An Interview with Rafael Pereira, co-Founder @Open Co
Digital banking and alternative data are changing the world’s financial services industry, and Brazil is one country that is leading the way. Brazil is home to the largest fintech market in Latin America, whose innovations are driven by a culture of fast tech adopters, the need for financial inclusion, and a pandemic that has fast-tracked e-commerce growth. The results speak for themselves. While just a couple of years ago, for example, Brazil had 45 million unbanked consumer (nearly 1 in 3 adults), that number has now dropped to 34 million (closer to 1 in 5 adults). Today, many Brazilians who never had a bank account or credit cards can now open digital accounts and make payments online.
These are exciting times for the Brazilian financial system to say the least, and Rafael Pereira has been there since the beginning. Rafael is co-founder of Open Co, a new financial institution formed by the recent merger between two leading fintechs, Rebel (co-founded by Pereira) and Geru. Rafael is also President of the Brazilian Digital Credit Association (ABCD), and previously was an executive director at Enova in the US.
“It never made sense to me why a middle class American can borrow at 10% APR, while a Brazilian needs to pay 300%… Our goal at Open Co is to provide Brazilians with credit, and with that, the tools to enable financial inclusion around the region.”
We are super excited to speak with you, Rafael. Please tell us a little more about what you are doing today.
“My first exposure to the financial system was working with one of the first online lenders from the US that we grew to 7-8 other countries. I wanted to bring that technology home to Brazil, because it never made sense to me why a middle class American can borrow at 10% APR, while a Brazilian needs to pay 300%. So I saw a business opportunity, and one that could have a social impact as well – making sure Brazilians have access to credit, and not debt. That sounds semantic but there is a big difference between having credit and having debt. That was our goal at Rebel, and today our goal at Open Co, together with my partner (Sando Reiss from Geru), is the same – to provide Brazilians with credit, and with that, the tools to enable financial inclusion around the region.”
How are you able to do this? It is your access to data that banks don’t have?
“Interestingly enough, banks always had access to this information, but they did not have an incentive to use it. These are some of the most profitable banks in the world. So why would they cannibalize themselves with lower margins? They never had an incentive to work towards doing that. We are now here in this space because in many ways the banks have failed on their social missions.”
And yet fintechs still have a technological advantage, given that banks are slower to adopt new systems, right?
“Many bank’s data are sitting on old mainframes that were built in the 70s, and this creates complexities on how to harness the data. But the technology element paints only one side of the picture. Very broadly, creditworthiness can be put into 2 categories. One of them is the financial ability to pay. But the other side is more psychological – what is your emotional situation and state for taking out the loan? Are these funds that a borrower needs to build his or her business, and will I look to their credit provider as someone who allowed them to achieve their dreams, or is this more of an emergency? For example, an Uber driver who can’t afford to have their car in the shop for a week? There are many mental and situational states that can be combined with the financial situation in order to make much better credit decisions.”
How do you capture such data?
“We have many different ways of capturing that information. Some information is captured by self-report, which we cross reference with other sources, and that teaches us a lot about the person. For example, many Brazilians tend to over-estimate their actual post-tax income (I can’t explain why). So they believe they have more money to spend, and we can help educate them about this.Also, the way a person interacts with the system is informative. For example, if someone is given a few credit options, and chooses the highest amount over the longest period of time, and does so within the first few seconds, that is one type of consumer. While another customer may select a certain amount, logout, and come back later after thinking about it, and choose a lower amount, for example. That second person is likely to be more concerned and calculated than the first person.”
“There is a democratization of the financial system. The whole idea of fintechs in Brazil is to try and help all of those people who were excluded to get back in.”
So you can give each one credit that is more suitable for them to manage responsibly?
“Exactly. No two people are exactly alike. The beauty is that we can offer more tailored products to each person. So understanding each specific individual as closely as possible is something we are trying to accomplish.Banks have been looking primarily at income variables, that has created financial exclusion. And now there is a democratization of the financial system. The whole idea of fintechs in Brazil is to try and help all of those people who were excluded to get back in.We do this by providing small credit amounts to people who were excluded, so their primary needs can now be met. For example, a guy who sells beer outside the stadium on game night. He would otherwise have to borrow from his family to buy the beers in advance, and then pay them back after selling the drinks, and pocket the difference. Now we can help in cases like these by providing financing based on each person’s need, and it is very interesting to see how wide such needs are.”
“We were a company with millions of dollars sitting in our bank account, but the bank wouldn’t give us a credit card, because our income statement was zero.”
In the end you are changing people’s lives. Having better models is one thing, but having models that can provide new credit is even more exciting.
"It is interesting that we experienced this first hand. Even after our 2nd round of raising capital, I was still paying for our Amazon server costs from my own personal credit card. As we grew, this expense became very significant, in the tens of thousands of dollars. And so we decided that was it was time to get a company credit card, but we could not get approved! We were a company with millions of dollars sitting in our bank account, but the bank wouldn’t give us a credit card, because our income statement was still zero. It took us a couple of years to eventually get a card, and even then, we could only qualify for a low limit card, even though we had 10x more cash than what the limit was…"
“Our hypothesis is that we can influence good financial behaviors to make you a more credit worthy client, which will ultimately lead you to get lower rates in the longer term.”
That’s amazing. You are lucky to have had other options. Many others do not, and are simply blocked from doing business.
"For historical reasons, Brazil became a high-interest high-delinquency economy. It’s impressive because Brazilian banks are very profitable, and efficient in technology, but their rates are still 2-3x orders of magnitude higher than they should be. It has become a vicious cycle, but it can be stopped. Part of that is happening because of new information systems, but also nowadays with the privacy discussions around the world. Borrowers can allow lenders to harness their personal data, and by doing that, can help them get away from the “bankocracy”, and the whole market potential can change.What we are trying to do here is to leverage this new type of data, psychometrical and behavioral data throughout the whole process. Not just at one point in time. So we know the person who borrowed last month, and who is that same person today? Our hypothesis is that we can influence good financial behaviors to make you a more credit worthy client, which will ultimately lead you to get lower rates in the longer term."
How do customers generally feel about providing this information ?
"Our experience is that if consumers see the benefit of providing additional information, they will typically do that. Brazilians are tech savvy and early adopters of technology, and there is also a cultural issue – they are a lot less concerned about privacy. Of course no one wants to be exploited, but if they can see the benefit of providing additional points, they will do it.Our open banking app that we built in house, allows customers to connect their bank accounts to our technology platform. We have access to their bank statements and transactions, and a lot more people opt in to something like this. If they can get lower rates by allowing us access to this information, which will show more proof of income, this can be very powerful for them."
These alternative or hybrid credit models are still in their infancy, and Covid has shaken things up. What does the future look like?
"I have a very positive view on that in 2 aspects. First, regarding Covid, technology will be even more present in the future. For example, my father used to pay for everything in person at his branch, and save the paper receipts. Now, he does it all online. But all of that information about his physical visit to the bank branch was not utilized, when he entered, was he happy, etc. And now, with every interaction online, we have a lot more tools to understand each person compared to what we used to have in the past.The other thing is that technology is enabling finance to be even more present. Think about the online food delivery company that now has all of your information. That company has now become much more relevant to the restaurant than their own bank, and those companies are going to be providing financial services to the restaurant. This is the financialization of businesses. When we have a lot more data, then finance can be distributed where the consumer needs it, and that is going to create an interesting dynamic for us to better understand who the consumer actually is. It is not only the financial information that matters anymore.And as a consumer, I want to have the same great experience that I have with Netflix, Spotify and Uber, with my bank or credit card company as well."