Fewer Lawsuits and More Innovation: The Rise of Fintechs and the New Paradigm of Financial Lawsuits

By Prof. Maria Paula Bertran, Professor of Law, University of São Paulo, and Lucas Lopes de Freitas, Attorney and Master Student in Law and Development, University of São Paulo

Financial innovation is transforming the banking sector worldwide in multiple aspects. Brazil offers a unique opportunity to observe changes in the intriguing aspect of litigation. Brazil faces significant challenges related to bank litigation, stemming from a combination of economic, political and legal factors.

The country experiences an alarmingly high level of litigation between clients and financial institutions. Financial institutions currently account for the largest number of private litigants before Brazilian courts. The Brazilian judiciary tracks this extensive litigation. The National Council of Justice of Brazil compiles data on Brazilian judicial activities in its Major Litigants panel, highlighting the companies with the most pending cases and new lawsuits over the last 12 months. Not surprisingly, the Financial Activities, Insurance, and Related Services sector ranks second, with 8,449,462 pending cases and 4,731,942 new cases in the past year (as of January 15, 2025). We are talking about 3,811 lawsuits for every 100,000 inhabitants in Brazil, only in this economic sector. This high volume of litigation creates a significant burden on the judicial system and increases costs for both banks and consumers.

Our research, undertaken at the University of São Paulo, reveals a significant phenomenon regarding the declining volume of lawsuits specifically targeting digital banks and fintechs (financial-technology firms). This study probes whether this trend is attributable to innovative business models that emphasize enhancing consumer experiences or if it stems from variances in financial agents’ operational frameworks. In this article, we will present pertinent data from Brazil. However, a critical inquiry remains: Does this represent a localized occurrence, or could it signify the emergence of a broader global trend?

Fintech, a portmanteau of “financial technology”, refers to the innovative application of technology in the financial sector. This term encompasses a wide range of technological advancements that enhance, automate or streamline financial services and products. Examples of fintech include mobile-banking applications, online lending platforms, digital payment systems and robo-advisors. In this article, we will present Brazilian data that shows how fintechs have fewer lawsuits than traditional banks.

A study published by PricewaterhouseCoopers (PwC) indicates that the number of individual customers of Brazilian credit fintechs grew from 1.2 million in 2017 to 53.9 million in 2023. With their digital models and predominantly online operations, these companies are characterized by offering more accessible services compared to traditional banks.

In light of this reality, our study focuses on the differences in litigation among financial agents, particularly comparing traditional banks with fintechs. In the study, Banco Bradesco, Santander Brasil and Banco Itaú represent traditional banks, while Nubank, C6 Bank and Banco Original represent fintechs. The result is that fintechs engage in far fewer lawsuits than traditional banks when comparing the number of new cases and the average number of customers during the same period. In some instances, this correlation is negative, meaning the observed behavior corresponds with a decrease in the number of cases.

The three largest traditional banks—Bradesco, Santander and Itaú—continue to exert considerable influence over the Brazilian judicial system. Bradesco stands out with a rate of 495.7 cases per 100,000 customers, followed by Santander with 215.3 cases and Itaú with 211.8 cases. To better understand the correlation between these data, we can use an index ranging from -1 to 1: (i) -1 indicates a negative correlation, where an increase in one data point coincides with a decrease in the other; (ii) 0 means no correlation; and (iii) 1 demonstrates a positive correlation, whereby both data points tend to grow simultaneously.

The correlation coefficient between the number of customers and the volume of lawsuits for traditional banks is 0.74, indicating a strong positive correlation. In other words, as banks increase their customer bases, the volume of lawsuits grows proportionally.

In contrast to traditional banks, the Brazilian fintechs studied present significantly lower litigation rates. Nubank, the largest fintech in Brazil by customer volume, registers only 46.2 cases per 100,000 customers, a figure much lower than that of traditional banks.

Moreover, we found that, among fintechs, the number of customers does not necessarily lead to a proportional increase in lawsuits, as the correlation coefficient is close to 0 (-0.14).

C6 Bank stands out as an exception among fintechs, with a litigation rate of 166.1 per 100,000 customers, the highest within this group. This data is relevant as it may provide a clue to understanding this behavior. Although it operates predominantly in the digital environment, C6 is classified as a multiple bank with regulatory authorization to offer a wider range of services than payment institutions, for example. The bank conducts operations in commercial, investment, real-estate credit and leasing, as well as credit, financing and investment portfolios.

This diversity of services, combined with internal policies for handling consumer complaints and the organization’s own litigation, may explain the increase in the volume of lawsuits. In other words, financial institutions offering fewer products tend to face fewer lawsuits. In the case of Brazilian fintechs, which are new players in the market, they have not yet reached the same level of structuring as traditional banks, making them less complex and consequently less prone to litigation.

Is this a global trend or a unique characteristic of Brazil? It is essential to encourage researchers, academics and analysts worldwide to continue investigating litigious behavior in the financial sector. Measuring and comparing litigation rates among different types of institutions across various national markets will be crucial in answering this question.

By analyzing the dynamics between traditional banks and fintechs in Brazil, it is clear that increasing competition will continue to pressure both sides to adjust their business models. Traditional banks, with their historically broader and more complex business models, will need to reform internal policies to reduce their exposures to litigation. However, this adaptation will not be limited to technological changes; there will also be pressures to improve the customer experience, reduce bureaucracy and enhance litigation management, or risk losing ground to leaner competitors.

On the other hand, fintechs, which currently benefit from simpler structures and business models focused on specific sectors, may see this simplicity diminish as they expand their product and service offerings. As they attempt to compete in a broader market, they may adopt some of the large banks’ traditional practices, such as a less rigorous credit policy characterized by flaws in risk analysis and greater exposure to defaults. Additionally, they may resort to interest rates significantly higher than average market rates, reflecting inefficient risk management and a need to compensate for losses.

A crucial question remains: Will traditional banks be able to adapt to competitive pressures without compromising their regulatory and compliance standards? And what about fintechs? Will they be able to preserve their innovative and flexible characteristics, or will they ultimately adopt practices that, in part, have defined the banks they now challenge?

This reflection is significant not only for the financial sector but also for other markets undergoing similar digital and competitive transformations. By observing the convergence and divergence between banks and fintechs, it is interesting to consider how regulation and business practices may evolve to meet the demands of a rapidly changing market while mitigating the risk of escalating litigation.