PagSeguro Digital Ltd
NYSE:PAGS
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PagSeguro Digital Ltd
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Good evening. My name is Greg, and I will be your conference operator for today. At this time, I would like to welcome everyone to PagBank PagSeguro Webcast Results for the Third Quarter 2021. This event is being recorded and all participants will be on listen-only mode during the Company's presentation. After the speaker's remarks, there will be a question-and-answer session. At that time, further instructions will be given.
[Operator Instructions]. This event is also being broadcast live via webcast, and maybe accessed through PagBank PagSeguro's website at investors.pagseguro.com where the presentation is also available. Participants may view these slides in any order they wish. The replay will be available shortly after the event is concluded. Those following the presentation via webcast may post their questions on PagBank PagSeguro's website.
Before proceeding, let me mention that any forward statements included in the presentation or mentioned on this conference call are based on currently available Information and PagBank PagSeguro 's current assumptions, expectations, and projections about future events. While PagBank PagSeguro believes that their assumptions, expectations, and projections are reasonable in view of currently available information, you are cautioned not to place undue reliance on these forward-looking statements.
Actual results may differ materially from those included in PagSeguro's presentation or discussed on this conference call for a variety of reasons including those described in the forward-looking statements and Risk Factors sections of PagBank PagSeguro 's registration statement on Form 20-F and other filings with the Securities and Exchange Commission, which are available on PagBank PagSeguro 's Investor Relations website. Finally, I would like to remind you that during this conference call, the Company may discuss some non-GAAP measures.
For more details, the foregoing non-GAAP measures and the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures are presented in the last page of this webcast presentation. Now, I will turn the conference over to Ricardo Dutra, Chief Executive Officer. Mr. Dutra, you may begin your presentation.
Good evening from Sao Paulo, everyone. And thanks for joining our third quarter results conference call. Tonight, I have here with me Artur Schunck, our Chief Financial Officer; Alexandre Magnani, our Chief Operating Officer; and Eric Oliveira, our Head of Investor Relations. Let me start by giving you the highlights of this quarter. Record TPV in both acquiring and banking. Record revenues in EBITDA, and the second-best non-GAAP net income, only behind Q4 last year. We will see more details throughout the presentation. Quick update about COVID-19 in Brazil, while pandemic is not fully behind us, we have started to see signs of the economy reopening the back of the vaccination. In Brazil, you have been seen a higher acceptance of vaccines in comparison to other countries.
That is also campaign to give you extra shots to reinforce due immunity of the elderly, and people with high-risk disease or medical conditions. However, as a consequence of these almost 2 years of COVID-19, the Brazilian macroeconomic scenario is changing very rapidly. Inflation rate went up above 10%, the unemployment rate continues to be above double-digit, and the interest rates are increasing faster than the market expects. Regardless of these macroeconomic challenges, our track record gives us the confidence we can navigate very well during the crisis and grow our businesses.
Our quarterly results, one more time, consolidate our winning strategy to continue to invest in technologies to make client's lives simpler. While guaranteeing a safe ecosystem, driving a profitable growth, and increasing revenue and profits diversification with cross-sell and up-sell of PagBank products. Our revenues have accelerated driven by our new growth initiatives, mainly in serving larger merchants than long tail, and cross-selling PagBank offers for merchants and consumers while we attract a more diversified client profile. This quarter, we launched the automatic payment called Debit-Automatic in Portuguese, DDA, and several new partnerships targeting the gaming community.
On top of that, several milestones were achieved in our PagInvest initiative. We now offer 70 investment funds and several CDs to foster our deposits. We also have a Brazilian treasury bond trading platform, and our home broker trading platform for equities started to roll-out this week, and we expect it to be available for all clients until the end of November. On the regulatory front, we continue to see the regulator fostering competition which could create opportunities for PAGS. Therefore, our investment thesis remains the same. We will continue to combine the best balance between growth and profitability among Brazilian payments and FinTech space, while we prepare our Company for the long-term, where we expect to have a larger and more profitable Company.
It's only the beginning. We also low credit zone of the key drivers to achieve larger revenues in profits in the future. And we are 1 of the few players in Latin America that has been building gradually and consistently a very diversified credit portfolio with a healthy asset quality. We have a seasoned team, exclusive data, and right credit policies. There is no need to rush. Our main goal is to build up a solid credit business. One more time, I'd like to reinforce that I'm very encouraged by the recovery trajectory, and pleased with the momentum in both businesses, PagSeguro and PagBank. Finally, nothing of these would have happened without the confidence of our shareholders. the commitment of our suppliers, and the best and most committed team working hard every day to promote our mission.
Being part of the financial life cycle of every Brazilian citizen, promoting massive financial inclusion in our country. Thank you very much PagBank PagSeguro team. That said, Artur and I will present some slides and have Q&A session at the end. Turning to Slide 3, we highlight achievements of the third quarter. Record total revenue of $2.8 billion rise up 56%. In the blocks below, we can see PagBank revenues reaching almost R$240 million and acquiring revenues reaching R$2.5 billion. All-time high consolidated TPV off R$126 billion, up 86%, with PagBank TPV reaching an impressive R$59 billion, growing 158% versus Q3 2020. Acquiring TPV grew 58%, excluding Corona voucher, reaching R$67 billion, with HUBs TPV growing very rapidly and reaching around 15% of the year-to-date acquiring TPV.
Adjusted EBITDA of R$742 million, up 40%. With acquiring adjusted EBITDA reaching R$818 million and PagBank adjusted EBITDA, reducing losses as a percentage of PagBank revenue, and increasing its margin, gaining traction to reach a bit creeping in the coming quarters. Non-GAAP and net income of R$419 million up 27% year-over-year. CapEx -per-sale has been down from 32% in Q3 2020 to 15% in Q3 2021. Moving to PagBank, in September, our active client surpass its 12 million, driven by 1 million net additions in the quarter, while active commercials total R$7.7 million. Our credit portfolio reached R$1.6 billion in September, with NPL 90 under control, with new cohorts those after August 2020 operating at single-digits. Total NPL 90 is running at low double-digits.
Turning to Slide 4, we present PagSeguro 's highlights or acquiring business. Our acquiring TPV grew 58%, excluding Corona voucher, driven by our successful execution to serve not only long-time merchants with excellence, but also SMB through our hubs. Increasing our market share that reached between 9.5% and 9.7% as we can see right below the chart. Shirt to the Capex top right, we can see our acquired TPV growth is accelerating versus previous years, and growing 63% year-to-date ahead of 45% guidance we gave last quarter. The positive trends remain and we are happy to announce that in October, we reached a new all-time high daily TPV for the third consecutive quarter, processing more than R$1 billion reals payments in one single day. In Q3, our active motions reaching R$7.7 million as the chart on the bottom right shows, our gross additions remain healthy in comparison to previous years.
However, the net ads impacted by a higher mortality related to lockdowns, higher churn related to wildcard news flow during the second and third quarter of 2020. Slides that, it is worth to remember that there is no impact on acquiring TPV trends, as for active merchants, we consider at least 1 transaction in the last 12 months. Moving to Slide 5, acquiring revenues grew 52% in comparison to the same period last year, or 35% on a 2-year CAGR basis. The growth was due to the growth of our merchant base and our successful execution to SMBs through our hubs. Despite our SMBs merchants have lower take rates, their TPV s are 5 times larger than long tail, and that's why our net take rate maintained a flattish trend in comparison to the previous quarters.
Bottom left, as the client mix is changing towards larger merchants combined with a larger share of wallet, we can see the growth of TPV per merchant increasing 18% versus same period last year. Our adjusted EBITDA reached R$818 million, a 35% growth year-over-year. Despite the higher investments to roll out our Hubs and continuous improvements in our payment services to our merchants, we were able to gain market share, consolidate our position, and increase EBITDA. Moving to next slide, taking the opportunity to explore in the previous slide, I want to share the results of our Hubs evolution in slide 6. HUBs TPV continues to deliver a strong growth and represents approximately 15% of year-to-date acquiring TPV.
Outpacing the best estimate for a modest, due to the economy reopening and a strong execution to serve larger merchants combine it with a powerful competitive advantage, which is PagBank. I'm also happy to say that in October we reaching more than 300 HUBs fully operating. At the same time, we're also observing HUBs break even between 3 to 4 quarters, and paybacks between 4 to 5 quarters. Our software solution reached 1.3 million subscribers or 17% of PAGS active merchants. Last quarter, we announced a consumer's acquisition, one of the most disruptive Fintech in 2021 according to Daily Finance Magazine, which has speeded up a reconciliation product roadmap.
This will also help us to expand our reconciliation software, offering to SMBs and long tail clients, which were not served by our previous solutions older tech. Moving to Slide 7, PagBank revenues continues to present healthy trends, reaching almost R$240 million, up almost 80% year-over-year, with better trends in the Adjusted EBITDA losses, which had a negative margin of 58% in 2020 versus a negative margin of 32% in Q3 2021. We had a net addition of 1 million new PagBank clients in Q3 2021, surpassing the mark of 12 million PagBank active users, being 46% of these clients composed by consumers.
Products for user remaining stable versus the same period last year, despite the healthy growth in the number of new clients. On top right, PagBank's, gross take rate improved 31 basis points compared to previous quarter, reaching 1.93%. This is the result of the increase in monetizable TPV as we shown sharp bottom-right, increased 52% year-over-year. Moving to Slide 8, quick update regarding initiatives to improve client convenience and experience. During this quarter, we closed a partnership with big brands that are now available at our PagBank Shopping such as Booking.com, AliExpress, and recognizing gaming companies such as Xbox, PlayStation, and Steam.
Finally, PagInvest assets under custody and deposits surpassed R$6 billion, up 88% year-over-year, driven by our increasing number of clients and new products available. In September, investors active clients were 391,000 and we're offering more than 7 investment funds in our platform, expecting to reach a 100 funds by year end. We also have 5 PagBank's CD's and 2 of them with credit card offers using CD balances a collateral. In September, we launched the treasury bronze trading platform, and this week, we launched our home growth trading platform for equities, combined with free financial education contents, to explain the basics of investments for our clients. Now, I'd like to turn the conference over to Artur our CFO, who will talk about our credit portfolio, and our financial results for this quarter. Artur, please go ahead.
Thanks, Ricardo, and good evening, everyone. Following our representation in the slide 9, September ended with a total credit portfolio reaching R$1.6 billion, being 57% of working capital loans, 39% of credit cards, and 4% of all other credit products. The performance is improving day after day based on efficient credit models, experience of team, and several learnings from the results of past quarters. All our credit products grew very fast in the last 12 months, mainly due to low credit origination from April to August 2020, always being carefully with asset quality. Our delinquency rates continue to be under control and trending down, due to the phase-out of the effects related to the lockdowns and the new credit models adoption. In August 2020 onwards, the cohorts on the new credit model, are presenting a single-digit NPL 90 days ratio, maintaining our assets quality while we expand our credit products. The total NPL 90 days are running at a low double digit.
This quarter, we launched the overdraft to loans, offering one more product to our vast merchants. It is important to have a broad portfolio to offer the right product for the client needs. Moving to Slide 10, we present the costs and expenses analysis. Our non-GAAP total costs and expenses totaled R$2.2 billion, up 66% year-over-year, as a reflection of volumes growth and investments to develop and launch new products and services to merchants and consumers, and expenses to expand sales channel to serve every size of business in Brazil. On cost of sales and services, there was an increase of 42% compared to Q3 2020, mainly related to higher transaction costs, reflecting strong acquiring TPV growth, with more credit card mix and higher G&A due to investments in R&D, technology, and POS devices. Selling expenses presented an increase of 95% year-over-year, driven by higher personnel expenses for the expansion of Herb's Salesforce and for [Indiscernible] bank teams and higher marketing expenses to consolidate PagBank brand awareness.
The most relevant increase in expenses was on financial expenses line due to higher working capital needs to fund accelerated growth of prepayment TPV, and higher basic interest rate that grew from below 2% per year, to more than 6% per year. Comparing to Q3 '20, the positive working capital needs due to lockdowns and acquiring TPV mix towards to debit with lower duration of credit transactions, help it to reduce financial expenses last year. It is important to mention that for every 100 basis points of increase in the Brazilian interest rate, the net income is impacted by approximately R$17 million, and financial expenses increase R$90 to R$110 million both in annual basis.
Moving to Slides 11, despite of a challenge here in the environment for financial expenses, due to higher interest rates. Our team delivered once again, a solid quarterly result. In the top left, our consolidated net take rate reached 2.44% is slightly better than Q2 2021, and 9 basis points higher than Q3 2020, driven by better TPV mix with more credit transactions, with a lower share of debit transactions, and helped by our larger PagBank revenue. In the bottom-left chart, the adjusted EBITDA achieved R$741 million on third quarter, with a growth of 18% versus last quarter; adjusted EBITDA margin remains flattish at 26.7%. Excluding the change and cards in fee, our adjusted EBITDA margin was 41.4%. In the top-right graphic, we share our strong cash position with a positive balance of R$8.7 billion, reinforced by the issuance of PagBank CDs to fund the credit disbursements.
This positive position increased R$500 million in comparison to last quarter due to rise of accounts receivables from issuers. Finally, in the bottom right, we shut our capital allocation. During the third quarter of this year, we invested almost R$426 million, being 52% in POS acquisitions, and 48% in R&D to develop new products, features, and services. As a percentage of revenues, CapEx decreases at 18 percentage points, reaching 15% versus 33% in the third quarter of 2020. Moving to the last slide of this conference call, as Dutra said in his initial remarks, the positive trends of this year, led us to review our acquiring TPV growth guidance from 40% to above 45% last conference call.
As we continue to observe a very positive trend, we are increasing the bar to between 50% and 53% in 2021. We project a reduction of capital expenditures in R$100 million, setting our new level of R$1.7 billion for this year, this year, optimizing the cash flow generation. Finally, I slightly update on D&A levels expected to end the year between R$800 to R$900 million. After we move to Q&A session, I would like to turn to Alexandre Magnani, our new Chief Operating Officer, to say some words.
Thanks, Artur. Hello, everyone, and thanks for joining our quarterly results call. It's a great pleasure to talk to you and let you know a little more about me. I have been working in the payments industry for 28 years, starting my career at Credicard and Redecard, where I had different roles on sales, planning, and products. Right after that, I spent a 15-year tenure at MasterCard, where one of my many accomplishments was the implementation of a non-financial institution licensing program to foment the development of new issuers across Latin American markets among retailers, pre -paid program managers, and fintechs.
In January 2015, I have joined PagSeguro with the mission of building the acquire and issue business. It has been an exciting journey since then, transforming the card acceptance landscape in Brazil by including millions of underserved business and individuals in the electronic payments system and providing them simple and smart financial services.
I have no doubt after almost 7 years within PagBank PagSeguro, that we have developed the most dynamic Fintech in the market, which is capable to generate more value for all the stakeholders in a faster way. We are very proud of our capacity to innovate, execute, and deliver strong results. I'm very excited about my new role as COO, and will keep our focus on growing profitably, consolidate PagBank, developing new capabilities to simplify our customers' lives, doing all of that in a safe and seamless way, and most importantly, with the passion and excitement of our team. Thank you. Now, we will end our presentation and we can start the Q&A session. Operator, please.
Ladies and gentlemen, we will now begin the Q&A session. [Operator Instruction] if at any point your question is answered, and you would like to remove yourself from the question in queue. [Operator Instruction]. Our first question comes from Mario Pierry with Bank of America.
Good evening, everybody. Congratulations on the quarter and thank you for taking my questions. I have two questions. First one is on the prepayment business, right? As you show that financial expenses now represented 22% of your revenues, and this was like 3% 1 year ago. So, I was wondering about your ability to pass on these higher costs into your final prices or your desire to do so. So, that's question number 1. Question number 2 is with regards to your HUBs strategy.
You show that your TPV HUBs is already at 15% of total TPV, you are guiding for 6% to 11%, so it's clearly going better than expected. Can you give us some color on why this is going better than expected? You said, right, it's because -- part of this is because of PagBank, you offering the banking solution combined. You also talked about that you opened 300 Hubs. Maybe you can help us understand if this 300 Hubs was better than what you expected, what are the targets in number of Hubs, and why not change the guidance for the Hub TPV from 6% to 11% to something closer to the 15% level that you're already seeing. Thank you.
Hi, Mario, this is Ricardo. Thank you for the question. Good to hear you. I will start to answer here the first question and then I can go to the second one. Or better, let's bring it back. I will start backwards; I will start from the Hubs and then I will go to prepayment because Artur can also help me here. Well, in terms of Hubs, as you said, we are doing better than we expected. We expected to reach 11% in the best scenario, now, we already have 15%. Part of success is because we cross-sell acquiring with PagBank.
The other reason is also because we took advantage of the pandemic and we focus to accelerate and we expect it to have 300 HUBs by the end of the year and we could anticipate that, so we have more people in the streets. And also, because when they made these assumptions about the HUBs, KPIs, we thought there would be much more difficult to get clients from competition than what we see in the streets than what we see in reality. So, we -- as you can imagine, all clients from HUBs, they already accept cards. So, we don't go there and make the inclusion of these clients different than what you have in long tail. So, we should go there, we need to take clients from competition.
We thought that would be harder. But when we went out there, we see that there are many, many merchants very unsatisfied with their current providers. That's why we are being more successful than what I thought, and we always say that we are very, very, very focused on execution and HUBs is essentially that. To have people in the streets, making the right route, talking to the right merchants is the right offer. And following the productivity of HUBs salesforce team and so on. So that's why we're doing better in the HUBs. In terms of prepayments. I know that when you alluded --
Just before we move to prepayment, then. If I can just ask a follow-up on the HUBs. Sorry about that. Can you talk about your pricing, then? Since you're taking clients from compensation, are your prices similar to the competition?
Is very similar in some cases even a little bit higher. Because as I said, many motions are not satisfied with their current providers. And also, we bring PagBank together. So that's why we are not -- we know that is not the best way to compete in prices, to have this price war because at the end of the day, everyone is going to lose. Because I will decrease the price, competition will decrease next week and then you can imagine what's going to be the end of that. The sales force team has some offers they can offer to the merchants, but we control that very much to avoid this price war. I'm not saying that in some cases we could be aggressive, but that's not the majority the majority of the cases we try not to compete in prices.
Okay. Thank you.
Thank you. In terms of prepayment, Artur can complement here. But just when you look at the numbers, the 3% versus the 22%, I guess, it's I would say unbiased here. Because last year in Q3, we had a strong position of cash in the Company because of the COVID-19. So, when we had a deceleration of TPV last year, we started generating cash. So, because the prepayment decreased, so we started generating cash. We had a strong position of cash, that's why we look, it's only 3%, and now it's 22%, because I guess the 3% is outlier from last year. The other reason that is increasing, as you can imagine, is because of the base interest rate of the economy in Brazil. And also, because we are growing TPV and we need to anticipate. So those are, let's say the main highlights here, but Artur can give you more color.
Mario, good to talk to you and it's hard to speak in. And just to compliment what Dutra has said, in 2020, just in the beginning of the COVID, we had a movement here to advance receivables with bank issuers and we prepare our cash flow to follow the next months in the COVID, because it was difficult to predict what would happen with the world on that time. And so, we had a good cash flow until Q3 '20. And also, the mix of transactions moving to debit that helped us in the case of our cash flow, the duration of credit reduced. And also, when we take a look in Q3 '21, part of the financial expenses that we have is related to the volumes of our TPV that grew very fast. And based on the model that we have here, also the prepayment volumes that we had requires more working capital and so the cost increased.
But what I'm trying to get at, it seems to me that the profitability of the prepayment product is lower than what it used to be just because your funding costs are going up with a higher [Indiscernible] rate. Are you willing to continue to operate the prepayment business with a lower profitability or would you be inclined of increasing the prices of your prepayment product to compensate for the higher financial expenses?
You asked a debt and I forgot to mention, Mario. We -- of course, we will be rational here. We tend to increase the prices because at the end of the day, the basic interest rate is the raw material for us and for our competitor, so we intend to increase the prices. Of course, we also follow the market, what's going on with the market. We see some of our competitors that had a prepayment lower than ours coming to the same level that we have. We are following that very close, but we have the ability to increase.
And to be sincere, I think it's going to be unavoidable not to increase because we are going to 7 -- we have right now 7.75%. Some people are saying that next meeting of [Indiscernible] in December, you increase 200 basis points. So, we're reaching close to 10%, 9.75%. So, it's going to be unavoidable to increase, we have the ability to do so and we also imagine or expect that competition will follow this price. So, we have today a lower profitability, as you mentioned, but we have the ability to increase the price and pass for the merchants.
No, that's very clear. So just to be clear, when you said on your remarks that 100 basis points increase in interest rates will have a negative impact of 70 million on a net income is assuming nothing else changes. But at the end of the day, this impact could be lower?
Yes, exactly.
Okay.
Thank you, Mario.
Thank you.
Our next question comes from Tito Labarta with Goldman Sachs.
Hi, good evening. Thanks for the presentation and taking my question also. A couple of questions as well. 1. I guess a bit of a follow-up on the financial expenses. Just more -- if I look on your Balance Sheet, clearly, you've had a big increase in deposits. You have about R$2.7 billion in deposits, and I think on average across that deposit was about maybe a 150% of Selic, because I think you were paying maybe 200% to some clients. 1. Are you reducing what you're paying on deposits? Because for you to pay 200% of Selic at -- 2% of Selic or 8% Selic, that becomes harder. So, help us think a little bit about the cost of deposits.
Also, what else on the liability side? You have about R$11 billion in payables. Is that part of the working capital? Are you saying that as interest rates increase, would you have to pay on those payables as it's increasing? Just to understand the balance the balance sheet perspective and how that's impacting financial expenses. And then my second question, do you think about I guess the profitability in the margin -- so a little bit of improvement in the margins, consistent with what you said last quarter.
How should we think about that maybe for next year PagBank becoming more profitable? You said the HUB take 3 to 4 months to break even, I think 5 months to start generating profits. Any color you can provide on the evolution of the margins from here, given the rising rate and the investments to continue to make. Thank you.
Hi, Tito. Thank you for the question. Regarding the R$6.2 billion in deposits, or as you said close to R$7 billion here, we do pay some percentage of CDI for some of the depositors. We also are following that very close. We don't have the plan, let's say, to decrease right now because it helps us to get new PagBank clients. We know it is important for us to make PagBank as the main bank for our clients. And at the end of the day, this R$6.2 billion is not that expensive when we compare with the TPV debt we need to anticipate and from a, let's say, acquisition cost perspective today, it's something that we can keep doing for a while, but of course we're going to follow that. If reach 10% or 975, as [Indiscernible] we need to make the calculations here again, but that's something that we can also adjust anytime. In terms of Balance Sheet, if I got your question right, if we need to anticipate more of the receivables that you have. Is that right or you ask a different thing just for me to be clear on the answer here.
Yes, I think it's along those lines. Just to understand where on the balance sheet do, we see the impact of that higher interest rate. Is it your payables are going up and you have been paying more on those payables? You have about R$11 billion in payables in this quarter, and that balance, what caused is part of -- the other part of what's causing those financial expenses to rise?
So related to the payables, yes, we expect that payables will increase because we are considering there the deposits that we have for the Company. The merchant's money in our PagBank account is booked at there. And so, our expectation for the future is growing this number to help us to have a better [Indiscernible] of funding. Okay?
Just one thing that is important here, Tito is when Selic was 2%, and we anticipated from the banks. Some banks charged us like 2% plus a few basis points. Or some banks charted us a percentage or CDI, when Selic goes to, let's say this 8% than you have today, it's very common that as a percentage of Selic [Indiscernible] statement -- the prepayment is lower, because at the end of the day there's -- they're looking more for the spreads, and for the nominal basis points. So, what I'm trying to say here is that 120% of 2% of Selic 40 basis points. 110% of 8% Selic, 0.8 basis points. So, when the base interest rate of the economy goes up, we can also negotiate better with banks to decrease as a percent of our CDI, because at the end of day they're looking much more at the nominal spread than the percentage itself. So that's something just to bear in mind here. And you were asking about margins as well.
Related to margin, I would like to reinforce that as we mentioned on the last conference call, Q3 will be better than Q2. And we did. The expectation for Q4 is the same that we disclose it there and we believe that we can have a better -- a slightly better margin, so we can compensate the financial expenses that will be higher in Q4. I think I'm looking in 2022, we are more focused on nominal growth. And you know that margin for next year will depend on pricing and market conditions for acquiring business. If conditions improve, it's possible to have a slightly better margin for next year. And the macroeconomic conditions in the country is tough right now, and will probably continue in 2022. On top of that, we have -- we will have a hard election process next year that will create more volatility and instability in the market.
But what we expect at the end of the day, Tito, is to have better margins than what we're seeing right now. I'm not saying there's going to be much, much better, but what have in mind is to have slightly better margins. Of course, depending on the all the variables that Artur just mentioned, just like elections, and unemployment, inflation is coming up, basic interest rates and this stuff. But what we have in mind is to get a better margin, something that we saw in Q3 versus Q2 this year. And we will probably see Q4 versus Q3 as well.
Great. Thank you. That's helpful. Maybe if I could just have one follow-up. A bit on PagBank and the -- do you still expect to breakeven next year, and I say that in the context there was discussion about capping the interchange on prepaid, which is a big revenue driver of that. Does that change anything at all about when you expect PagBank to become profitable because of that?
Tito, it didn't change our plan. The idea is to be breakeven by the end of next year. The public hearing is, as the name, it's clear here, it's a public hearing, there's nothing definite. We can update this date of breakeven as we have more information, but it didn't change anything. And remember that regardless of the results of the public hearing for the Company as a whole, the impact is negligible because we have the two-side equal system. We have the two-side business, so to say. We have the current business in the issuance -- the card issuance. So, if you have a slightly better conditions in one side, it's going to be worse in the other side, and vice versa. So, for the Company as a whole, it's going to be negligible, but let's wait for the public hearing and then we can give more information. But it didn't change that plan to be breakeven by the end of 2022.
And Tito, just let me remember you that we have been diversifying our PagBank products, which has been reflected into our PagBank revenues breakdown. With crop products such as credit underwriting gaining more traction, with a health asset quality delivering very good results, and revenue diversification. So, it's going to be negligible for us for 2022 if the PagBank [Indiscernible] is approved without any change.
Great. Thank you for that. I appreciate it.
The next question comes from Bryan Keane with Deutsche Bank.
Hi guys. Wanted to ask about the merchant count. Obviously, the merchant count was lower due to some churn and some mortality of some of the merchants. Can you just talk about what you expect going forward? Does that change much? It doesn't seem to be impacting volume growth. Volume growth is still really healthy. But just curious on how we should model out for net merchant adds. And then secondly, on the financial expenses in the higher rates, historically at some point, does that usually get passed on to the client and it's just a timing issue. Because I think the markets a little bit confused of how much you will have to permanently eat these higher rates going forward versus -- I think historically you've always just pass them on eventually to clients so that a lot of that expense will go to the merchant. Thanks.
Hi Bryan. Good to hear. Thank you for the question. We've already -- I will start backwards here. So, the financial expenses, it is a matter of timing for us to increase the price. As I said, we are following that very close. But to me, and we are in the discussion here, it's going to be unavoidable to pass on to the merchants. So, I know the market is confusing because we don't want to give more details what's going to be the trigger or when we're going to do that. But we have this ability to pass to the clients, and it's going to be unavoidable to do that, in my opinion. Regarding the net-ads, you're right. We had a net-ads that is lower than what we used to have in past quarters.
There are two main variables here: 1. is related to the mortality of businesses, I guess. That's a behavior that is happening not only in Brazil, but also around the world. Many So, small businesses closed their doors. And of course, we're going to see just more talent coming into our base. In terms of gross ads, we are doing well, we're doing same that we used to do in the past. In terms of gross ads, so we keep selling device at same level. But of course, you had this mentality from the past that we use impact our churn that's the first variable. The second one is that, remember we bought Wildcard in July 2020, and because of regulatory processes we only could get the competitor start managing the Company in November.
So, there was all this negative news flow about Wirecard in Germany with these accounts and stuff. And so, one and of course, there's some clients from Wirecard that decided to work with another provider, and we are seeing these churn right now. And we will probably see this churn in Q4 as well from Wirecard. That's not something in my opinion is structural because we are having the same gross adds that used to have in the past, it's something more that you're going to see for, let's say a few quarters, maybe Q4 and Q1 next year, let's see.
But the volumes are coming because at the end of the day, we are measuring the active merchants looking for 12 months. And when we are having this call, we are looking for TPV only for the quarter, so there's this disconnection. What I can say you is that when you look at the 90 days active merchants, it is growing quarter after quarter. So of course, we would like to have the base as big as possible, but we have this disconnection, the 12 months versus the quarter, and also the mortality from COVID and from Wirecard [Indiscernible] last year. Q4, we're going to have the same impact from Wirecard as well. Just anticipating here. Net adds in Q4 is going to have the same levels we are having here, probably.
Okay, great. Thanks for taking the questions.
Thank you, Bryan.
The next question comes from Jorge Kuri with Morgan Stanley.
Hi. Jorge Kuri from Morgan Stanley. Congrats on the quarter hiring up. I have 2 questions, if I may. The first one is on PagBank, which has a -- have an impressive number of clients, so congrats on that. And I wanted to see if there's any way that you can help us understand the monetization profile of the client base and how the different cohorts are improving over time. And I know -- talk about cohorts that business that may be 2 years old is probably not the best way to think about it. But if you can just help us understand the early client versus the today client -- that a cross selling metrics that [Indiscernible] client, the gross profit per client and help us understand that the [Indiscernible], which this business is becoming revenue, profit generator and help us just understand how quickly that will really add to the overall business.
Because I think that 12 million clients, if you had not thought about it a year ago, you would probably think that maybe further out into the future, and so congrats on that. And the second question is in this whole issue about the higher prices. So, I'm hearing it's inevitable that we will increase prices, inevitable. I'm just wondering, what are the triggers for that to happen? So why isn't it that you're increasing prices today or why is it that you haven't decided not to increase prices? So, you're in between A and B and there is no clarity and so wanted to see if you can help us understand what would be the things you need to see from here in order to be certain about increasing prices or the other way around.
What are the things that you need to see in order for you not to increase prices because it doesn't seem that there's a hard decision made yet? Or maybe it's because you don't think rates are going to be high forever, but that's could also be the case, where rates just go back to single-digits anytime soon. And so, then that's many more years, of -- or many more months already of lower margins. And so, help us understand how you think about it and at what point you move one of the things you need to see to move. Thank you.
Hi, Jorge, this is Ricardo. Thank you for the question and good question. We -- regarding PagBank we have many margins as you mentioned during your question, we measured the products for user that we are giving disclosure for you, 2.8 per user. We follow the cross-sell. We follow the first product that users use here. We follow how many of the new client’s order cards activate using SO-1. But going straight to the end here, if you look at the demonetization for clients, the ARPU in the quarter, if I'm okay here in the math, is something like R$80 to R$82 versus R$76, R$77 in Q3. So, we are doing the best combination here, which is grow the base and grow the revenue per user.
We know that as we mentioned before, that the monetization of some PagBank clients takes a while to start because they come here, they start using the account. They only send money from one side to the other, and we don't make any revenues in this type of activity. So, it takes a while for them to test the account, see if it works. The majority of the clients we are bringing, they already have a bank account with another player. So, they test as before, use us more often or used PagBank as the main bank. That's why the monetization takes a while, but and we can look at the air pool that is growing quarter-after-quarter.
And the number of users is growing as well. Regarding the price, we did that in the past already. We increased prices in the past. As I said before, to me, it's going to be unavoidable to increase the prices. We are just waiting for right moment. We are discussing here what's going to be the new price, and there is management discussion here in following the basic interest rate of the economy. We just don't want to give more today, what's going to be the new price, when we're going to do it, of course, because of competition and strategic decisions here. But we do have the ability to do that. We always say that mainly the long-tail base is not price sensitive. They just want to sell as fast as possible. And as I said, it's going to be unavoidable to increase the prices. We are in the discussions here and once we have more decisions; we can give more color on that.
All right, thanks again.
Thank you, Jorge.
Our next question comes from Neha Agarwala with HSBC.
Hi. Thank you for the presentation and for taking my questions. Just very 2 quick questions. First, on the HUB business. Should we expect that the investments that are regarding HUBs, both employment of new personnel and opening of new HUBs, are we done with that already by third quarter or should we expect a bit more expenses on that front in the fourth quarter? And the second question is on credit. We saw the -- some good pickup in the credit books this quarter, but what kind of growth should we expect in the coming quarters and in the next year? And I'm asking that more in light with the tough market environment that we're seeing ahead of us. Do you think this is an environment where you are comfortable lending and we can see good growth in credit book's coming years or not as much? Plus, any initiatives you have related to consumers, how you are monetizing your consumers on your platform? Thank you so much.
Thank you for the question, Neha good to hear you has. As Ricardo, to answer the third question and then Artur can talk about the credits. Well, talking about the HUBs, we launched already 300 HUBs up and running. With this HUBs we have more than 80% of the coverage in the Brazilian GDP. There will be new HUBs here and there, but I will say that's going to be marginal. The majority of the HUBs we already opened. They are in the main capitals, the main cities, the largest cities of the country, in places with more demographic. I'd say that makes sense for us with more people, but there could be some HUBs here and there; probably smaller HUBs to serve some clients in specific cities, but I would say the majority of the investment is already done. In terms of consumers, we keep using the same drivers that used to generate these revenues which is the main one is the interchange of the cards.
The other one is the transaction of the account. When they use the account, we make some revenues depending on the activity they do. And also, for some clients, we have the credit. If they invest in a CD, we give them credit cards so that we receive interchange in other fees from credit card. We're also launching this week the home broker for equities. So, there's going to be some promotions, some of the orders are going to be free and after, if I'm not wrong, the second order, we're going to charge. So that could help also drive new -- it's not going to be transformational, but it could help.
And also, we are launching -- we already launched actually, but it's in the, kind of, pilot. We are not -- we didn't make advertise it yet, but we will do it; the multiple cards. Today our cards are more related or is a cash card or a credit card, and the credit card will limit for the consumers only if they invest in a CD. Now, we are launching a multiple card with debit and credit. For the consumer's credit, it's going to be 0 at the beginning, and then if we decide to give credit to them, it's going to be much easier. We don't need to send a new plastic to them, just make the credit limit available. That's something that I also believe it could help. Also, we launched some insurance products and there's going to be more insurance products in the near future. That could also help monetize the consumers. Those are the -- what you have in mind in terms of product flow demand for consumers. In terms of credit book, I guess Artur can help me here.
Yes. I'd like to say -- I would like to say that there is a huge opportunity in the markets. As you know, 70% of credit is held by the top 5 banks in Brazil, and based on the experience that we have in our clients, we know that there is a big opportunity to grow the credit book, but we are not in a rush. We are doing all things in credit step-by-step, learning a lot. The NPLs are better than we had before. The new cohorts are performing a single-digit NPL. The whole book is in the low double-digits. [Indiscernible] days and also based on that, we are very confident that we can accelerate the conditions, allow us to do that. But we are not in a rush. We are doing everything step-by-step. But the opportunity is too high.
I would like not to set to you a level of a portfolio. But there is a lot of room to grow in terms of credit here. And also, for consumers, we are not offering credits. Just credits with -- just Credicard with a collateral. And so, in the end of the year or in the beginning of next year we will start some offers to consumers.
If I can just quickly follow up, you mentioned in terms of monetizing your customers, you already charge them [Indiscernible], you already make money on [Indiscernible]. Is that mostly from the prepaid cards that you currently issue to the customer and to the consumers?
Yes. It is the -- what do you say, the [Indiscernible], is the prepaid card, yes.
And that's off the prepaid credits?
I'm sorry, Neha.
That is prepaid credit s, Ricardo?
Yeah. That's a prepaid card, yes.
Okay. Good.
I just take advantage I don't know if you are let's say, worry about the public hearing, but again, I just want to take advantage here that everyone is listening to us. The impact of the public hearing 89, which is discussion about this GAAP, is negligible for the Company as a whole. Because the volumes that have and spending for the prepaid cards, is very similar than what we have in the acquiring when we were capturing these prepaid cards using our acquiring. Because the acquiring receipts -- we capture prepaid cards from all the banks in Brazil. So, the volumes are very similar. Any changes that you had one side, there's going to be an off-site in offset in the other side. That's why, I mean, I just want to take advantage here to make it clear, and if it's not clear, I can -- we can say it again. Just take advantage of our questions Neha.
Thank you so much. That's very clear. Thank you so much for the clarification. So, onto credit to the consumers, I'm assuming that you're not in a rush, and maybe you'll think about it in the second half of '22 or maybe after?
To give credit for consumers?
Yes.
Credits for consumers, our intention is launched and it starts with credit card in the end of this year or the beginning of Q1 '22.
Okay.
But remember, Neha, that we are already offering favorable loans for consumers, which is a very low product risk and helps to engage clients from consumer or consumer profile into PagBank. Artur was talking about credit cards, but we already have credit products with low risk for consumers.
Thank you. Thank you so much, everyone.
Thank you very much, Neha.
The next question comes from Kaio Prato with UBS.
Hello, everyone. Congrats on the results and thank you for asking question. So, I have 2 questions, please. The first is about the SMB strategy again, just to understand better what the profile of these SMBs today. You mentioned that you are taking share from competition, and one of the reasons is the combination of acquiring and banking. But just to understand, before you reach the merchant, I believe it already had a bank relationship before you, right? If so, are you saying that they are entirely replacing their previous banking accounts to yours?
And if so, what's the reason for this, and if you are already originating credits for them? And the second is a follow-up on the question about the cap on prepaid cards. I understood what you said about the potential impact, but I would like to better understand your general view of about this [Indiscernible] hearing if you believe this makes sense, and if there is any change -- any chance of these not passing. And also, if could share with us, what's the percentage today of PagBank revenue is coming from the interchange if it is around 60%. And finally, if you didn't actually impose by the central bank, if -- does that change your guidance offer reaching 30% of total revenues come from PagBank until 2024? Thank you.
Kaio, thank you for the question. Talking SMBs, when we have 300 Hubs, we have everything, right? We have -- everything is going on. We have different type of clients, different type of merchants, but I would say that the common behavior is that why they do have a right banking relationship, you're right. Why they consider PagBank as an advantage and why they come to us because many of them, they pay fees for the banks. In some cases, you don't have good service. In some cases, they don't have good products.
So that's why they come to use us. Again, that's the average client. If they come straight to us, probably not. Because they start using us, they're starting testing the account. they're going to receive the card in a few days. And then once they get the confident that -- the confidence that the account is okay, the app is working, they can withdraw the money and so on, they start sending more money to us. And I'm not sure if they cancel the bank account right after that. But probably if they are paying fees, they do cancel and start working with us, or they negotiate with the banks or things like that. But, you know, there in Brazil, that even banks that today charge for basic activities.
If you want to make a wire transfer for instance, they charge. Some people would say there is speaks, but peaks there's some limit. And -- so sometimes you need to make this wire transfers and so on. There are many fees that banks charge for SMBs, and that's why some of them come to us. Also, we -- some of them asked us to have this multiple cards that we didn't have, and we launched it last week. So that's another thing that we can advertise more and be closer SMBs. Regarding on the capital of the prepaid, again, it's a public hearing. In regards of the outcome, the impact for the Company as a whole is negligible because there is the offset. Should we change the -- and also asking about the 60% revenues from interchange of the cards, today is lower than that, it's less than 60%. Does that change -- the public hearing changed our guidance for 30% of writers 2024? No, didn't change at this point.
Again, it's a public hearing, we are looking for 2024. There are many variables, many assumptions in our business plan here to reach this 30%. Some of the assumptions we are more conservative, some of the assumptions they are more aggressive, but it's a very dynamic situation here. So, we don't need to change that at this point, we don't think it's feasible to change that. We are part of the public hearing. Central Bank -- what are we seeing Central Bank these past years is that they are fostering competition.
They try to make the financial situation more competitive, which is good for us because we are a flexible and agile Company, tech DNA, and so on. So, we don't see the Central Bank changing their behavior in terms of fostering competition, which is very good news for us. So, it's too early to say. The public hearing is going to be over in November 21st, and we don't know the outcome. It could be that the outcome is going to be keep same -- everything is the same as it is today because Central Bank is going to look at the impact and so on. So, it's too early to give probable outcome. But again, the impact for us is negligible. That's to me, it's the most important message.
Great. Thank you very much.
Thank you.
This does conclude our Q&A session for today. I would like to turn the floor back over to Mr. Ricardo Dutra for his closing remarks.
Hi, everyone, thank you very much for investing your time to listen to us. Thank you very much for the question. Look forward to talk to you next Thursday in our first PAGS day. have everyone great night. Have a good night and talk to you next week. Thank you very much.
The audio conference for PagBank PagSeguro's result for the third quarter of 2021 is over. Thank you very much for your participation and have a good evening.