Tech report: innovation
Banco Inter’s president is upbeat about the future as he taps Brazil’s vast unbanked and under-banked market
By VINOD SREEHARSHA
Brazil’s Banco Inter has seen its shares more than triple since an initial public offering last year. In July, the former mortgage lender turned online bank held a follow-on offering raising some 1.25 billion reais. SoftBank snapped up most of the additional equity offering, taking an 8 % stake in the online lender, which offers digital accounts, loans and investments and brokerage services.
Banco Inter plans to use the proceeds to grow its credit operations and acquire companies.
The equity sale came as financial technology companies in Brazil and throughout Latin America attract growing volumes of investment. Banco Inter is a rival to digital bank Nubank, which is now valued at $10 billion after a $400 million private funding round in July led by venture capital firm TCV.
Banco Inter is one of only a few Latin American fintechs to go public. And its equity deal marked an unusual investment for SoftBank, which has created a $5 billion Latin America fund to invest in technology companies in the region.
SoftBank has usually participated in private funding rounds but instead chose to purchase a stake through the equity follow-on.
“I think the fintechs broadly speaking should be trading at higher valuations than the incumbents are. I do think so. I don’t think it’s a matter of a bubbleâ€
LatinFinance sat down with Banco Inter President João Vitor Menin in São Paulo to discuss the company’s plans and the outlook for Brazil’s fast-growing fintech industry.
How would you describe investor reception for your follow-on share offering?
I think it was a success. It went better than we ever expected. We were the last follow-on equity offering before the August holidays. We noticed a hangover from the several follow-ons that had already priced. We had six times greater demand than we needed. And we brought in the largest and most significant technology investor in the world, SoftBank. I don’t think it could have gone better.
How did your relationship with SoftBank begin?
They approached us. They were mapping and screening many Brazilian companies and the entire digital banking market in Brazil. It was around the same time they announced their new fund for Latin America.
I told them ‘it’s great you’re interested but we’re starting our follow-on offering and I can’t cancel it.’ So they entered the offer and we continued with the follow-on.
During your road show, what kind of comments or concerns did you get about the economic picture in Brazil? It was well known the first quarter posted negative growth and the second quarter would be tepid at best.
The investment funds knew there was negative growth in the first quarter. They also knew pension reform is practically finished. So that was positive.
They see a world with a lot of liquidity and with negative interest rates throughout it. So people are looking for stocks. Brazil has the potential to grow and now our fintech and digital banking sector is reshaping one of the largest industries in the world. These funds said: ‘We want to be in Brazil.’
What was Banco Inter’s first product?
Our first product is what remains our flagship product today: the conta corrente (checking account).It combines three important characteristics: It’s a digital experience for the user, it’s free, and it is complete product. We’re not just a digital credit card or an online investment platform. We lend money. We invest money, exchange money, recharge your cell phone and offer insurance. It started with conta corrente in 2014, but after that, we started adding things.
Do the majority of your customers already have bank accounts elsewhere?
Yes, the majority of our clients are what we call “switchers.†They’re moving from their previous banks to Banco Inter. Why? Because they’re underserved and overpriced.
How important are the unbanked and the under-banked in Brazil to Banco Inter’s future?
They are incredibly important. Today there are 115 to 120 million people with checking accounts in Brazil. But 30 to 40 million are unbanked.
Today all the major banks have digital credit cards and start-up incubators. Do you see them as competitors in the future?
No. I don’t.
Why not?
If you look at their financial results and economic models, they’re imprisoned in a system that charges the maximum amount possible. People are overpriced and underserved. Do I think major banks will disappear? No, I don’t think they’ll disappear. I don’t think they’ll suffer financial losses. They will continue catering to large and wealthy businesses, but I think they’ll lose market share.
There was once a perception that the newer fintech upstarts could grow but would eventually just get absorbed by bigger banks. Do fintechs, including Banco Inter, have space to grow independently and to go public?
My vision is the following. We have a world full of money and there’s a buy side looking for companies that generate value. Folks on the buy side are no longer looking for companies that generate profit. They’re looking for companies that create value. Banco Inter is profitable. But more than profitability, investors are looking for companies that create value for customers, for society. And so I think for companies that generate value, there are unlimited amounts of capital available to grow, to do an I.P.O. or to get backed by private equity.
Besides the big banks, who do you see as your main competitors?
Traditional banks are on one side, and fintechs are on the other. Banco Inter is in the intersection. If you ask me who do I think will be the winners from the group of fintechs? I have three names: Banco Inter, MercadoLivre with Mercado Pago and Nubank.
How do you see the regulatory environment today?
The central bank’s agenda is totally pro-competition. It’s totally pro-innovation. It’s totally in support of companies that create value. The regulatory environment today in Brazil is very favorable for our business model.
Are you concerned about high valuations in private fintech companies? Are we seeing a bubble?
I don’t think it’s a bubble.
Are fintechs overvalued?
I think that when things change very fast in any type of industry in any given age in the modern world, you have some corrections. But what I think is important is the trend, and I think the trend is that people on the buy side believe that the future of banking does not lie with the incumbents but with the disruptors.
And that’s going to happen. Of course, during this journey, some wrong valuations will take place. Some fintechs are going to go bust. The market is going to go through some corrections, but I believe the trend is positive and it’s the correct one.
I think the fintechs broadly speaking should be trading at higher valuations than the incumbents are. I do think so. I don’t think it’s a matter of a bubble.
You’re always going to have some investor who made the wrong approach and assessments and they’re going to be paying too much.
