Notes from the road: driving financial inclusion in Brazil

Lack of access to the financial system limits the life chances of many people in the emerging world, and economic development more broadly. For a select group of companies, enabling financial inclusion is both a structural-growth tailwind and an impact opportunity.

Nov 9, 2023

3 minutes

Eduardo Gomes

The fast view

  • Lack of access to the financial system limits the life chances of many people in the emerging world, and economic development more broadly.
  • For a select group of companies, enabling financial inclusion is both a structural-growth tailwind and an impact opportunity.
  • That was evident on a recent research trip to Brazil. From the beach to the back of a taxi, there were clear signs that an innovative payments system is driving company growth and economic development.

In Latin America, small and midsized enterprises (SMEs) account for 99% of companies and 60% of formal employment1. However, Latin American SMEs have a larger-than-average productivity gap – i.e., lower economic output per worker relative to bigger companies than in other regions – and account for only onequarter of GDP. One reason for this is that they are deeply underserved in digital solutions to sell their products online. They are also severely underbanked, with the incumbent banks in Latin America tending to focus on large businesses and high-income customers.

Individuals are similarly excluded. According to the World Bank, in 2021, 139 million adults in Latin America and the Caribbean (28% of the population) did not have access to a financial-institution account. Brazil, Mexico and Colombia alone were home to 92 million unbanked adults, 65% of the total. The statistics are staggering, but the situation has improved significantly since 2011, when 260 million people did not have an account with a financial institution (see chart).

Percentage of adult population with no access to a financial-institution account

Percentage of adult population with no access to a financial-institution account

Source: World Bank.

A number of Latin American companies are actively addressing financial exclusion. MercadoLibre*, the largest online marketplace in the region which I met with recently, and Nubank*, the leading online bank, are two of them. They help to widen financial inclusion by providing digital infrastructure and financial services (through the Nubank app and Mercado Pago, MercadoLibre’s digital wallet) to SMEs, assisting them to become more productive, achieve greater market reach and grow. They also offer free digital accounts. By addressing a hitherto underserved market in a sustainable way, these companies in my view have a long potential growth runway ahead.

State institutions in Brazil are also working to bring more people into the financial system. During my trip to the country, it was encouraging to observe the widespread adoption of PIX, an instant-payment system launched by the Central Bank of Brazil in November 2020. PIX is an alternative to the legacy official Brazilian payment method called ‘Boletos’, through which transactions can take up to three days to be completed, compared to less than 10 seconds for PIX.

I saw it being used by individuals and enterprises in both the informal and formal economies, like the ‘matte’ (iced-tea) seller on the beach and the driver for a ride-hailing service pictured here, both of whom displayed QR codes to initiate payments via PIX.

This innovative system has been a material driver of financial inclusion in Brazil. According to the Brazilian central bank, almost 150 million Brazilians (out of 216 million) have used PIX, and the volume of transactions is increasing rapidly. PIX has been particularly important for lower-income people, who previously had to pay high fees for digital transactions. It has allowed more than 36 million citizens (c.20% of the adult population) who would not have been able to complete transactions – for a variety of reasons including prohibitive costs or lack of access to a bank account – to do so.

In less than three years, PIX has become an integral part of Brazil’s financial system, adopted and enabled by many financial enterprises, including MercadoLibre and Nubank. By extending financial inclusion, PIX should ultimately grow the pie for financial companies.

And while the incumbent banks may lose some fee income (PIX must be offered free to individuals, and charges are fixed at a low level for enterprises), we see it as a particular tailwind for financial-sector challengers. For MercadoLibre and Nubank, for example, it increases customer engagement by making it easier for people to transfer money to Mercado Pago and Nubank accounts. In addition, PIX usage generates credit data these companies can use in the future to provide other financial products, hence expanding their total addressable markets and long-term structural-growth opportunity.

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1 OECD, 2019.
* This is not a buy, sell or hold recommendation for any particular security. Individual security performance does not represent the performance of any Sustainable Equity strategy. There is no guarantee that any Sustainable Equity strategy is currently investing and/or will invest in the securities in the future. Sustainable Equity portfolios may change significantly over a short period of time. 3. MercadoLibre and Nubank were held in Sustainable Equity portfolios as at 31 October 2023.

General risks. All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.

Specific risks. Emerging market: These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.

Authored by

Eduardo Gomes

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