that brings opportunities," Joelson Sampaio, a finance professor at Fundacão Getulio Vargas think tank, said in an interview. Sampaio argued that there are "windows of opportunity that they do not want to miss" and that for traditional banks it is easier to invest in fintech rather than to develop these areas internally.

These kinds of partnerships provide a win-win situation, according to experts.

"Those digital banks need capital," said Guilherme Machado, a bank director with S&P Global Ratings. "And in terms of size, it's not even a big investment for these players. And it can be very profitable given the margins that Brazilian banks operate with."

However, the scope for large investments could become limited since the competition in digital banking is already very strong, Machado said. There are fewer remaining assets, or well-developed neobanks, for these large global banks to buy, although there could still be room for further partnerships.

BBVA sets foot in Brazil

With its latest investment, BBVA acquired a 21.7% stake in Neon, adding to a previously held position through venture capital fund Propel. Following this transaction, BBVA reported a total stake of 29.7% in the digital bank.

"This investment allows BBVA to gain exposure to retail banking in Brazil, a market with one of the highest potentials in the world," Diego de la Vega, a general manager at Latin American Venture Capital association, or LAVCA, wrote in a recent report.

Spanish banks Banco Santander SA and BBVA have relied on their large Latin American units to increase their profitability in recent years. However, the acquisition of a stake in Neon has been the first incursion into the Brazilian market by BBVA, which has a large presence in Mexico, Colombia, Peru and Argentina.

Santander, which is well established in Brazil through Banco Santander (Brasil) SA, said last December that it will spend about $6 billion on digital transformation and technology in Latin America between 2022 and 2024. Santander said 40% of its profits are generated from Latin America.

Higher than average financial growth, greater profitability and a large proportion of unbanked population with smartphones are three of the factors that have drawn interest from international banks to the region, according to Julián Colombo, CEO at N5 technology company.

"Higher banking rates in Latin America lead to a greater return on capital by banks than elsewhere," Colombo said. "There is huge financial system growth, extraordinary returns and 50 million adults without a bank account."

BBVA and Banco Neon did not reply to a request for comment.

As of March 23, US$1 was equivalent to 4.86 Brazilian reais.