“Starting out with payments was just a Trojan horse, a way of striking a relationship with the Brazilian business owners,” Piau said in his first interview since the company went public in 2018. “Our main strategy now is to offer all the other services banks offer those clients and ultimately yank them out of the banks.”
Similar to Jack Dorsey’s Square Inc, The São Paulo-based Stone started out providing point-of-sale software to merchants to handle card payments. That business used to be dominated by Rede, a subsidiary of Itau Unibanco Holding SA, and Cielo SA, jointly owned by Banco do Brasil SA and Banco Bradesco SA.
Stone uses hubs spread throughout the nation to cater to small and midsize businesses without relying on a branch network. Last year, it took the same approach to expand into other areas, offering merchants loans and digital accounts. For 2020, it plans to add everything from insurance to payroll management, Piau pointed in a wide-ranging phone interview.
Those new battles won’t go uncontested. Banks have been fighting back, prompting what analysts and executives have called a price war. Stone shares tumbled last year after Rede eliminated fees for some payments services and Cielo slashed margins to regain market share. But, for now, investors are sticking with the newcomer: After last year’s tumble, shares rebounded near all-time highs, with an 86% increase since the firm went public.
“Just look at the size of Itau, Bradesco and Santander in Brazil,” Piau said. “We’re not only competing just with their payment firms anymore, we’re competing with the banks themselves.”
Still, Stone has no plans to actually become a bank and will instead use its existing licenses to offer new products, he said.
The strategy also involves bulking up through acquisitions, which should accelerate this year, said Rafael Pereira, the firm’s investor-relations officer. Stone bought stakes in four companies last year, including Collact, a customer-relationship manager, and Trinks, a beauty-services firm. It also signed a deal with Grupo Globo, the largest media conglomerate in Brazil, to create a joint venture targeting micro entrepreneurs.
Valued at US$12.4 billion, Stone is one of Brazil’s most successful fintech firms, joining the ranks of South American success stories including Nu Pagamentos SA, a credit-card company valued at US$10.4 billion, and XP Inc., a US$19.5 billion retail brokerage. All three have been gnawing at banks’ revenues, with Stone and Pagseguro Digital Ltd. upending the payments industry.
“We will continue to invest aggressively on growing but keeping the same margins we had in 2019,” Piau said.
Last year’s net income surged 164 percent from 2018, and the company ended the year with 495,100 active clients, up 84 percent. Cielo holds almost 40 percent of the market, but its fourth-quarter profit was less than Stone’s.
Stone was co-founded by Andre Street and Eduardo Pontes, both 2010 graduates of Harvard Business School’s leadership program who worked together in the e-commerce industry for almost 20 years. Piau had a similar trajectory: Prior to joining Stone in 2015, he graduated from Harvard Business School and started a firm focused on electronic payments in taxis.
Lending is Stone’s main new project.
The firm ended January with 200 million reais in loans to clients, and has a “conservative” estimate of reaching 500 million reais by the end of the year, Pereira indicated. Stone plans to sell the loans in coming months to avoid holding the risk on its balance sheet.
Another goal for the year is tapping the global bond market. The firm has sold only local debt so far, and is seeking to diversify its funding sources.
Two things Piau is staying away from, at least for now: expanding outside Brazil and striking a partnership with banks to distribute Stone’s products.
“Brazilian banks’ business model is all about pushing products to clients,” he added. “It’s not a healthy relationship and doesn’t work for us.”