Open Co Raises $115M to Expand Brazilian Credit Access

Brazil's Credit Landscape and the Rise of Open Co

For many years, Brazil has faced significant challenges within its credit market. As the largest nation in Latin America, it simultaneously contends with some of the world’s most substantial interest rate differentials.

Indications from 2019 revealed that Brazilian credit card interest rates were approaching an astonishing 300%, illustrating the severity of the issue.

The Emergence of Fintech Solutions

These elevated interest rates are a key driver behind the increasing number of fintech companies appearing throughout Latin America. Such high costs create a persistent cycle of economic hardship, making financial improvement exceptionally difficult for many.

Demonstrating a commitment to both innovation and financial inclusion, Open Co, a São Paulo-based consumer credit firm, recently announced a $115 million funding round, spearheaded by SoftBank Latin America Fund.

The round also saw participation from existing investors including Raiz Investimentos, IFC, and LTS.

Open Co: A Merger for Financial Wellness

Open Co originated earlier this year through the consolidation of Geru, an online lender established eight years prior, and Rebel, a four-year-old startup leveraging AI and bank account data for risk assessment and client financial evaluations.

The company’s stated goal is to “facilitate responsible consumption financing for Brazilians.” A primary strategy for achieving this involves avoiding the imposition of exorbitant 300% interest rates.

“The availability of quality credit at the precise moment it’s needed represents the most significant impediment to Brazilians achieving financial stability, increasing their purchasing power, and building wealth,” explained Sandro Reiss, co-founder of Open Co.

“A substantial portion of the market remains under the control of established institutions that levy extremely high interest rates, hindering borrowers’ ability to repay loans. This creates a detrimental cycle of high delinquency rates and even higher interest charges. Our core mission is to disrupt this pattern.”

Providing Accessible and Affordable Credit

Open Co offers clients not only access to credit but also tools designed to enhance their financial well-being, rather than exacerbate their difficulties.

The entire process is conducted digitally, eliminating bureaucratic hurdles; it is designed to be swift, and the interest rates are lower than those typically offered by traditional banks.

The Scale of the Problem and Open Co’s Potential

The need for these services is demonstrably clear. Approximately 52% of the Brazilian population relies on credit to cover essential expenses, resulting in an unsecured consumer credit market valued at roughly $200 billion, with around 70% comprised of revolving credit.

Consequently, 62 million Brazilians currently have outstanding debts or missed payments.

Open Co aims to provide Brazilian citizens with more viable options, and initial responses suggest a positive reception to these alternatives.

“Buy Now, Pay Later” in a Brazilian Context

While “buy now, pay later” solutions are currently gaining prominence, Open Co’s leadership points out that installment-based purchasing has long been a common practice in Brazil, with consumers frequently utilizing credit cards for purchases spread over time.

Financial Projections and Growth

Looking forward, the Open Co team is remarkably transparent regarding its financial outlook. They project revenues of nearly $196 million in 2022, representing a threefold increase compared to 2021.

Furthermore, the company intends to facilitate access to over $616 million in financing for its customers throughout 2022.

Although the business is currently profitable, executives emphasize ongoing substantial investments in growth and the development of improved products and technology, leading to cash requirements exceeding operational cash flow.

Impact and Partnerships

Through the combined efforts of its predecessor companies, Open Co reports having saved consumers over $500 million in interest expenses. The company is also actively forging partnerships with merchants, retailers, and service providers to enhance accessibility to credit at the point of need.

To date, Open Co has extended nearly $405 million in credit to over 200,000 individuals.

“The Brazilian consumer lending market is exceptionally large,” Reiss stated to TechCrunch. “However, it is unfairly priced and dysfunctional for consumers, with Brazilians facing the second-highest interest rate spread globally.”

Favorable Market Conditions

The Open Co team believes several factors are contributing to their success.

“We operate within a vast market characterized by complacent incumbents, a population readily adopting new technologies, and a supportive regulatory environment,” explained Rafael Pereira, co-founder of Open Co.

“Last year saw the introduction of Pix, an instant payment system enabling free, near-instantaneous money transfers. This year also marked the beginning of open banking implementation, which will reduce information asymmetry between established institutions and fintech companies.”

Future Plans and Expansion

The company intends to allocate its new capital towards expansion initiatives, with “significant investments” directed towards technology and product development. Recruitment efforts will also be increased.

Currently, Open Co employs 230 individuals, with over 50% working in technology and product roles.

“Regarding our future plans, we aim to extend credit to individuals with existing overdue accounts,” Pereira added. “However, we are committed to avoiding the conventional approach of imposing high interest rates that hinder repayment. Our mission is to break this cycle.”

SoftBank’s Investment Rationale

Felipe Fujiwara, investment leader at SoftBank Latin America Fund, expressed SoftBank’s enthusiasm for Open Co’s “substantial” potential to improve the financial well-being of Brazilians through access to credit.

“Difficulty accessing credit is a major social issue in Brazil. Over half of Brazilians are compelled to seek credit to cover basic expenses, and the combination of demand and high interest rates results in 62 million people being denied credit,” Fujiwara stated via email.

He further noted that the company possesses a proven track record in underwriting personal loans and securing debt funding to provide superior credit alternatives to consumers.

“Additionally, it offers merchants the ability to significantly increase traffic, order value, conversion rates, and GMV.”

“Furthermore, it was the first fintech to utilize artificial intelligence to analyze customers, addressing the country’s credit problem, which is characterized by one of the highest interest rate spreads in the world,” Fujiwara concluded.