For decades, Brazil has had a huge credit problem. It is Latin America’s largest country and has one of the highest interest rate spreads in the world.
To give you an idea of just how bad it is, reports indicated that in 2019, credit card interest rates neared a staggering 300% in Brazil.
This is one of the reasons you’re seeing so many fintechs emerge in Latin America. Interest rates this high make it very difficult for the economically challenged to ever not be economically challenged. In another example of how startups in the region are working to boost inclusion as much as innovation, Open Co, a São Paulo-based consumer credit company, announced today that it has raised $115 million in a round led by SoftBank Latin America Fund.
Existing backers Raiz Investimentos, IFC and LTS also put money in the round.
Open Co was created earlier this year by the merger of Geru, an eight-year-old online lender, and Rebel, a four-year-old startup using AI and bank account data to underwrite risk and assess clients’ financial health. Its aim is to “finance consumption for Brazilians in a healthy way.” It plans to do this in a few ways, but for starters, by not charging 300% interest rates.
“Access to good quality credit at the point and time of need is the single most important obstacle for Brazilians to achieve financial wellness, increase consumption and create wealth,” said Sandro Reiss, Open Co’s co-founder. "It's a huge market that is still controlled by incumbents charging extremely high interest rates, which makes it difficult for people to pay back their loans. It is a vicious cycle; delinquencies are high and interest rates even higher. Our mission is to change that.”
Open Co provides clients with access to credit and access to tools that are designed to improve their financial lives, not make them worse. The process is 100% digital, with no bureaucracy involved; it claims to be fast, and the rates are lower than those of traditional banks.
Clearly, the need is there. An estimated 52% of the population use credit to pay for basic expenses, creating an unsecured consumer credit market of about $200 billion, of which about 70% is in revolving credit. As a result, 62 million Brazilians have overdue accounts or missed payments.
Open Co wants to give Brazilian people more options, and so far, the people seem to be welcoming those options with well, open arms.
There is a lot of buzz around “buy now, pay later” nowadays, but the truth is -- its execs point out -- that it has always existed in Brazil, a country where people usually buy things in installments with their credit cards.
Looking ahead, the Open Co team is refreshingly transparent regarding financials. To get even more specific, the team is projecting to reach nearly $196 million in revenues in 2022, a “3x” growth compared to 2021. It also aims to allow its customers to access over $616 million in financing in 2022.
Execs say that its business is profitable, but it is still heavily investing in growth and building better products and technology, which causes its cash requirements to be above the cash produced by operations.
Combining the results of its two predecessors, Open Co says it has helped consumers save more than $500 million in interest expenses over the years and has been increasingly establishing partnerships with merchants, retailers and service providers to be closer to its clients’ point of need when requesting credit. Overall, it has provided nearly $405 million in credit to more than 200,000 people so far.
“The consumer lending market in Brazil is massive,” Reiss told TechCrunch. “However, it is mispriced and dysfunctional for the consumers, with Brazilians being forced into paying the second-highest interest rate spread in the world.”
A few factors are working in Open Co’s favor, its team believes.
“We have a huge market with complacent incumbents, a population that adopts technologies early on and a supportive regulatory agenda. Last year we saw the creation of Pix, an instant payments system that allows people to transfer money in a few seconds, for free; and this year the implementation of open banking, which will reduce information asymmetry between incumbents and fintechs, started as well,” said Open Co co-founder Rafael Pereira.
The company plans to use its new capital toward its expansion plans, with “significant investments” in technology and product development. Naturally, it will also be doing some hiring. The company currently has 230 employees, more than 50% of whom work in tech and product.
“When it comes to plans for the future, we can say that we want to give credit to people who have overdue accounts,” Pereira added. “But we don’t want to do the traditional way, with high interest rates that make it difficult for people to pay. Our mission is to break this vicious cycle.”
Felipe Fujiwara, investment leader of SoftBank Latin America Fund, said that SoftBank is most excited about Open Co’s “large” opportunity to improve the quality of Brazilians' financial lives through credit.
“Difficulty in accessing credit is one of the biggest social issues in Brazil. More than half of Brazilians are obliged to ask for credit to pay their basic expenses, and the result of the combination of demand and high interest results in 62 million people being denied credit,” Fujiwara wrote via email.
The company, he added, has a track record in underwriting personal loans and in raising debt funding to provide better credit alternatives to consumers. At the same time, it offers merchants “the ability to meaningfully increase traffic, order value, conversion and GMV.”
“Besides that, it was the first fintech to use artificial intelligence to analyze customers, helping to solve the country's credit problem, which has one of the highest spreads in the world,” Fujiwara added.