StoneCo Ltd
NASDAQ:STNE
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StoneCo Ltd
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Good evening, ladies and gentlemen. Thank you for standing by. Welcome to the StoneCo Second Quarter 2021 Earnings Conference Call. By now, everyone should have access to our earnings release. The Company also posted a presentation to go along with the call. All materials can be found at www.stone.co in the Investor Relations section.
Throughout this conference, the Company will be presenting non-IFRS financial information, including adjusted net income and cash flow. These are important financial measures for the Company but are not financial measures as defined by IFRS. Reconciliations of the Company's non-IFRS financial information to the IFRS financial information appear in today's press release.
Finally, before we begin our formal remarks, I would like to remind everyone that today's discussion might include forward-looking statements. These forward-looking statements are not guarantees of future performance and, therefore, you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from the Company's expectations. Please refer to the forward-looking statements disclosure in the Company's earnings press release.
In addition, many of the risks regarding the business are disclosed in the Company's Form 20-F filed with the Securities and Exchange Commission, which is available at www.sec.gov. Please note, this event is being recorded.
I would now like to turn the conference over to your host, Rafael Martins, VP of Finance and Investor Relations Officer at StoneCo. Please go ahead.
Thank you, operator, and good evening, everyone. Joining us here today, we have Thiago Piau, our CEO; Lia Matos, our COO and Chief Strategy Officer; and Marcelo Baldin, our CFO. Today, we will present our second quarter 2021 operational and financial results as well as discuss the recent trends that we are observing.
I will pass it over to Thiago, so he can share the main highlights of our performance. Thiago?
Thank you, Rafa, and good evening, everyone. Thank you for participating in our second quarter earnings call. The second quarter of 2021 was marked by an acceleration of our core SMB business, an evolution in our strategic road map balanced by a challenging short-term scenario in our credit products.
Our SMB fundamentals are very strong with accelerating TPV growth and record net addition of clients. The high growth in our SMB segment led us to be the fastest-growing player in the payments industry this quarter, largely driven by over 1 million SMB clients and over 100% SMB TPV growth.
This accelerating growth was achieved with healthy unit economics with TPV per client and revenue per client, excluding credit, both increasing quarter-over-quarter. We have been looking more at revenue per client and take rates because we believe this is a metric that better demonstrates our ability to monetize the relationship with our clients. Nevertheless, take rate in SMB's ex-credit was stable quarter-over-quarter at 1.79% compared to 1.8% in the first quarter '21.
Our TON product has moved from being an experiment and optionality to becoming a proven and high-growth solution that added over 140,000 new clients, 83% more than the previous quarter and over 60% of net addition of clients of the leading player in the micro merchant space. Our Pagar.me SMB product, which enables clients to accept payments online, is proving the strength of the online opportunity in Brazil with 93% year-over-year TPV growth in second quarter '21 and a 63% two-year CAGR, while represent take rates above 3%.
Also, the engagement of our SMB clients with our financial platform showed a significant improvement in the quarter, with prepaid card TPV, banking money in and money out volumes and total banking accounts balance all grow between 4 and 5.5 times. Besides the number of Stone SMB clients certainly in our digital account increased 45% quarter-over-quarter to 273,000 clients.
The traction we are seeing in our banking transactional volumes, together with the strong growth in a number of active accounts, give us confidence to make sizable investments in our digital account infrastructure as we believe this will be key to improve engagement and the level of satisfaction of our clients.
Our total revenue excluding credit grew by 68% year-over-year, and the acceleration of our SMB business was the main driver behind such growth. Encouraged by this growth, we have continued to invest in our business to drive further growth in areas such as technology, distribution and customer service operations.
Our consolidated results were significantly impacted by short-term challenges in credit products with higher level of NPLs and decreasing expectation of recovery of non-performing clients than we previously expected. Although we recognize that our underwriting risk capabilities and collection process still have to evolve, given the early stage of our credit solution, we are facing an expected deterioration of credit collaterals given the problems associated with the registry of receivable systems. For further details about these short-term challenges, you can refer to our recently released teach-in on August 25.
As a result of a more uncertain scenario regarding the enforcement of guarantees, we decided to take a cautious approach and stopped disbursement while our team rebuilds our product, given the new environment and we follow the register of receivables evolution. We have also increased coverage for potential losses. And as a result, our credit project contributed negatively to our reported revenues by R$397 million in the quarter.
Despite the short-term challenges, I want to highlight that our opportunity regarding credit are huge. In the short term, we will continue to serve the working capital needs of our clients through prepayments, which is running smoothly while we focus on a turnaround of our credit operation as Lia will double-click shortly.
In software, our business continues to show great organic traction. As the deal with Linx closed on July 1 and we started managing the Company, we reinforced our beliefs about how valuable the asset is despite investments needed to enhance the business in the future. Linx is a scarce asset built over decades in which clients are sticky and switching costs are high.
The Company has an unparalleled level of data for retailers in a very granular way for each one of the verticals, which will enable a more assertive and differentiated offering of financial products in the future. We are pleased to welcome aboard the Linx team this quarter that has an incredible knowledge about retail, and we are excited to work together on this journey onwards. As a reminder, Linx will start being consolidated into our financial results in the third quarter '21.
Before I pass it over to Lia, I would like to close with some thoughts regarding how the quarter has helped us to reinforce our long-term vision. We recognize that we made mistakes in our execution in credit, especially not foreseeing how the malfunctioning of the register system could harm our business. However, this situation has also brought an impressive amount of learnings that we will use as fuel to boost the construction of what we envision as being a much better credit solution aimed at serving good merchants better.
We are building our capabilities for the long term, and therefore, we will continue to expand in enhancing our core SMB operation, opening new hubs and improving our execution. We will make significant investments behind our financial platform, which is a huge opportunity, and keep working hard to provide more financial solutions and workflow tools to our clients. We expect to further advancing our partnership with Inter with the ambition of creating more and better buying experience between Inter consumers and Stone sellers. Lastly, and more important, we keep our devotion to make our clients happy and to the evolution of our team.
We believe that incredible learnings from this quarter will take us to a new phase of our business, and we are even more convinced of the opportunities ahead. When we look backwards, it is incredible to see the evolution of our team and our business, and it makes us confident and eager for the years ahead. We are in the early stages of our journey to become the partner of choice of SMBs in Brazil, and we will continue to work hard to make sure they can rely on us for the most important financial and technology needs.
With that said, I will pass it over to Lia. Lia?
Thank you, Thiago, and thank you, everyone, for joining us today. I want to start by talking about the evolution of our core SMB business, which includes the Stone product for brick-and-mortar SMBs, our Pagar.me product that enables SMB clients to sell online and our TON product focused on micro merchants.
As shown on Page 4, while Stone and Pagar.me had their volumes growing almost twofold, reaching close to R$38 billion in TPV, TON volumes in the quarter jumped to R$1.5 billion, a threefold when compared to the previous quarter and 27 times higher than the previous year.
This solid growth in the SMB company to post the highest TPV growth in the industry this quarter. Since we had a weaker comp in the second quarter of '20 because of lockdowns, we're also showing our SMB two-year CAGR TPV growth, which accelerated from 42% in the first quarter of '21 to 48% in the second quarter of '21 and 58% in July.
Moving to Page 5. We highlight that we have not only grown our SMB client base fast, but we also did so with quality. We have added 188,000 new active clients in the quarter with net adds in our Stone and Pagar.me products, reaching 47,000, and our micro merchant solution, TON, adding 140,000.
The balance of net adds between Stone and TON are a result of our decision to maximize unit economics of clients based on their profile and size while offering solutions that are best suited for each client segment, as we move the lower TPV clients demand from Stone to TON product, while the hub operations targeted larger SMBs.
As Thiago said, on top of having our historical record net addition of clients, we've also seen increasing average TPV per client in all products within our SMB segment. The average TPV of SMBs ex micro has grown 29% year-over-year and 8% quarter-over-quarter whereas average CPV of our micro merchant client base has grown 126% year-over-year and 60% quarter-over-quarter.
Moving to Page 6. We have seen continued penetration and engagement with our financial solutions, especially banking transactional services. The number of active banking clients has increased over 5 times when compared to last year and 43% compared to last quarter, reaching 340,000 clients with a number of SMB clients in Stone that are settling transactions in Stone accounts increasing to 273,000.
With that, the percentage of Stone clients using at least one financial solution increased from 20% last year to 48% in the second quarter of '21. Banking money in and money out volumes in SMBs have surged, increasing 4.4 times to R$4.9 billion and 5.5 times to R$14.6 billion, respectively, while total prepaid card TPV grew 4.4 times to R$294 million, and total banking accounts balance grew 3.8 times to R$862 million.
Now moving on to Slide 7. I want to talk about the short-term challenges we're the short-term challenges we're with our credit product. As we have said in the release last week, the registry receivable system that was implemented in early June is not yet fully functioning. And since then, we better understood how relevant the problem of collateral leakage is.
As a result of this, we see more uncertainty in the short term in our ability to enforce guarantees of non-performing contracts. This scenario has led us to take a cautious approach and stop disbursement already in June. As you can see in the chart, in July, the disbursements were nearly zero, with only a few exceptions to test the registry system.
We also made an effort to adapt our credit metrics to more common market standards, as we are presenting here. In the top right of the page, we show that our group outstanding balance in this new methodology remain flat due to the combination of lower disbursements and loans repayments from clients.
Even though we have the perspective of lower NPLs and improving recovery rates after the beginning of the new regulatory framework, before the transition, we already had provisions for over 100% of the outstanding balance of clients that were not paying us for 60 days or more.
However, because of a potential deterioration in the quality of guarantees, given the challenges being faced with the registries, we decided to constitute an even higher reserve to cover not only for the portfolio in which we see no payments for 60 days or more, but all clients that are not being able to reduce principal for 60 days or more, even though they're still paying interest.
So looking at the portfolio, we have an outstanding balance of roughly R$2 billion for which we have constituted bad debt reserves of R$781 million. These reserves represent a coverage of 209% for clients with more than 60 days without payments and 112% for clients not amortizing principal for 60 days or more.
The overall scenario in credit has led us to make an adjustment in the fair value of our portfolio, which negatively impacted our revenues by R$397 million this quarter. Despite the worse-than-expected performance, we have received over 100% of the disbursed amount from the fourth quarter of '19 and first half of '20 cohorts as shown in the presentation. From now on, we will treat this legacy portfolio separately from new disbursements, so we can properly track the performance of each of them.
Moving to Slide 8. As Thiago already mentioned, I want to do a quick recap of our vision, comment about recent learnings and what we're doing differently in order to have a more robust credit product.
As we previously indicated, our vision for what we call internally as Stone Capital is to build an asset-light model in which funding and underwriting risk for credit stays with multiple partners. Our product has to be easy to sign up to completely embedded in our core financial platform and SMB operation.
Rates must be attractive and simple to understand and reconcile. Repayment should be aligned with our clients' cash flows. And for better clients, we should present better conditions. Although we recognize that we have to work around the risk associated with our credit products, many of the features mentioned above we already built, and we understand that the opportunity to offer working capital solutions to SMBs is huge.
The new receivables registry system will be transformational for Brazil. And when it is fully operational, it will create the basis for a much bigger market for collateralized credit. In this process, we believe that merchants' data will be key, and our software business gives us an edge for the future.
Even though our credit solution was developed during a period with significant negative external factors, such as the lockdowns brought by the pandemic and the short-term problems with the transition to the new regulatory framework, we also had many learnings in this process.
First, we developed the product with the assumption of a functioning registry system, which is yet to occur. Second, our previous assumption regarding recovery of non-performing contracts was higher than observed in the second quarter of '21, influenced by how relevant the problem of collateral leakage is.
Finally, we also made in 2019, the decision to use the fair value methodology when accounting for credit results, which, although is an IFRS standard, brings a lot of volatility and creates more management complexity.
We are working very hard to address all these points and have already taken some important steps. We brought in 2021 a more experienced team to improve our credit scoring model, risk management and funding capabilities. We're also enhancing policies and processes to improve underwriting risk through a broader set of collaterals, access guarantees that were contractually given to us and enhance our recovery, recovery process and renegotiation capabilities.
Starting in the third quarter of '21, new '21, new credit contracts will be accounted for on an accrual basis. We are also exploring new partnerships to enable the asset-light model we envisioned.
Now moving on to Page 9. We highlight the performance and strategic road map of our software business. We're happy with the advancements we've made in the quarter and really excited for what lies ahead, not only because our solutions continue to grow at a strong pace, but especially due to the conclusion of the Linx acquisition, which will be consolidated into our results from the third quarter '21 onwards.
Pro forma software revenue increased threefold to R$62.4 million in the quarter, which organically represents a 52.5% growth. With Linx, pro forma revenue would have grown 31% to R$305 million, reaching over R$1.2 billion annualized software revenues. The number of subscribed clients in our software portfolio in the second quarter '21 grew fourfold to 143,000, while Linx reached 72,000 software clients, a 13% growth.
In Page 10, we talk about our current focus and priorities in Linx. As Thiago mentioned, as the deal closed on July 1 and we started managing the Company, we reinforced our belief about how valuable the asset is. First, a profound knowledge of how retail operates in Brazil and products that have deep integrations to retail workflows, giving stickiness and high switching cost to the business as well as very low churn ratios.
Second, the unparallel level data from retailers in each vertical will give us an edge in the future in terms of more differentiated financial offerings. These strengths of Linx made the Company increase net revenues by 13% year-on-year in the second quarter despite the noise related to the delay in the approval of the acquisition that took almost one year to occur.
Today, we have five main priorities regarding Linx: First, to migrate Linx Stone platform and create offers to further penetrate financial products to Linx' client base; second, invest in technology capabilities to enhance the existing platform, aiming to improve client satisfaction and achieve scale in the SMB market; third, to build infrastructure and tools to enable merchants to have a multichannel storefront, selling their products seamlessly across multiple channels online and off-line; fourth, to build a data management architecture that enables us to create new financial and technology products; and lastly, capture synergies and cost efficiencies.
On Page 11, we give a quick update on our key accounts business. We saw two different growth dynamics within this client segment in the second quarter. First, we saw low growth in sub-acquirer volumes, which present more volatility and lower unit economics.
On the other hand, our platform clients to whom we can offer value-added services that result in better unit economics grew its volumes by 62% in the quarter. These platform clients encompass a wide range of business models, including marketplaces, e-commerce platforms, software companies and omni-channel retailers and are the strategic focus in our key accounts business.
It is important to note that although we serve sub-acquirers because of their incremental contributions, these clients are less strategic. As an example, our top two sub-acquirers only represent approximately 3% of our consolidated revenue, net of funding costs, and we expect this number to decrease in the future.
On Page 12, we'll bring an update on our strategic investment and partnership with Inter. We're very excited to work closely with Inter's team to advance on four main value creation drivers, which were mentioned in our first quarter '21 earnings call.
First, we have three main focuses to integrate Linx' platform to Inter shop, enabling Linx clients inventory to be sold through Inter Shop digital channel, enabling an omni-channel purchase journey to Inter consumers, shop to serve non-account clients, leveraging Stone payments and risk management platforms, help to digitize Stone and Linx service clients through Inter shop.
Second, we see an opportunity to create a data architecture that will enrich both consumer and seller ecosystems and through targeted offerings and incentives helped drive more buying experiences between Inter consumers and StoneCo sellers.
Third, we are jointly working to offer credit and working capital solutions to StoneCo and Inter client base. as well as exploring cross-selling opportunities to strengthen both ecosystems.
Lastly, we have finalized initial funding agreements and are further exploring opportunities to leverage Inter's retail distribution for Stone's funding capabilities.
With that, I will pass it over to Rafael, who will discuss our financial results in more detail. Rafa?
Thanks, Lia. Despite the short-term headwinds with the credit products that we previously discussed, we remain focused on the long term, investing heavily for growth.
As shown on Page 13, we increased our investments by approximately R$180 million when compared to the same period last year, with our marketing investments growing over 230%, sales force headcount almost doubling, technology headcount increasing over 90% and our customer service and logistics personnel growing 88%.
In Slide 14, we can see that our underlying business remains strong with a 45% client base growth, excluding TON, reaching 766,000 clients, while TON increased its client base by 9.4 times to 330,000 clients. The growth in client base was accompanied by an increase in average TPV in SMBs, which resulted in StoneCo presenting a 58.6% TPV growth to R$60.4 billion or R$58.6 billion when excluding Coronavoucher volumes.
Our total revenue and income was R$613.4 million in the second quarter, representing an 8.1% decrease when compared to last year. The lower figure is primarily driven by a negative contribution of R$397 million from our credit product.
Moving to Slide 15. We can see that our operating leverage was strongly impacted by the negative effect in revenue from credit and our decision to keep investing heavily in our business to support long-term growth. Also, financial expenses increased as a percentage of total revenue and income due to a higher CDI in Brazil.
Now going into more detail on each P&L line item on Page 16. Our revenue from transaction activities grew 57.9% driven largely by the strong TPV growth in SMEs. Revenue from subscription services and equipment rental also presented strong results, growing 90.1% when compared to last year, driven by both an increase in our software revenue and a significantly larger Stone SMB client base.
Our financial income, which combines the revenue from prepayment and the credit products was affected by the negative result of the credit product of minus R$397.2 million as a result of the increase in provisions for expected losses in credit and ended up decreasing 87.7% to R$40 million in the quarter. Excluding revenues from the credit product, our financial income would have grown by 67% year-over-year, demonstrating the strength of our prepayment operation.
Our cost of services were R$302.4 million this quarter, 52.2% higher than previous year. This increase was mainly due to higher investments in our technology and customer support teams and higher investment in TAG as well as higher costs related to depreciation of POS.
Administrative expenses were R$121.8 million, 35.5% higher than last year due to higher third-party services, mainly expenses with software services, higher depreciation and amortization expenses, especially due to amortization of fair value adjustment on intangibles related to acquisitions and higher travel expenses. Compared with the previous quarter, administrative expenses were 3.6% higher.
Selling expenses were R$223.2 million in the quarter, an increase of 94.6% year-over-year, mostly as a result of higher marketing investments, mainly in TON and investments in hiring of salespeople. Compared with the first quarter of 2021, selling expenses increased by 37.1% to the same reasons that I just mentioned.
Financial expenses were R$157.6 million, 151.8% higher than the previous year, mainly 151.8% higher than the previous year, mainly due to the higher outstanding volumes of prepayment and credit and higher cost of funds, mostly due to the higher and increasing base rate in Brazil.
Other Income, net, was positive by R$777.0 million, mainly related to a mark-to-market gain of R$841.2 million related to our investment in Inter. Excluding this effect, Other Income was negative R$64.2 million, 60.2% higher year over year, mostly explained by share-based compensation expenses and issuance fees regarding the $500 million bond offering that was successfully concluded in June.
Finally, moving to Slide 17. We show that our business, excluding the credit product, continues to grow at a strong pace. Total revenue and income grew by 68%, with take rates and adjusted earnings before taxes also increasing rapidly on a yearly basis.
Before we start the Q&A, I would like to revisit our outlook for the year. Given the short-term challenges in credit, we decided to suspend previous guidance on take rate and adjusted net margin for 2021. We are keeping our guidance of active client base between 1.4 million and 1.5 million clients including TON and approximately 950,000 clients, excluding ton. It is important to highlight that Linx will be fully consolidated from third quarter 2021 onwards.
With that said, operator, can you please open the call up to questions?
At this time, we're going to open it up for questions and answers. [Operator Instructions] Our first question today comes from Tito Labarta with Goldman Sachs.
Hi, good evening everyone. Thank you for the call and for all the information that you've provided. A couple of questions. I guess, first, just to understand a little bit more on the issues with the credit portfolio. Why do you think it was such a big write-off, given that the receivables market really only started already in June? So it was like you were already two-third through the quarter. And a lot of the loans you had done were pre the receivables market. So just to understand, why it became such a big issue for you and why other players haven't really experienced it? I think you were kind of expecting the receivables market to be a big growth factor. But just to understand, compared to other players, why you had such a much bigger impact?
And then following up on that, in terms of -- I know you've mentioned three to six months to start lending again or till the issues potentially get resolved. Have you started lending again? How much confidence you have in that the issues do get resolved? I know you said it's still a big opportunity for you, but does that happen already in the second half of this year? Or do you think you'll have to wait for next year before seeing that opportunity? And then I'll ask another question after that.
Tito, Rafael here. Thank you for the question. So starting on the first point of your question, I think, there's two factors there that happened this quarter. So the first is we saw NPLs increasing, right? As we have mentioned in this release, the clients that are not paying us for 60 days or more are 19%. This number was around 12% last quarter.
And I think the second factor that is very important to explain is that we -- our expectation of recovery of non-performing clients, we reduced that expectation a lot, especially given the problems in the registry. And for everyone to remember, our credit product was designed to be fully collateralized.
So when we saw that the new registry system was not working properly, we saw that we could not enforce those collaterals. So given the methodology that we have been using, the fair value methodology, and we saw this happening, what we did is we decreased our expectation of recovery of non-performing loans. So it was pretty much a double effect, NPLs increase and our expectation of recovery of those NPLs also decreased. So that's why you see the size of the impact that you see there.
One thing that is important to mention is we had already before over 100% coverage for those clients not paying us for 60 days or more. And when we saw the situation with the collaterals, what we did is we decided to increase the coverage significantly, so we could have over 100% coverage for clients not only not paying us for 60 days, but even for those clients that were paying us in the last 60 days, but they were not being able to amortize principal. So that's our decision in terms of being more conservative in terms of recovery. And I think that the registry had a big role in that decision.
Regarding the second part of your question, as we mentioned in the teaching and here as well, the technical issues in the registry, they are complex, right? So that's why we mentioned three to six months. The product that we have today is a collateralized product. Of course, that we are developing and improving our products, it will depend on the risk appropriate opportunities that we have, so we can resume disbursements. We haven't yet resumed the disbursements. As we have mentioned in our materials, we have disbursed pretty much R$0.8 million in July, and we have not yet resumed.
So we are taking a cautious approach assessing the risk, not only, of course, in terms of improving product but also the externalities and how the environment is in terms of technical capability to start working. So that's the latest that we have for this.
Rafa, if I may just add to your point, Tito, just to talk a little bit about what we expect going forward in terms of the operation, right? I think as Rafa mentioned, there are a lot of things that we're doing right now to turn around our credit operations given all the learnings that we've had. So I think number one is we're making an assessment of our collaterals, talking to players and regulators to see if some regulatory or legal action would be needed in order for us to access guarantees given to us.
But of course, in the operational side as well, we have hired a lot of new experienced people that are working on processes and policies to evolve our products with the goal of really improving our underwriting capabilities, our recovery in credit scoring processes. And we're adjusting our product so that we can have a broader set of collateral from clients and working in these strategic partnerships, as we mentioned, to really look for this asset-light model that we talked about just now. So we're following closely what's going on, but I just wanted to highlight that there's already many things that we're doing in the operations to turn around the product.
Great. Thanks Rafael and Lia, that's helpful. Maybe a follow-up then on that, if I may. I guess, is it because it's a collateralized product and because of those issues, could you say that you're maybe even over provisioning more than you may need to because you're not sure about that collateral and you may still be able to recover some of these loans? You're just -- because if you're provisioning based on our collateral life product and you're not sure going, maybe in the short term, you have to provision a lot more. Or is that the correct provision a lot more. Or is that the correct it? And maybe you can get some of this back feature?
Yes, that's a great question. So of course, we will pursue those amounts and try to have part of it back, but we have to have our best estimate as of now. And what we are seeing now is that given the technical challenges, the system is not yet working, so many challenges there.
When we look, for example, at the priorities of the credit contracts within the registries, they are not yet correct. And there's still something that has to be solved. So I think it's possible that we have part of that flow back. What we have seen in the last few weeks is when we see players that were not settling in our bank account and some of the smaller players started to settle, we do see the flows coming back.
So I think this is positive but still very small given the total size of our non-performing loans. So we decided to work with the information we have and take a cautious approach and do the increase in provisions to have coverage that we think is adequate given the profile of the portfolio, the maturity of the portfolio. So, we are very comfortable with the level of provisions we have now. And that's, I think, the latest we have.
Just one follow-up. I think you're right, this product, the collateralized products, so in the end of the day, we have to see cash flows of our clients coming to our bank accounts as we had a lack of receivables to create expectations for future collections.
So what we are doing now, we are talking to players to understand the problems and the problems in the registry and the reasons why some players are not selling transactions right and discuss things with regulators, how can we solve this. So I think that if the flows come to our bank accounts, as we were expecting, given that we had priority in the previous rule, I think that we can make a new assessment about our ability to recover the money that we have landed to our clients.
But with the information we have, we decided to take a cautious approach and make the provision as we did. And in terms of your question about the future, it's difficult to talk about the future now in terms of projection. But in the end of the day, opportunities are huge, and we are 100% focused on the execution, as Lia said.
The demand hasn't changed. And our client base grows a lot, both in terms of clients and TPV that in the end of the day, we want to see as potential collaterals, but the registry system has to mature in order for us to be comfortable with the collateral.
And while we are observing the evolution of the industry, we are turning around our product and execution. So it can take anywhere from three to six months, as we've said, but the opportunity for the future are huge. And it didn't decrease what we expect as the product that we want to offer to our clients and the opportunities that we see to our business.
Okay. Great. That's very helpful. And just one other question, if I may. I guess, on Pagar.me, you mentioned you're focusing on more profitable accounts. Do you think that's going to continue to be a headwind for volumes as you maybe lose some of the sub-acquired business and focus more on higher revenue-generating opportunities? Is that the right way to think about it?
Hi, Tito, just -- yes, to talk about Pagar.me, specifically the key accounts business, like we said, right, I think that we can separate that business in two groups. The first is the sub-acquirers, which, yes, the answer is we expect this low growth to continue, but the unit economics of that is really not relevant at all. So we mentioned that the top two sub-acquirers, which are a large part of the volume in the sub-acquire segment, they represent only 3% of our revenues net of funding costs. And we don't expect this number to increase, quite to the contrary.
On the other hand, we do see this positive evolution and growth in the platform business, right? And I think that's very aligned with everything that's going on in terms of, number one, more platforms growing in the markets, not only marketplaces, but all different types of seller services platforms, many software providers that want to embed payments in their offerings to their clients, many retailers wanting to go omni-channel. So we do see a lot of opportunities there, but that's where we're going to focus on, right? We're going to focus on those platform services that we think are much better opportunities in terms of unit economics and growth.
Our next question comes from David Togut with Evercore ISI.
Thank you. Good evening. You've been very clear that the next three to six months will be difficult for the credit business. But in terms of framing what financial income might be, should we think about the 88% year over decline in the second quarter to PLN40 million representing the approximate trough earnings for this business.
Hi, David. Rafael here. Thank you for the question. So we have broken down that financial income line decrease. So if you look to the growth of our prepayment business, which is also embedded in that in that line that we have over 60% growth year-over-year.
I think that when you have the credit product normalizing, you should see a growing very fast. And what we are seeing is the prepayment business is indeed growing very fast and varies mostly, as Thiago mentioned.
So the R$397 million of negative effect that we have mentioned, this is all concentrated in the financial income line. So I think if you strip out that, you can take a look at what the normalized the normalized ex-credit financial income would be?
Understood. And then -- yes, sorry.
David, Thiago here. Just to follow up on that. If you remember, previous to this situation with the collaterals and in the early beginnings of the credit during last year, we were expecting something around 1.5% to 2% risk-adjusted return for the product. So that's basically the rates that we are charging for clients less the provisions we have, less cost of funds we had.
So I see this business as being a very profitable one. I think we had the problem in terms of collateral leakage. We are changing the way we account for this product. And in the third quarter onwards for the new credit disbursements, we use the accrual methodology that, basically, we will book the provisions upfront, and we will accrue the revenue over time. So there will be a margin to be accrued over time as we started to distribute the product back again, and we will help investors to reconcile both ways of booking because in the end of the day, cash flow doesn't change, but the way that you book your revenues, it changed.
So I see this business as being a very profitable one. Our clients, they need credit to evolve, to buy more inventory and to grow. So we need to serve them, but we have to do with the proper risk. We learned that the collateral we were seeing, it didn't give us the protection that we were expecting, so we are turning around the operation. But it's a very profitable business. When we think about the expectation of profitability, I think that we were not too far from what we expect. But in the end of the day, we have to make sure that we have the risk assessment of collaterals and the clients' right to get the project back on track.
Understood. And just as a follow-up. How much visibility do you have that you'll be through this difficult period with the registry of receivables by the end of six months?
Great question, David. So we have weekly meetings with the players with the three registry of receivables with associations of the card players in the market with Central Bank. So everyone is following closely the technical implementation that is being made by the three registries now. And we think that once that is done, the market will be very protected from collateral leakage.
So I think that there are confidence that we will get fastest is these two factors. On one hand, following closely the industry evolution and the other hand, rebuilding the product and working around our execution. So this is something that we are, as you know, the size of the opportunity and the size of the impact we are following very, very closely.
Our next question comes from Mariana Taddeo with UBS.
Hi, hello everyone. Thanks for the opportunity. If I could make some follow-up related to the credit business, as you pass-through the issue with the registering of receivables, how do you plan to scale the portfolio? If you could give us a base maybe related to your past levels of origination, that was something around R$800 million per quarter, should we you keep this level or assume a more conservative approach going forward?
And the second follow-up is when you said in the presentation that you are exploring new partnerships to enable asset-light model. Is this related to funding, something similar that you are doing with Banco Inter? Or should we expect a similar model that you had in the beginning with a partner that was assuming the credit risk. Thank you.
Hi, Mariana, Thiago here. So regarding expectation of new disbursements, I think that our ability to scale the credit solution has to do with how we built the product. The product is 100% embedded to our financial core solution. So once we are comfortable with collaterals and with the behavior of clients, it's easy to show the value proposition for them, and the on-boarding process that we build for our clients are pretty easy.
So I think that the demand for the product is high. The usability of the product and user experience is very good. And our ability to make all the process works seamless is very good. This helps us in terms of selling the product.
But in the other hand, we have to be comfortable with the risk. So that's why we are paying so much attention to the collateral. In the end of the day, what we were doing was we were like advancing 1 month or 1.5 months of cash flows to clients. And we were selecting a very small percentage of that cash flow that we were taking back on a daily basis. So it was a product to be paid back in eight months. So the risk should not be that cash flow that we were taking back on a daily basis.
So it was a product to be paid provisions in the amounts that we have today. So the first thing we have to do here is to make sure that the collaterals of the industry will be back that once we give credit to our clients, we can access those collaterals. And if not, we have to access other type of collaterals in order for us to be comfortable to scale the product back again. And we are making this so we are confident that once this solution has passed, we will be back on track in terms of growth of our products.
And when we think about partnership, we will do two things. When we have very good risk opportunities and clients that we really understand and we can make a very good assessment of them and the quality of the credit, the amounts that we are disbursing are small and very comfortable, we can use the same methodology we had where we disperse the product and then we sell the outstanding balance to the market. That was our intention from the beginning.
For the other type of clients, we want to use like a marketplace in where we provide access to players that want to give credit to our clients, but we have to keep the level of service that we have always offered. So we will balance those two methods and the partnerships that we are working is to use third-party balance to provide credit to our clients. And we beat the player in the middle, helping both the partners to make the assessment of data and our clients still have a very good experience. So we want to have both models working.
Our next question comes from Jeff Cantwell with Guggenheim Securities.
Hi, can you hear me?
Yes, Jeff.
Thanks for taking my question. On the credit product, this is going to sound similar to some of the earlier questions, but I wanted to ask on credit in a very specific way. My question is, can you walk us through the next three to six months from two areas, first, from a regulatory perspective; and second, from Stone's operational perspective, as you were thinking about those two areas right now?
Because the question I have after reading the teaching paper and hearing the comments today is, what exactly is going to happen over the next three to six months from a regulatory level? And then there's also what should be happening concurrently by you, by Stone, as you move forward with the learnings you've had from this. I just want to put some markers down today for investors' sake, so they have an approximate understanding of what to expect. So can you talk to us a little more about those two things? Would be much appreciated.
Jeff, yes, of course. Thank you for the question. Thiago here speaking. I think that from a regulatory perspective, the Central Bank is doing an incredible work of helping the market to get to a solution. And the solution is not about the regulation itself, it's about the technical implementation by the players. It was a big change in the way that you see and use collaterals, in the way that you register the assets and the technology that was made was not paid in the right place.
So I think that as we disclosed in our teaching, there are many technical evolutions that the three registry of receivable has to implement, and that's what we'll be following in the next three to six months. It's about the technology of the registry of receivables and the interoperability between them to make sure that once we give credit to our clients and we contractually receive the guarantees of all the transactions from one specific card brands, we can access that collateral in all of the payment players regardless of the registry of receivables that we are using without having collateral leakage.
So the interpretability in the system has to evolve. I think we have talked a lot about this in the teaching to be easier to understand, and we will be following that implementation very closely. In terms of the Stone perspective and what we are doing, as Lia said, we are improving our underwriting risky assessment and capability to make sure that we really understand the client and the behavior of the clients. because two things happen here. One is the industry has this collateral leakage type of problem, but in the end of the day, our clients, they decided to move from our payment solution to another acquired payment solution.
And then we were not seeing that cash flow anymore because of the collateral leakage. So what we want to evolve is, why are our clients move to another acquiring player. At the end of the day, we understand that because of the pandemic, many of the clients, they are trying to protect cash flows and renegotiate the contracts later and decided to move, not to pay the credit in the beginning. So we want to evolve our risk assessment of our clients to make sure that we protect the business for this type of behavior in the future; although, it's important that the collateral is working pretty well.
The other thing is that we have to evolve in terms of our recovery process, our renegotiation with clients because if a client has a problem, we have to renegotiate with them to give them the ability to repay us back in the way they should pass for them and for our risk and return assessment. So we are evolving a lot in terms of the recovery process and the renegotiation with clients. The other thing is improving the credit scoring process in order for us to see other collaterals, more than the TPV and the card transactions that the clients have.
Many clients, for example, They are the owner of the store, and we are not seeing the store, the actual store, the real estate as collateral for -- as a collateral for the credit project, for example. So we're improving our ability to have more collaterals for the same clients. And in the end of the day, Jeff, as I just said, there are some profile of clients that maybe we will not be the one increasing credit risk to create the product, but we can provide for them the same level of experience with third-party partners providing the credit and being and having us as the originational partner with a fee in that relationship.
So we are working on those fronts in terms of the turnaround that we are doing in our operation in order to get the product back on track. So it's a two-way execution here following the evolution of the industry and it's a two-way execution here following the evolution of the industry and rebuilding our product. But in the end of the day, what we have to keep in mind is the project has to be simple. Rate has to be simple and the client has to reconcile easily. We have to be paid back aligned with the cash flows of our clients, and we have to provide a better deal for the better clients. We have to work on a way to make our clients sell more by buying more products and evolving. That is the fundamental of the product. So that's what we are focused here in terms of our execution.
Okay. Great. Appreciate all of that detail. Also, I wanted to shift gears and ask you about Linx because there has been significant focus over the past several months about that. And now it looks like that will begin being integrated into the numbers going forward.
So you've had a significant amount of time to focus on this integration. Can you talk about the integration? How is it going so far? Are you selling optimistic about the potential for new synergies, revenue synergies and cost synergies. How are those looking for you right now? Can you help us size the opportunity for the combined company because there's a lot of interest in this combination? So I was hoping to get an update, any color you might be able to provide under pro forma outlook would be appreciated.
Yes, Jeff, of course, Thiago here again. So about Linx, main message here is that it's incredible to see how resilient the business is. If you remember, even though the business faces the pandemic situation and with many of the clients closing their stores, the business proved to be very resilient. And it has the noise of the acquisition. It was delayed. It was more than one year. And even though you passed all of that, it delivered 13% net revenue growth. So it's impressive how resilient the business is.
We are very impressed of how sticky and deeply integrated the products are to the retail workflow. So when we talk to clients, it's incredible to see how deeply integrated the solution is. I don't think that the clients are willing to change Linx systems. So it provides us a big opportunity to integrate with our financial solutions and to help our clients to move that inventory Orion because they really know how to use this Linx system. And I don't think that they are willing to change the POS and ERP that Linx has. So you can see by the client retention, which is very, very high.
We are still making an assessment of the Linx numbers, but what I can say is that there are great opportunities in terms of cost and expense synergies on top of the top line synergies that we have talked in the past. So we are currently focused on mapping all of them, and we already initiated some of that execution. It will be easier to talk about Linx numbers in the third quarter after we consolidate them and use the same accounting standards and procedures that we use. So we decided to provide some preliminary numbers that we have received from the Company.
And we will continue to be 100% focused on the execution. And once we consolidate in the third quarter, it will be much easier to talk about the synergies potential that we are seeing and putting some numbers in terms of OpEx. So, we just started to manage the Company 1st of July. So we had a plan, but now we are executing for almost two months. In the third quarter, it would be much easier to give color for you and follow the investors about synergies and numbers.
Our next question comes from Mario Pierry with Bank of America.
Hi, everybody. Thanks for the opportunity to ask the question. Two questions. Let me change the focus a little bit. You're maintaining your target of achieving 950,000 clients, excluding TON by the end of the year. It means that you have to add almost 190,000 clients in the next two quarters, when you're adding close to 45,000 to 50,000. So it seems like you're expecting a significant acceleration in client adds in the third and fourth quarter. Can you give us explanation why you're positive about that?
And second question is related to this mark-to-market of the Inter stake, right? You know that it was a significant gain of almost $850 million. Is this something that should continue to create volatility to your results going forward? Thank you.
Hi, Mario, Rafael here. Thank you for the question. So regarding your first question, we are -- as we said in the presentation, we are investing heavily in the growth of the operations. So we should see an acceleration in the net adds, excluding TON. And I think you'll see that in that second half. Of course, we will always balance the unit economics of clients, right? We cannot take the irrational economic decisions. If we have a client that is best suited for TON product, for example, we direct that client to that solution.
But I think that we should see acceleration given the strong investments we have been doing. So as Thiago said, not all the investments that we do, you see the result in the same quarter, right? We have to upload investments upfront. Sometimes, then you'll see the results in the following quarters. So that's why we maintain that same guidance of active client base at the end of the year.
Regarding your second question in the Inter, that's right. So you should see the volatility in the other income expenses line. We are adjusting that in our adjusted net income. But given that we don't have a significant influence in the Company, that's how we should account for it. So that's why you see that mark-to-market in that line item. I think that if people look, of course, it's a public traded company, you can follow the stock price and people can, I think, calculate that effect and try to estimate the impact that we'll have, and we'll keep adjusting this in our adjusted net income metric.
Mario, Thiago here. Just to give an additional comment here, although we are balancing better, both products, TON and Stone, mainly focus on being the best NPS on our clients and the best cost of acquisition and lifetime value ratio in the products we have.
We see that our hubs are doing very, very well in terms of productivity. We are opening new hubs. So our expansion for our core product and the core channels we use are doing pretty well. So that's why we are confident that we can get to the numbers that we have just talked.
I'm very impressed about by the growth of the business. I think that the team understood how to manage revenue per client in a different way. And I think that now the product is much more robust. So I'm very positively impressed by the new balance that the team achieved and very confident with the growth of the core.
Okay. Now that's helpful. Can you discuss then like to get to this level of clients, right, and again, I do realize you're making the investments and adding hubs and people, But the economy, can you tell us a little bit about how you've seen the economic scenario in Brazil? Because, again, there was a lot of optimism maybe two months ago, but given the high level of inflation, the right interest rate environment, people are getting less optimistic of the economy. So also, how does that tie into your guidance of 950,000 clients?
Mario, I think that in the end of the day, I'm not a specialist in terms of macro, so I don't have much to say about it. But I think that in the end of the day, our market share is still very small. And the coverage that we have give us the ability to increase a lot the size of our operation because we still have a lot of regions that we have to cover. So despite of the macro environment -- and we have learned how to manage this.
Keep in mind that we are growing the Company between 2015 and now, so it was not an easy macro scenario. But in the end of the day, our business has a lot to offer for retailers in Brazil. And the market is very big, and we have a very small market share yet. So I think that macro changes do not impact too much our ability to grow in terms of clients.
We have always to pay attention to interest rates curve because in the end of the day, it can impact our cost of capital. As you know that we have a big outstanding balance of prepayments, so we have to adjust pricing over time to make sure that we are following the cost of capital of the Company. And that's a situation that we follow very closely on our treasury team and our pricing team.
But that's the main KPI in terms of macro that we look. It's the yield curves of Brazil and how we adjust cost of funding and Brazil and how we adjust cost of funding and pricing of the products. of the products. In terms of number of clients, I think that's basically market share is still too small. The opportunities ahead that are very, very big, that's why we can increase our operation without being too much impacted by that.
Okay. And just a final question related to the same topic, if you can discuss a little bit about the competitive environment, right? One of your peers is making a big push into the SMB segment. We know that another one was to IPO later this year. So can you just talk -- give us a little sense of the competitive environment? And my question is, I thought your net adds this quarter was a little bit weaker than what we were forecasting. So I don't know if that was a reflection of more competition or like if you can just then give us an overview of the competitive environment. That would be helpful. Thank you.
Yes, Mario. Although we are happy for our growth, we don't want to let you down. So we will make sure that we keep the growth increasing in the speed we expect. I'm very happy with the level of growth we have now, but I think that we have much more things to do to increase our growth over time. For us, it's clear that competition has intensified a little bit.
But on the other hand, we are much stronger than we were one year ago. So some comments here. One, we have a much more robust product. So engagement of clients are increasing. Our distribution is much more robust, and the service capabilities that we have invested are providing a better experience to our clients. I think the level of experience that we offer. You don't have a parallel to that in the market.
We have learned this better balance between investment and return that I just said. So it gave us the opportunity to access new markets that we were not present. In the micro merchant segment, it's a very positive news that we had. We learned how to operate in that segment. So we expect good growth from that segment. We think that the numbers show the strength of the team, the strength of the business model.
So we are very confident that we can keep winning in the SMB space. So I think that the dynamics of competition is pretty much what we have experienced. Our ability to manage through different products, new markets and balance investments, I think that is what makes our numbers be in the place they are. I'm very happy with the growth that we have presented and with the discipline of the team.
Our next question comes from Domingos Falavina with JPMorgan.
Thanks guys also for taking the question. First one is, I guess, on the operational side. So you mentioned basically 35% of your clients are not reducing principal. That's what's written in the presentation. And then I think you mentioned in the call may be paying interest or not, and 19% or generally flattish in some year and 19% are not paying either.
My question is in between those two numbers, there are 16% of your clients who are being able to collect something. What's happening on those guys' case? So if the guy is swiping or they could, I guess, all be on relief. That's one option. So it's -- they're not paying because they're not charging. Or they're swiping such a small volume that you're only being able to poach a part of that? And if you could really elaborate with some examples, like we usually only go up to 10% of the sale volume or 20% and then it's what we're paying and that's what's not allowing us to get the principal. I just want to have a bit more visibility on that. And then I'll ask to second one.
Hi, Domingos. It's Rafael here. Thank you for the question. That's right. So you have 19% of the outstanding balance not paying for 60 days or more and 35 not paying interest. So I think there's two things that can happen there. So one is clients that were -- their cash flows were impacted. So their sales reduced significantly. So they are being able to pay us back, but they are not being able to reduce amortized principle.
And the other effect -- and those two effects might be correlated sometimes, which is they are shifting volumes away to what the acquirers try to sort of bypass the collateral. So you have a small percentage of their total sales being moved to us. And in that case, they also don't have the ability to amortize principal.
And it's interesting because we cannot, of course, take all of their flows and all their sales to pay us back. Otherwise, this harms merchants and it's not healthy. So I think that's why you have that gap in between those two numbers.
And I think it's an important point that we mentioned about the registry system. And the new system when it's working properly, it will be much better by the exact reason that when merchants will transact with all the acquirers, it should -- we should see those flows as well, and we should have the ability to withhold the amount that those clients owe us. And in that case, we would have a different scenario. But that's sort of the situation between those 35% and 19% outstanding balances.
Got you. And my second question is, let's assume it doesn't work, the collateral. Does your zero -- or virtually zero origination in August means Stone won't be doing un-securitized lending? Or should you adjust lending rates, maybe further adjust the addressable market within your client base and start migrating to these other business product? Because I would assume you have long enough relationship with select clients where you will be comfortable to land even in an uncollateralized way. And if we should read that uncollateralized is something that's just possible to do and something or that's Stone will do?
Hi, Domingos. It's Thiago here. Thank you for the question. So two things. One is, I believe that the industry will stabilize shortly. So as we said, we are following very close the discussion. I think that that's a functionality of the ingress, which is very good for everyone. It decreases the risk for lenders and it decreases the price of the credit to clients. So by the focus that the industry is putting on this, I think that it will be resolved shortly.
But to your question, we don't intend to have clean credit risk from our clients. So what we are doing is we are seeking for other collaterals and guarantees of the owner of the merchant. Personally, for example, if the owner has assets, we are seeking for guarantees that the real estate and other type of guarantees. We don't want to incur a clean credit risk.
But in the end of the day, if the clients need a clean credit risk, we want to be the one accessing partnerships that can provide this to our clients without having this type of risk in our balance sheet. So our strategy is to have a collateralized product in which we can offer good rates to our clients in the -- aligned with their cash flow and have a very controlled execution. So that we were -- that's the reason why we're surprised by the collateral leakage. We don't intend to have two credit risk in our company as of today.
Our next question comes from Neha Agarwala with HSBC.
Thank you for taking my question. Again, on the registry receivables, thank you for the teaching. It's very helpful to have that understanding. But this problem that you're having with the registry of receivables, it could have happened previously as well, right? I mean, before like last year, when you accelerated giving credit, at that point, we did not have the receivables operating. So why didn't we have this problem last year or earlier this year? Why is it happening now? Maybe I'm missing something here. And then I'll ask my next question.
Thiago here. So I think two factors, as we have disclosed. NPLs are increasing. So NPLs are past during 2020. So in fact, when you see ability to collect cash flows, it decreased a lot by what we have observed until now.
In the other hand, in June 7, the new registry systems begin to operate and the new regulation begin to operate. So our expectation was -- since we had the collateral set contractually with our clients, and we have the priorities in place, we have the lock of receivable in the old regulation, we were expecting that all players would be selling transaction in the right way. And then we would have the priority on the cash flow of the clients in the accounts that we have set in the registry system.
So, we're expecting to have access to collateral that it was given to us in the past. But because of any issues on one of other players, we would be able to access that collateral. And it didn't happen until now. So that was the big frustration we have in terms of expectations to recover the flows, and that's what we are following closely to see where the situation will land.
We expect to have the priorities once all the situation stabilized and a big part of that cash flow come back to us. So we make -- we made a research and the vast majority of clients that we give credit, they are operating.
So we can see the account receivables that they have with other players. We can make visits to them. The vast majority is live, is transacting, but the flows is not coming to the bank accounts that we have set, so we don't have the ability to access the collateral. So we expect that once the situation evolves, maybe we can access the collateral that we were expecting.
And was this problem seen with any other acquirers as well because we haven't heard that from other participants? So was it that was Stone was targeted by some of the other acquirers, who are being aggressive in taking away your merchants, and that resulted in losses for you on the credit side? Or did you see this problem occur with other acquirers as well and other players as well in a similar manner as yours?
I think banks were impacted in the credit product, but I don't see many other acquiring players offering credit in the way that we do in Brazil. Our prepayment product is running smoothly. We have disclosed the numbers of the prepayment product for everybody to understand that the prepayment was not impacted. The only impact we had, was in the credit product.
So yes, I see that banks were impacted for this, too. But when you compare to acquirers, I think that the outstanding balance we had and the operation we build is different than what other players did. That's why we were more impacted than others.
Okay. Okay. Perfect. On the change in methodology that you implemented this quarter. So if I do the numbers for the previous quarters, you made about 150 million, say, in the third quarter and fourth quarter of 2020, down about -- that was the revenue from the credit. What would these numbers look like, if under the new methodology? What I'm trying to understand is that once you start accelerating credit again, what would be the impact in the revenue recognition because of the new methodology?
Rafael here. So we have changed the accounting methodology for the new disbursements. So the contracts that we have until now in the portfolio that we are calling the legacy portfolio, this will continue to be accounted for at fair value methodology. So the accrual basis will be only for the new disbursements. And I think that the fair value methodology brings complexity and volatility that is higher than the actual volatility and complexity of the operation. So that' one of the reasons why we decided to change the methodology. But again, this is only valid for the new disbursements. The portfolio that we had until June 30, this will still be accounted for at fair value method.
Okay. But I understand why you changed it. What I'm trying to estimate is that, obviously, now the supposed any -- if you originated 500 million during a quarter previously, and your revenues were much higher during that quarter. Now, the revenues for the similar amount of origination is going to be much lower because of the new methodology. So could you quantify that a bit? How much could revenues from credit per quarter or year look like once you start giving credit again?
Yes, Neha. So I think that the rationale to calculate, for example, revenue on an accrual method is the average outstanding balance and the rates that you actually charge the client. When you look at the past, we did the account is the way we were doing. So we don't have that number for you. I think we can chat off-line. If you want, we can try to reconcile the numbers. And -- but I think that the accrual method is actually much simpler than the fair value methodology, which embeds the estimates of cash flows from clients, so on and so forth. So I think we can try to chat off-line so I can help you to reconcile those numbers.
Okay. Sure. Perfect. And with this methodology, would you be recording provisions separately in the cost line, I believe, or not or be netted against the revenues?
Yes. That's right. I mean the provision will be separate in the cost line instead of netted in the revenue as it is in the cremated.
Okay, perfect. And lastly, on the credit side, you said that you could also add as a marketplace in giving credit for the clients where you're not comfortable. So just wanted to clarify, would it be more like a marketplace where you're just getting a fee that is a percentage of the loan amount? Or would you have more like a partner bank model where you can split the profit on the loan?
Hi, Neha. Thiago here. I think that the mindset is exactly what you just said. We want to have multiple partners in which we can rely to have the balance sheet and to offer the credit to our clients, and we want to split results with them. So -- but we are just analyzing what the best alignment with our partners. So I don't have too much to disclose now. I think the next quarter we have more color about the way that we will operate with third parties.
And in terms of the reconciliation that you just asked, so taking into account that it's fair value, you have both revenues and costs and all the provisioning upfront. When we change to accrual basis, as we just said, we will book the provisioning upfront, and it will be on the cost line and then you will have the revenue coming over time as we accrue that. But we will give information to investors to understand what is this revenue going forward in terms of size of disbursement, rates.
So it will be very easy to reconcile once we start to disburse under the new methodology. And we will always have the old legacy products with fair value and the new credit product, and the new disbursements will be based on an accrual basis, and we reconcile to be very simple to understand. We can bring this in the next quarter for you, and we can chat off-line after the call to help you better understand.
Perfect. Thank you so much for the disclosure. And I hope you will keep giving us some of these additional disclosures that you provided this quarter. It was very helpful in understanding the profitability of the credit and the prepayment business separately. Thank you so much.
Thank you, Neha. We will continue. Count on us.
There are no further questions at this time. So this will conclude the question-and-answer session. I will now turn over to your host for final considerations.
Thank you. I just would like to say thank you very much for participating on our second quarter earnings call, and see you next quarter. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.