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Can Fintechs Help Brazil Navigate The Coronavirus Crisis?

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The Covid-19 crisis is impacting and transforming every sector across the economy, but investors in certain segments such as fintech, remain confident about the role these startups will play during and after the pandemic in Brazil.

Manuel Silva Martinez, partner and investment director at Santander InnoVentures, is among the optimists. InnoVentures is a $200 million corporate venture fund investing in fintech and has Brazilian companies such as Creditas and US blockchain platform Ripple among its portfolio companies.

According to Martinez, Latin America is a peculiar market, where the pace of changes that have driven fintech in other markets, such as smartphone penetration, has overtaken the ability of the financial services sector to meet new consumer needs. The result is a scenario where the population, until recently ignored by traditional companies, is better served by startups.

“Investments in Latin America are interesting for us, as it enables us to support the financial success of those emerging players, while gaining a better, deeper understanding of the future competitive landscape and how it will shape up outside, or in partnership with, the incumbent financial sector”, he points out.

Regarding Brazil in particular, the investor notes that institutional factors favor the performance of fintech startups, such as interest rates, which in turn facilitate the creation of credit startups. Another advantage is the advancements in the payments segment, which favor businesses active in the transactional side of financial services. Martinez also highlights the increase in the number of foreign entrepreneurs operating in Brazil, who helped to accelerate the maturity of the ecosystem.

As the pandemic unfolds and companies start thinking about scenarios in the short and medium terms, Martinez believes that Brazilian fintechs have a great opportunity to focus on offers aimed at consumers and small and medium businesses - according to him, the current scenario is not ideal for B2B propositions.

"It is hard to see the extent of the consequences on the global economy and deeper societal changes across the globe. Despite the confusion, fintech businesses have an important role to play", Martinez stresses, adding that this will happen across two dimensions: in the short term, the crisis is displacing global supply chains and associated payments, as well as risk transfers between productive agents.

“Fintechs could be a good way to bridge some of those gaps,” says Martinez. According to the specialist, these companies could work on ensuring faster payments, as well as greater information transparency, delivery of more financial information in real time, in addition to better and more direct communication with customers, alternative ways of evaluating their creditworthiness, as well as different ways to access capital markets.

The crisis will present other opportunities for fintechs: according to Martinez, the pandemic is likely to change what segments of the population become unbanked or underserved by rebalancing economic flows and profit pools. In addition, the disruption of capital markets and the huge interventions of governments in global economies can create new asset classes which can also bring business opportunities.

Challenges ahead

There are opportunities but turbulence is also to be expected. However, the flexibility and response capacity often seen among startups will be an “antidote” to the negative impact of the crisis, according to Martinez.

The investor anticipates a scenario where these companies will adapt quickly to respond to the new market imperatives. This includes an emphasis on remote, flexible and direct financial services, but involving a greater amount of risk.

"But it is likely that some fintechs will face short-term challenges that will put them under pressure in the coming weeks or months," he predicts. After all, fintechs are also part of a financial system which is under massive strain due to the public health crisis.

“[Fintechs] that rely on access to capital markets may suffer from a variety of challenges: lower supply of capital, or a hike in pricing, or a change in contractual terms, or a changing situation that limits securing long term sources,” he warns.

Regarding a possible increase in the mortality of startups as a result of the coronavirus crisis, Martinez believes that failure is a natural component of the innovation cycle, but argues that the current situation will affect some companies more than others.

“Businesses should themselves: how is my demand, direct or indirect, going be affected? What is my dependence on other external elements, such as access to capital markets, soundness of a particular regulatory asset or a distribution channel, and how will these elements be affected?”, the investor advises.

“The ability to understand the answers to those questions, making the right business decisions quickly and decisively and adjusting priorities, costs and perspectives will be the key”, Martinez points out. "Resilience and adaptability will be more important than the business model in order to weather this situation."

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