How Fintech Became a Hit in Brazil

With its fast growth, Nubank has become the poster child of the fintech boom in Latin America. But it isn’t alone. The digital technology revolution that has upended the transportation, food-service, retail and telecommunication industries in the region is doing the same in financial services.

Nubank also operates in Colombia and Mexico, and there are hundreds of other fintech companies across Latin America. As competition flourishes, a variety of business models are being tested. It will be interesting to see if companies providing specific financial services turn out to be more valuable than the sum of the parts held by traditional banks.

Innovation in Brazil is exciting for producers and consumers. But it isn’t surprising. When entrepreneurs are free to compete, new products and ways of delivering them emerge. Voluntary transactions enrich parties on both sides.

What’s impressive is that regulators managed to open to competition an industry that many Brazilians assumed was an impenetrable special interest. These are the true disrupters, whose work has led to greater financial inclusion.

In 2012 only licensed financial institutions could issue credit and debit cards. Consumers were an afterthought and when it came to serving merchants, an oligopoly had the power to charge killer fees for point-of-sale devices and transactions.

Recognizing the need for competition, reformers at the central bank drafted legislation to authorize the creation of “payment institutions.” Brazil’s Congress passed the provision in 2013. At the time banks didn’t consider the change particularly relevant because they expected to continue dominating the market, a central-bank staffer told me last week. In fact, he added, “it was a game changer.”

David Vélez,

a Colombian-born Stanford M.B.A., and his partners stepped into the space the law created. In 2014 they launched Nubank as a credit-card company operating in the digital world.

To appreciate how radical Nubank felt to Brazilians, consider what used to be the onerous process of acquiring a credit card through a conventional bank. It required braving long lines at a bricks-and-mortar location, heavy documentation in tow. Young adults with no credit history had trouble qualifying.

Mr. Vélez designed Nubank to offer consumers its no-fee card via an online application. No credit history, no problem. Card users’ limits start small but as a record of paying back debt is established, those limits grow. Building a credit history is beneficial for the cardholder; for those who pay off their balances every month, the card is a hassle-free, no-cost convenience.

Nubank’s high interest charges might be a turnoff. Yet the company’s flair for marketing has given the purple card a certain “cool factor.” Nubank has also made a name for itself in customer service. The ease with which cardholders can manage their accounts electronically is light years ahead of Brazilian household finance even a decade ago.

Nubank’s application for a license to operate as a financial company in Brazil was approved in 2018. Venture capitalists are backing the company and it has acquired other businesses, including software consulting firm Cognitect and Spin Pay. Last year it began working with Chubb to offer digital life insurance. In October Reuters reported that Nubank had recorded its first half-year profit.

The jury is still out on whether a company that has grown so fast can deliver on its high expectations. But no matter Nubank’s fate, the pertinent point is the reform that made competition possible.

And not only for Nubank, which is an issuer. New acquirers (firms that put credit-card machines in stores, authenticate the cards and act as intermediaries in transactions) also have entered the market, reducing merchant costs for accepting charge cards. More reforms have followed. Since 2018, for example, new regulation has allowed credit fintechs to use two types of financial institutions to do direct lending.

All hail the risk-takers plowing this ground. But my awe is reserved for the central-bank technocrats who, against all odds, opened the market. They are the heroes of Brazil’s financial democratization. Someone should bottle whatever they were drinking—and presumably served to Congress.

Write to O’Grady@wsj.com.