Over the past 20 years, XP Inc. has successfully established itself as the go-to digital investing platform for 3 million retail investors in Brazil, growing its assets under custody to 715 billion reais in the first quarter of 2021. The low-rate environment in recent years has been a huge tailwind for equities and an important driver for XP’s expansion.
XP’s growth has been at the expense of large lenders such as Banco Bradesco, Itaú, Banco do Brasil and Banco Santander, which have long dominated asset management, along with most other traditional lines of financial business. Now, with a U.S. IPO under its belt, the tech-driven investment fintech is ready to take competition one step further, as it looks to expand its footprint into the 500 billion reais credit market.
CEO Thiago Maffra, who took over at the helm from founder and ex-CEO Guilherme Benchimol in May, ratified XP’s expansive plans into core banking services in his first interview with an international news outlet as the firm’s top executive.
S&P Global Market Intelligence: A low-rate environment has been a major driver for the 2-million increase in the number of equity investors since 2019. But with rates rising, how do you see that trend behaving in the next few years?
Thiago Maffra: We are still very optimistic about the growth of the equity investor in Brazil. There is a huge opportunity when you look at tailwind for equities. Most people are still very conservative on allocation and invest in low-risk fixed-income. Not even 10% of investors [buy stocks]. Brazil has 3.5 million investors in equity out of 50 million investors in the country. That is insane. It is very low compared to anywhere in the world. In the U.S., that number is close to 90%. We believe that the number [of equity investors] should grow to 10 million in the next 2 to 3 years. And even then, we would still be underdeveloped.
As a result of the COVID-19 crisis, demand for foreign asset allocation has increased in Latin America. What is the opportunity in this market?
Giving retail clients in Brazil access to U.S. [financial] markets is the most advanced internationalization project we have. If you [are Brazilian and] want to open an account in Itaú’s private banking in Miami, or with Bradesco, you probably have to be a multimillionaire. If you want to open one at XP, the [minimum] today is $500,000. It is the lowest, but still pretty high. The big difference is giving access to small clients. Investors with $1,000 or $10,000 for which there are no providers today. Why not? Because it is tailor-made and expensive. It is a human-intensive business. You need people to open accounts and execute orders. [But] once you leverage on tech and automate, then you can go down to small clients and still have a profitable business.
Are there opportunities for replicating your model elsewhere?
We do not have a timeline, but our goal is to expand our retail client business to other countries in Latin America. Mexico is the biggest opportunity outside of Brazil. We have been looking into the market but do not have any launch date yet or [an] “almost done” project. And when you sum up Colombia and Peru, they add up to almost the same addressable market as Brazil.
With so much ground to cover on investments, what is the rationale behind the decision to expand into banking?
XP turned 20 in 2021. For the first 19 years, we were completely focused on investments. For the past 12 to 18 months, we began to expand into other business lines. We released a credit card this year, and our strategy right now is to move forward into banking services, insurance and other types of credit. The financial market as a whole – credit, insurance, banking services, investing and payments – adds up to an addressable market of 800 billion reais in yearly revenue, of which 500 billion reais is some form of credit. Today, we are present in 100 billion of that pool.
Banks in Brazil have large amounts of capital and expertise in the loan market which can be hard to match for fintechs. What is your strategy in overcoming these competitive advantages that banks claim to have?
We want to be one of the top players [in credit] in Brazil, but we don’t want to be a bank or a capital-intensive business. Banks pile up debt on the balance sheet. We believe we are going to be able to distribute our debt through securitization. For us, this is a huge competitive advantage. XP is today an investment company, and most revenue streams come from our core business that is investments. So credit is still small, but growing really fast.
The company created its own bank in 2019, and launched a loan portfolio a year ago which has grown to 4.7 billion reais, according to company information.
Banks have reacted to competition, cutting costs aggressively during the past years. Do you think they are leveling up with fintechs?
They are trying. They are closing down thousands of branches every year. But this is not something you can do over a short period of time. They are very big ships. Like the Titanic, as it is often said. Very hard [for them] to change the direction very fast. They have a very high fixed-cost structure, with almost 100,000 employees, brick and mortar branches. When you compete against asset-light companies that leverage tech, it is really hard.
And the second thing which I believe is a huge disadvantage is tech itself. Big legacy systems, mainframes. They still have people who translate new languages to Cobol [a widely used but archaic legacy programming language] because you need platforms to [communicate with] the core, which is a mainframe in Cobol. So it is very slow. They do a release of the app once every one or two months. XP does two or three a day. It is hard for them to compete, that is my point.
You have identified in your financial reports a “substantial and increasingly intense competition” as a significant risk to the outlook of XP. Who are you thinking of here?
I am a tech guy [Thiago Maffra was formerly CTO at XP]. I am always concerned with big techs. These guys are smart, they have a lot of capital, data, and talented people. The problem for them is that once you are a financial company, you become regulated. Regulation, I would say, is their barrier. Once you have a bank, you have to follow banking regulations. If they enter the space, then they lose the freedom they have as a tech company.
So what do you see as the greatest risk to your model?
The biggest competition is still against the 5 big banks in Brazil. Eighty-five percent of the wealth is inside of big banks. Most of the clients are inside of big banks. Of course, we see new players in the ecosystem but we believe it is much easier for us to expand in [banking] services and credit than it is for neobanks to [grow into investments]. Some claim to have 40 million clients, but [their customers] are really retail, with a balance of usually 300 to 400 reais. They are not investors. The biggest fight is still against the big banks in Brazil. Clients and money are still there…
