Why is Brazilian payment company StoneCo so popular?

In early October, Tencent took a $200 million stake in Brazilian company Nubank. Momentum said then that Tencent was to occupy a position before Ant Financial has an absolute advantage, and to leave room for its future development.

Unexpectedly, Ant Financial made further move immediately: on October 25, StoneCo, a Brazilian payment company, launched its IPO on Nasdaq (stock code: STNE), and Ant Financial announced to buy $100 million of StoneCo shares at the IPO price within 30 days after IPO.

In addition to Ant Financial, several big-name investors also joined in, including Buffett’s Berkshire Hathaway and investment firm Madrone Capital Partners, whose backer is the heir of Walmart.

(Buffett recently changed his investment strategy and now focuses more on fintech. In addition to StoneCo, he has invested in India’s Paytm. Momentum Works will report it later, so please stay tuned for further updates from us.)

The initial offering price of StoneCo ranged from $21 to $23, but the roadshow subscription was so popular that the price was raised to $24, offering 47.7 million shares and raising $1.144.8 billion in total.

We asked an old friend from Brazil how he felt about StoneCo, and he just said, “oh, its headquarter office is on the floor below our company…”

Big changes in the payment environment

According to Brazilian friends, StoneCo only offers ordinary service, and there are other reasons for its popularity.

Brazil’s banking system is one of the most bureaucratic in the world, and the five largest Brazilian banks (namely, Itau Unibanco, Banco Santander, Banco Bradesco, Banco do Brasil and Caixa Economica) occupy 80 percent share of the credit market.

There are also two oligarchs in the payment field, namely Cielo and Rede.

Cielo was founded in 1995 originally named as VisaNet. It was jointly established by Visa, Bradesco, Santander, and Banco do Brasil, three of the five major Brazilian banks, as well as Real and Banco Nacional. Cielo is the largest credit and debit card operator in Brazil and also the largest acquirer and payment company in Latin America.

Rede has longer history. It was set up in the 1970s by Citibank and Itau Unibanco, Brazil’s largest financial institution. It mainly issues Mastercard.

 The two companies previously each owned half of Brazil’s payment market. However, in 2010, the regulatory policies changed. The Central Bank of Brazil required the acquirers to accept bank cards issued by all banks, and VisaNet was renamed as Cielo at the request of the government. Cielo and Rede no longer did things in its own way

In 2013, then-president Dilma Rousseff signed new provisions of the law that centered on the interconnection among mobile network operators, card issuers, acquirers and card brands.

After opening up the once monopolized payment market, and as Brazil has higher smartphone use rate and better Internet infrastructure than the rest of Latin America, Brazilian mobile payment market has entered a new phase of development.

Legendary founder

Andre Street and Eduardo Pontes, the two founders of StoneCo, are well-known serial entrepreneurs and investors in Brazil. Their entrepreneurial model is rather legendary, basically following the cycle of “establishing a payment company, selling it to a financial giant, establishing another payment company, selling to a financial giant……”

Andre Street founded his first company, Pagafacil, an e-commerce payment processing tool, when he was 15 and sold it in 2004.

Andre and Eduardo Pontes then founded Netcredit and Braspag. Netcredit was sold to Bgn/Cetelem Bank in 2007, while Braspag was sold to Cielo in 2011.

Andre and Eduardo are early investors in Moip, a payment service provider, which was also sold to Wirecard Germany.

StoneCo which launched IPO this time was founded in 2012. It mainly focuses on helping merchants and customers conduct electronic transactions, and is generally regarded as the South American version of PayPal or Square.

StoneCo grew very fast. Though established in 2012, StoneCo didn’t launch fintech services until 2014. StoneCo has accumulated more than 200,000 clients, according to the report it filed with the SEC before IPO.

The clients are mainly small businesses. StoneCo said traditional banks and traditional financial services were unable to offer these services effectively due to “the lack of leading technology advantages and distribution networks”.

For companies located in remote or less populated areas, StoneCo provide on-demand customized service for them through “Stone Hubs”.

Biggest competitor: PagSeguro

In Brazil, StoneCo is always compared to PagSeguro.

PagSeguro (NYSE: PAGS) is more like Brazil’s Alipay. It was founded in 2006 and headquartered in Sao Paulo, Brazil. PagSeguro basically offers all kinds of payments.

PagSeguro also has a parent company like Alibaba, which is Universo Online (commonly referred to as UOL), Brazil’s largest portal website and the world’s largest Portuguese-language site.

UOL is second only to Google and Facebook in page view in Brazil, and has a complete Internet industry chain including e-commerce, recruitment, group buying, online education and cloud computing.

PagSeguro raised about $2.6 billion on NYSE in January, and this is the largest IPO on NYSE since Snap Inc in 2016.

StoneCo launched its IPO so late because it had been waiting for the valuation of PagSeguro to ultimately decide its own issuing plan.

Although the two companies have similar business, there are some subtle differences:

1. In terms of business model, StoneCo is in direct competition with the two oligopolies of Rede and Cielo in addition to fintech companies. PagSeguro creatively focuses on self-employed and micro-entrepreneurs (or MEI in Spanish). However, there are more and more competitors in this segment.
2. Stone Hubs is a distinctive feature of StoneCo. Stone Hubs are just like Automobile 4S Stores, integrating sales, service and technical support, etc. The 180 Stone Hubs all over Brazil are the key for StoneCo to maintain relationship with clients.

Thriving fintech sector in Brazil

In 2015, only 32% of Brazilians aged over 15 had a credit card, compared with 60% in the States, according to the World Bank. Currently, two-thirds of Brazilians still pay for goods and services in cash, which means fintech has huge prospects.

There were 210 different fintech companies in Brazil last year, according to Goldman Sachs, up from 54 in early 2015.

Besides, StoneCo reported its revenue of $164.9 million for the first six months of 2018, almost twice as much as it earned in the same period last year.

StoneCo now occupies about 4.5 percent of the Brazilian payment market (Cielo, mentioned above, occupies 51.5 percent). In addition to PagSeguro, a strong competitor, more than a dozen companies are trying to carve up the payments market.