Brazil’s Big Blockchain Bounce (And Other Digital Payments Advances)

The digital payments news out of Brazil has been fast and furious over the last few weeks – particularly when it comes to blockchain. And while the continual drumbeat of announcements from various players looking to find new and inventive ways to apply distributed ledger technology to various parts of Brazil’s financial services industry has something of a tendency to stand out, digital payments and banking news in general has been coming quick and constant.

Digital enterprises are going regional and instant payments are going national (and earlier than originally scheduled). The big story, however, has been blockchain, as entities public and private are hoping it might just be the digital magic bullet the entire ecosystem needs.

But before partaking in blockchain bacchanal …

Nubank’s $10B Regional Expansion

While Nubank is far from a household name in the U.S., the Brazil-based firm is on a path to becoming the most valuable startup in Latin America.

And, according to Nubank, it’s just getting started. The goal is to become one of the most valuable financial technology startups in the world as it eyes a region-wide expansion and seeks  a valuation between $8 billion and $10 billion, according to reports in Recode. And it seems they are track to actually meeting that goal: The firm has been in talks with SoftBank Group for a new round of funding that could actually get them there. According to reports, Nubank is looking to take in as much as $1 billion in their next round, which could include SoftBank as well as other support entities.

“We are always assessing opportunities for new funding,” a Nubank spokesperson said, declining to comment on specific figures. SoftBank declined to comment.

Were the deal to go through, Nubank would be the second-highest valued FinTech in the world, trailing Stripe, which is currently valued north of $20 billion. Founded in 2013, Nubank currently claims 8.5 million customers and is the largest online bank outside of Asia. The firm offers a variety of services (credit cards, debit cards, rewards programs) to underbanked consumers at affordable rates – a big offering in a nation where 55 percent of the population has no access to formal banking, interest rates are incredibly high and brick-and-mortar banking services are ranked as some of the worst in the world.

Meanwhile, while Brazilians aren’t widely banked, they have reliable phone services in one of the world’s fastest growing markets for mobile, and Nubank’s no-fee credit cards can be used with just a smartphone.

The deal is not final for now and has not been confirmed by SoftBank, and there is always a chance it could fall apart or that its terms could change. But if it goes through, NuBank might soon be a much more famous firm on the global stage.

Instant Payments Coming Early

The banks of Brazil are currently under a very different type of pressure than they’ve ever felt, according to reports. Part of that is the competition coming from upstarts like Nubank. But it also comes from Brazil’s government, in the form of Finance Minister Paulo Guedes actively and publicly campaigning for their disruption.

“We need competition, competition is good,” he said, before accusing the banks of having “cartelized” the Brazilian economy with their “excessive” profit-seeking.

Perhaps given the persistent and growing pressure, it should not be surprising to see the banks trying to raise the level of their competitive game – and perhaps rehab their less-than-sterling public image.

In that vein, Itaú Unibanco Holding, Brazil’s largest bank, announced last month that it will be launching its QR code-based instant payment system, called Iti, by Q3 of this year, according to a report by Reuters.

The app-based program will connect consumers and merchants, and will be open to Unibanco customers and non-customers. Transactions will come with a 1 percent fee, and merchants will immediately receive payments. The fee is cheaper than that of many current card processors, and the app doesn’t require a merchant to buy a card reader.

Marcos Magalhães, the CEO of Itaú’s card processor Rede, said the new service will attract a number of small merchants who don’t need customized services. In addition to the QR service, users will be able to transfer money to each other using an in-app messaging service. The company is also reportedly considering offering investments, loans and insurance products through the app.

Unibanco’s announcement followed one by Brazil’s Central Bank (BCB) a few weeks earlier that a QR code-based instant payments system will be designed by 2020, and will be up and running by 2021. The idea is to create a real-time payments ecosystem through which payments and transfers clear and reach their destinations instantly.

Looks like Unibanco is trying to get ahead.

The Blockchain Bonanza

In Brazil, there have been all kinds of blockchain announcements and advances from all kinds entities in recent memory.

The BCB has officially unveiled details of its newly developed blockchain platform, Pier, designed to facilitate information exchange between financial regulators.

The Pier platform was developed wholly in-house by BCB IT staff. It will enable the BCB to directly exchange messaging and data with other regulators such as the Securities and Exchange Commission of Brazil and the Superintendence of Private Insurance.

Blockchain was chosen, according to BCB’s IT Deputy Chief Aristides Cavalcante, because it is immutable – no regulator can tamper with the information because every data request is recorded cryptographically, and it represents a “horizontal network of information sharing” that negates the need for a central data hub.

And the BCB isn’t the only banking entity going big on blockchain in Brazil – the private banks are getting in on it, too.

Earlier this month, reports indicated that a consortium of Brazil’s banks will be implementing a new standardized blockchain identity solution powered by the Hyperledger Fabric platform. Co-developed by IBM, the BCB and CIP, the new platform is designed to authenticate digital identity by leveraging a mobile phone’s SIM card in combination with other smartphone-derived data points. That combination of data will be used to build a secure digital ID recorded on blockchain, which can be used by a variety of institutions to generate access credentials.

On a related but separate note, Brazil’s largest and fourth largest bank (Banco Bradesco) are reportedly partnering with blockchain tech firm R3 to build a platform  for foreign trade and insurance.

And then there are the foreign big names in crypto now moving into Brazil – most notably of late, Ripple. The firm announced earlier this month that they have set up their first Brazilian outpost as part of their larger mission to expand across South America.

“In January, Ripple surpassed 200 customers on RippleNet. The company is experiencing rapid customer growth across all markets, and is launching in Brazil in response to high customer demand in South America,” said Eric van Miltenburg, Ripple’s SVP of global operations. “We are fortunate to have Luiz on board to expand our presence in the region and help our customers address the challenges of cross-border payments.”

The company said more than a dozen Brazilian financial institutions and money transfer companies are using its RippleNet product, including the Brazilian arm of Santander, money transmitter BeeTech and local bank Banco Rendimento. The goal, according to Ripple, is to add an average of two or three new financial institutions per week to RippleNet. So far in 2019, Ripple reports it has seen more transactions on RippleNet in Q1 than in all of 2018.

Ripple says its focus is on building its customer base and team in Brazil and throughout South America, including in countries such as Chile, Peru and Argentina. It will also fund the University of São Paulo and Fundação Getulio Vargas to support the research of technical development across the region.

“We believe that academic institutions will play a key role in driving the blockchain industry forward,” said Luiz Antonio Sacco, managing director, South America. “USP and FGV are innovative, forward-thinking institutions that are investing in blockchain research to explore new use cases and help prepare students for future jobs in this space.”

The role of blockchain as an authentication method or a new mechanism of international funds transfer remains to be seen in Brazil. Blockchain has a long history of building a lot of hype for what it can do, only to have that hype deflated by what it actually does do.

But with Brazil’s massive economy that includes a lot of gaps and consumers left behind, the country is in the unique position of having access to many different digital financial services solutions. Maybe blockchain has found the environment that actually needs it.