Brazil’s biggest payments companies are racing to scale new products as they jostle aggressively for market share and seek ways to make up for tightening margins.
Amid intense competition in merchant acquiring, the biggest players are turning to lending, banking and super apps in a bid to defend territory and grow. PagSeguro, for example, estimates that by adding credit, banking and software products it can tap into a revenue pool that is 14 times bigger than that of payments.
The strategies offer insight into how fintechs with strong distribution models can add new products and services to compensate for sharp changes in market dynamics.
The third-quarter financial results from Cielo, Stone Co and PagSeguro also shine a light on the rapid change in Brazil’s merchant acquiring market.
The “price war” in merchant acquiring continues, Paulo Caffarelli, chief executive of incumbent Cielo, said on an earnings call, although he added that he believed the intensity of the competition has peaked. “Now things are starting to adapt, and we already start to see in the market a systemic change in pricing.”
The client base continues to grow for Brazil’s merchant acquirers. Stone topped 428,000 clients, growth of 68,000 in the third quarter. PagSeguro reported 5 million active merchants, growth of 305,000 in the quarter. And incumbent Cielo added 100,000 clients in the quarter to reach 1.5 million merchants.
Yet while PagSeguro and Stone also reported impressive revenue growth, Cielo and Redecard, the other main incumbent, fared less well.
Net operating revenue at Cielo fell by 17.2% from a year earlier, down to BRL1.3bn in the quarter. Itaú Unibanco, which owns Redecard, gave less detail but reported that card revenues had fallen 3% in the first nine months of the year, versus 2018, as a result of lower revenues from the acquiring business.
While Cielo still has a 42% share of Brazil’s acquiring market, the company is searching for ways to maintain leadership, through better customer service and new products. Caffarelli, who was hired from Banco do Brasil a year ago to lead Cielo’s turnaround in the face of aggressive new competition, told investors the company would seek to make better use of the data it has on customers, although offered little detail on the plan.
Additionally, Cielo is trialing a lending product and has launched a new app.
From payments to lending….
Under its pilot, Cielo has lent around BRL100m to its customers with an average ticket size of BRL40,000, Caffarelli said. He offered few details on the performance of the pilot except to say acceptance was “good” among clients it had offered loans to.
That reflects a move towards lending across the market. PagSeguro, which began lending in May 2018, said its credit portfolio had reached BRL 196m, with an average loan size of BRL3,300. It’s delinquency ratio was “very low”, it said. The company, which focuses on small and micro-businesses said lending was part of a long term strategy to engage merchants and “may” generate additional revenues in the future.
Stone, meanwhile, reported that it has lent BRL185 million to 13,400 clients, so far – and that its non-performing loan rate stands around the “mid-single digit” area. The figures indicate an average ticket size of just under BRL14,000.
But the acquirers are not stopping there. Cielo’s new app, “Cielo Pay”, allows merchants to accept payments via QR code and boleto and for consumers it offers a digital wallet. Cielo has big ambitions for the app, saying it will add new features soon, including mobile top ups, transport and entertainment payments and WhatsApp-based help service.
Stone may have its own super app in mind, although it did not use that term. Rather, the company noted that it has signed up 29,000 customers to its banking service. Chief executive Thiago Piau said Stone plans to launch an “integrated financial platform” in the first quarter of next year, offering an “unparalleled combination of a unique financial platform with best-in-class customer service”.
PagSeguro has ambitions to be a digital banking leader in Brazil. It has launched a high-yielding savings account and a new mobile app – which it describes as a “super app” – in the past two months. The company says it has 1.9 million active users of PagBank, which it defines as consumers who have made at least one transaction in the past 12 months or merchants who use at least one digital service beyond acquiring.
PagBank users can use their digital account to top up Uber, Spotify and Google Play accounts, and it recently added credit cards and a savings account.
“We believe these banking features will enable us to attract, engage and monetize both merchants and consumers, helping us to improve our client’sloyalty and stickiness,” said Eduardo Alcaro, chief financial officer.