Brazil, attempting to extricate itself from a recession as its president fends off a corruption scandal, has a well-kept secret: A thriving financial technology (fintech) sector that has managed to defy the country's political and economic turmoil.
With President Michel Temer denying allegations that he condoned a bribe to silence a witness in Brazil's widening corruption scandal, the country may find itself in the position of having to remove its second consecutive leader before their time in office expires. Meanwhile, Temer's economic reform agenda – unpopular with the public but embraced by markets — hangs in the balance.
The political intrigue has all but drowned out a tentative rebound in the economy, and a nascent boom in fintech. Moody's Investor Service estimates that investments into digital disruption in the banking system has topped as much totaled 5 billion reais (more than $1.5 billion) per year.
At least for the moment, enthusiasm blooms for Brazil's fintech sector, which is driving innovation within the country's banking sector — an area known for being tightly held and bureaucratic. In fact, Brazil's central bank is mulling new regulations this year to oversee the growing number of fintechs, which an official told Reuters this week was "very positive" for the country's financial system.
A recent report by Moody's highlights the number of FinTech startups in Brazil has "surged" in recent years, now making it the largest financial technology market in Latin America with more room for growth.
Simultaneously, Brazil's largest banks are also investing heavily in fintech, in order to increase efficiency and appeal to millennial custumers – a significant and growing segment of the population with particular preferences.
"The structural shift in customers' demands and behavior is leading banks to increasingly focus on alternative service channels," Ceres Lisboa, senior vice president with Moody's and co-author of the report, wrote in a research note last month.
"Lenders are also attracted to digital banking because they see opportunities to reduce costs as Brazil's economy remains weak after a protracted recession," he added.
Aside from political risks, there are other factors that loom large in Brazil's fintech sector. A January report by Citi cited Brazil as a "laggard" when it comes to the ability to reduce costs, as well as its "digital readiness."
Yet with the growth in digital services forcing the country's banks to gradually downsize, Brazil is being forced to adapt to a younger and readily agile generation that is demands flexibility on the retail level.