➤ StoneCo CEO says Linx acquisition will enlarge its market to a pool of acquiring, credit, software clients.
➤ The fintech company expects to begin expanding geographically in 2 years, viewing Colombia as a promising market.
StoneCo Ltd. is one of the fastest-growing financial technology companies in Brazil, making a name for itself through point-of-sale devices that have become ubiquitous in shops across Brazil. Founded in 2012, the company grew aggressively in a market historically dominated by bank-backed giants such as Cielo SA and Itaú Unibanco Holding SA’s Redecard SA.
StoneCo has managed to gain market share in relative short order, accounting for about 8.6% of Brazil’s total payment volume. The company, which launched a U.S. IPO in 2018, also has enticed world-class investors, including Warren Buffett’s Berkshire Hathaway Inc. and Jack Ma’s Ant Financial.
But Thiago Piau, StoneCo’s 31-year-old CEO, is looking well beyond point-of-sale. “In four or five years, credit card machines might not even be on the counter anymore,” he told S&P Global Market Intelligence in a wide-ranging interview.
The company is on the brink of completing a 6.7 billion real takeover of Linx SA, a leading retail software company. Piau said the deal will help StoneCo transform into an integrated provider of both software and payments at a time when digital transactions are booming.
Below is a transcript of Market Intelligence’s interview with the CEO, edited for length and clarity.
Market Intelligence: To what extent has the COVID-19 pandemic affected StoneCo’s business?
Thiago Piau: While the brick and mortar operation suffered because of lockdowns, growth in the digital side of the business has been amazing. There is a shift in retail in Brazil, where the digitization of consumption is playing a larger role. We believe that it is going to be a big trend going forward. What is happening now in Brazil with e-commerce is what took place in the United States in the early 2010s.
We [were] about 10 years behind. But with the pandemic, we fast-forwarded three to four years in just six months. Consumers now understand that they can buy online and that the logistic problem is not as big as they thought. … I believe that digital channel transactions will stabilize at this much higher level. This is a great opportunity, and we invested heavily in this direction.
Where does the Linx deal fit in all this?
The acquisition of Linx is all about the digitization of retail. We think the big driver in Brazil is to have those brick and mortar clients go digital. The omnichannel experience is really behind in Brazil when compared with Europe and the U.S., and through this acquisition, we aspire to become the leader in that. With both point-of-sale and [enterprise resource planning] software, it becomes easier for merchants to connect inventory to the different digital marketplaces. We now have all the tools to be a protagonist in the digitization of Brazil.
We have now seen quite a few Brazilian fintech companies move beyond the realm of finance. Why is that becoming more common?
There is something structural in Brazil. The profit pool on the financial side of the [fintech] business is really big, while the software part is not so much. Economics here in Brazil lean much more toward the financial side. So it makes sense to get the resources from one part and allocate them on the other. In our case, I’d say our reason is very simple: At the end of the day, we are focused on one thing only, our merchants. They need to sell online and manage day-to-day operations. We will do whatever they need us to do through tech. Once we stabilize the operation in this new phase, then we will be ready for the next step.
What is the next step?
The way I see it, we will have a play at the consumer side too, if we find the right angle. The second part is that we will go to big countries in Latin America. We are paying attention to Colombia and the opportunities there, where financial interest is just opening up. In two or three years, we will be talking about upscaling the operation in LatAm, but right now, we need to focus on what we have on our plate.
StoneCo recently expanded into the lending market, particularly to SMEs. That portfolio topped a billion reais in loans in the third quarter, but how big is your opportunity there?
The prospect for lending in Brazil is really big. For us, it is a 200 billion reais opportunity. That is the size. But when we think of credit, we see it as a very lean operation — not having 100% of the risk on our balance sheet, but rather securitizing all the time.
You got some pretty high-profile shareholders in your IPO, and so far, they have done pretty well. Your market cap is now about half that of Brazil’s big banks such as Banco Bradesco SA. Do you think StoneCo will ever surpass them?
I work on merchants and consumers. I really don’t care about market cap. We do make sure that our investors have more-than-decent returns, that they have great returns. At the end of the day, they help us a lot with strategic direction, they teach us about global trends, help us by critiquing strategy and execution. … They deserve great returns.
But you are still much closer to those big banks in market cap than you are in market share at the moment. Do you see a reason for that?
We are targeting a different market. Every single financial product that we offer is within this niche of SMEs in Brazil. When you think about the growth of retail digitization, the addressable market should be much bigger than that of the incumbent banks. It is what MercadoLibre Inc. and Square Inc. are doing. The opportunity is really, really big, and we are only in the beginning.
What are your business expectations for 2021?
A good job for us would be to have 1 million to 1.2 million merchants in our customer base by the end of it [compared to a client base of 582,900 as of third-quarter-end]. I believe growth will keep on coming for some years. We have the chance to get up to 8 million merchants on our platform in Brazil. We are just starting the operation with micro-merchants as well, which is a whole different avenue of clients.
What do you see as the biggest economic risks that could impact your market?
No one was expecting the activity in Brazil to rebound as fast as it did, and not only GDP. The retail activity is much stronger than everybody thought. I can see the economy doing very well next year. The coronavoucher [Brazil’s government emergency aid program] is now lower, and we will have to see what the government decides in January. We just have to make sure that we can control infections so that people do not get afraid. If they are, consumption goes down immediately.
