➤Sharp cost-cutting by Brazilian banks could drive price-based fintech models out of business.
➤Lack of historical data and high customer acquisition costs puts fintechs at a disadvantage in comparison to banks and technology companies.
➤Incorporating nonfinancial services is a way for fintechs to counterattack big techs' foray into finance.
Sergio Furio is the founder and CEO of Creditas Soluções Financeiras Ltda., a digital lending company he founded in 2012 to tap opportunities in Brazil's secured loan segment. The company recently garnered $231 million its series D funding round led by SoftBank Group Corp. Creditas is using the proceeds to expand into Mexico, where it expects to begin lending operations during the first quarter of 2020.
S&P Global Market Intelligence sat down with Furio on the sidelines of the Finnosumit Lendit Fintech conference in Miami, where the executive discussed the new phase of competition between Brazil's banks and fintech firms, and how digital lenders can stay ahead of the game.
The following is an edited transcript of that conversation.
Sergio Furio, founder and CEO of Creditas.
S&P Global Market Intelligence: Banks have been betting strongly on cost-cutting. How does that affect the competitive scenario today for fintechs?
Sergio Furio: It was very naive to think that banks would just sit and do nothing. I don’t think banks are "extremely inefficient," as it is often said. I believe they've got a distribution channel that is from the past, but its necessity is diminishing. They are getting digitized very rapidly, shutting down branches at a 10% pace per year in some cases. That will give them a lower fixed-costs structure which will enable price cuts. From this, several business models in the fintech industry will come out dead. You have to be reading this if you are a fintech.
How does that undermining work?
Fintech used to be a simple play, based on an idea that a lower price was going to attract more customers. But when the bank begins to reduce its costs and therefore its prices, what is the competitive advantage that fintechs have left? Fintechs have two problems: They need to invest in marketing to attract customers, while the bank already has a customer base deployed. Second, [is] credit scoring; though fintechs claim to be incredible at algorithms and data science, in the end, what happens is that more data is needed. And nobody has more of it than banks. Open banking in Brazil will help, but fintechs will still be in a weak spot.
What sort of fintechs are bound to survive a more competitive financial industry?
One of the models that will probably work will be that which is integrated into existing technology platforms with large access to data and clients. That is, a model that you can plug-in into Rappi, Uber or Mercado Libre, for example. They have their client base established, but not necessarily credit capabilities.
So fintechs might shift from selling user experience to banks to providing financial services know-how to big techs?
Exactly. If you are a technology platform with millions of clients, what you want to do is learn from fintechs. So you plug them in. It will work for fintechs, but it will be less profitable than you would like. In the end, it will be the platform that will own the client, getting the most out of it.
Creditas itself grew on offering lower interest rates in the market. Where do you fit in in this new scenario?
There is a second business model, which is the one we aspire to be, which is not centered on easy products but rather highly complex ones. Collateral loans are difficult for everyone. We believe that by creating this infrastructure we build a competitive advantage that can be sustainable over the medium term. In any case, you still have [high] customer acquisition cost. I believe getting into nonfinancial services is a strategy that makes a lot of sense.
So fintechs might end up incorporating capabilities from so-called 'superapps'?
Everyone in tech is trying to get into fintech. We want to do it the other way around. In the end, I am not going to do mobility, delivering packages or pretending to be Uber. That is not in my core. But we ended up having capabilities on high-priced products such as vehicles or houses [through home equity loans]. So we want to build an ecosystem of services around them. Say you want to make a house renovation, I not only finance you but manage the process all the way. You reduce the final cost by benefiting from scale with providers. And this way you can break out from the destructive circle of nonstop price cuts on your products.