From Food Delivery To Fintech, The New App Convergence In Brazil

After last month’s piece on Indonesia, I thought it would be worth taking a closer look at Brazil.  If Indonesia’s mobile economy is the new tiger of Southeast Asia, then Brazil’s is the jaguar of South America – just as formidable, with a character all its own.  It’s the fifth largest country in the world, with 212 million people.  Like Indonesia, it’s a very young country, with a median age of 32.    Here are some more interesting facts about Brazil:

Brazil’s people are highly clustered in major cities.  87% of Brazilians live in an urban center, and with a population of over 21 million, the greater metro area of Sao Paolo is one of the largest in the world.  This huge user base of urban, young, mobile-first consumers has given rise to homegrown start-ups in a variety of mobile verticals, from 99 (ride-hailing) to iFood (food delivery), lending (Creditas), and banking (Nubank).

Similar to the story playing out Indonesia, many of these local heroes have already grown to unicorn status, fueled by huge infusions of cash from international VC firms and strategic investors from China.  In January of last year, 99 received $100 million in funding from and then was acquired at a billion dollar valuation by Didi, China’s answer to Uber.  Nine months ago, iFood received $500 million in funding.  And Nubank, the most valuable startup in Latin America, is currently in discussions with global investors on a $1 billion dollar round which would value the company at up to $10 billion, making it one of the largest fintech companies in the world.  Clearly, Brazil’s mobile economy has made it to the big leagues.

Of all the major verticals in Brazil’s mobile landscape, fintech is perhaps the most dynamic.  Brazil has over 60 million people unbanked, representing over 40% of the adult population.  Brazil’s banking industry is highly consolidated, with the top 5 banks controlling 82% of all banked assets.  Similar to the “Big 3” automobile companies in the US in the post-war era, Brazil’s banks enjoy monopoly power, only extending credit to a select few and otherwise charging rates that would be considered usurious elsewhere – imagine credit card rates of 270%!   Of the reasons why so many Brazilians don’t have bank accounts, too high interest rates and lack of trust are among the most cited.

It’s an industry ripe for disruption, and more fintech start ups – 370 to be precise -- have launched in Brazil than in any other Latin American country.  They are attacking opportunities in payments/remittances, business and consumer lending, wealth management, insurance, and trading.   As these new entrants gain traction, we can imagine how the new financial ecosystem will evolve.  As analysts at Goldman Sachs have described, a “re-bundling” of the myriad financial services offered by traditional banks will occur, only by API.  Fintech infrastructure software companies like Plaid and TrueLayer will enable, say, an asset-based lender like Creditas can to offer its loans to customers of Nubank directly on Nubank’s app.  In this way, neobanks like Nubank have the opportunity to become financial services “super-apps,” acting like a portal that can offer their customers everything from home loans to investments from one interface.  The investors who are currently valuing Nubank at $10 billion USD are making a big bet this will happen.

But interestingly, the major fintechs face unexpected competition in capturing the value from increased financial inclusion.  As we saw in Indonesia, service-based apps, especially on-demand apps like ride-hailing or food delivery, are now driving greater financial inclusion in Brazil.  You may recall the anecdote about how a driver for Go-Jek, the Indonesian Uber, was able to qualify for a home mortgage because of his work history.   The on-demand “local super-app” model has originated in Asia.  China’s Meituan Dianping is perhaps the best example.  Likely the most valuable app you’ve never heard of, $44 billion Meituan began as a group buy platform for local/small merchants of goods and services, expanded to food delivery, and evolved into a platform where over 400 million users access services ranging from restaurant reviews and reservations to hotel and home rentals, to movie tickets and travel booking.   Meituan generates huge value for small/local businesses by leveraging data about customer consumption habits and price sensitivity.

Brazil’s iFood and primary competitor Rappi are following this script.  Beginning with one value proposition – delivering restaurant meals or groceries – they are morphing into platforms that are integrating into both their merchant’s operations and consumers’ financial lives.  iFood, for example, started iFood Shop, a marketplace for restaurant goods where restaurants can purchase needed supplies using money generated from the platform.  Combined with an analytics platform that helps restaurants optimize their product mix by seeing cuisine trends from the whole market, iFood becomes a SaaS-like super-app for its merchants as well as for its customers.

Brazil, then, shows all the hallmarks of the new mobile economy playbook established in China.  Players like Nubank and iFood are growing at exponential rates and are likely to converge and compete in many areas as super-apps, much like how Meituan now competes with Alipay.  Those who benefit most from this convergence are Brazil’s currently unbanked, who will be brought into the financial fold via these new super-apps and have their lives transformed for the better.  The only losers will be the incumbents from the old economy, whether banks or grocery stores, who still think the things that used to give them monopoly power, like real estate, physical distribution and access to traditional capital, hold the same value.  They are no match for the new generation of super-apps.

Source: Forbes.com

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