Electronic pole | Global finance magazine

Latin American economies benefit from a dynamic and innovative fintech sector.

Already Latin America’s largest neobank, São Paulo-based fintech Nubank could surpass the $ 55.4 billion market value of Itaú Unibanco, Brazil’s historic first bank, when Nubank launches its planned Nasdaq IPO, according to press service reports. This is not surprising. Instead, it symbolizes the rise of Latin American fintechs.

“There are 1,005 tech companies born in the region that [have each] raised over a million dollars, ”according to a recent report by the Inter-American Development Bank. “Fintech and e-commerce represent 72% of [Latin American and Caribbean startup] ecosystem value.

Before the pandemic, Latin American e-commerce was already growing by 20% per year and is expected to be worth $ 187 billion this year. Amid the lockdowns of 2020, it jumped more than 54% from 2019. Mobile internet users in the region are expected to reach 424 million by 2025. That’s all according to a report released this year by PayU , a global fintech operator. In 2010, Brazil had only two payment companies; it now has nearly 500, says Rodrigo Schemann, commercial director at Unlimint Brazil, the São Paulo branch of the global fintech company.

“In all markets, digital opportunities are increasing; but in Latin America the pace has been incredibly fast, ”says Lauren Morton, partner at QED Investors, a venture capital firm.

The growth of digital banks and payment tools is being fueled by several factors: tapping into the region’s huge market of unbanked and underbanked citizens, the preference of a host of young adults for online financial services, favorable regulatory measures in many countries and enthusiastic support from local and international venture capital funds.

FinTechs make money through financial inclusion. “By adopting strict underwriting requirements and limiting access to financial products, legacy banks in Latin America are excluding a large portion of the population,” says an online report by General Partner Angela Strange; and Matthieu Hafemeister, partner, from venture capital firm Andreessen Horowitz. “In Mexico, for example, more than 50% of people are unbanked; more than 30% have no access to any financial product; and only 31% have access to credit products. Most savings are largely cash based; add the authors.

“Companies have tried to target segments that incumbents are not interested in,” says Adal Flores, CEO and co-founder of fintech Kueski, which calls itself the largest online consumer lender in Mexico. “It is interesting to target these markets. They will move upmarket when they get stronger and bigger. A survey of a company shows that 60% of its customers have started to build their credit history with Kueski.

The pandemic has helped spur the growth of fintech in this segment. “Before the pandemic, only a small percentage of the Brazilian population had a digital wallet,” says Schemann. “Before, 60 to 70% did not have access to any type of digital system. Now that number is less than 30%. This was in part fueled by government efforts to boost financial inclusion, including distributing stimulus money to citizens through digital wallets.

Many observers believe traditional banks would like to tap into this market but are crippled by regulations and higher customer acquisition costs. Meanwhile, countries like Brazil, Chile, and Mexico are adopting fintech-friendly reforms. “One of the keys has been regulatory clarity, especially in Brazil,” Morton says.

Another key growth market is the tech-savvy young people at the base of what Flores calls the “age pyramid”. “In Mexico, 43% of the population is under 25 years old. This large, young clientele expects its banking service to more accurately reflect the consumer applications it uses regularly, ”says the Andreessen Horowitz report. “In addition, the use of smartphones is becoming the norm rather than the exception… Brazil is the second largest market for WhatsApp, with 120 million users.

Another factor mentioned by Flores and José Vargas-Favero, executive vice president and general manager in Latin America of Provenir, a provider of risk analysis solutions, is the deep mistrust of young people towards traditional financial institutions, due to of the 2008-2010 financial crisis. and other bad memories. Mexican banks “filled the parking lots with [repossessed] cars, ”Vargas-Favero recalls. “Argentina had big problems. People lost their savings in 2001. Flores adds that young people “remember how difficult it was for their parents to deal with financial institutions”.

This has opened up opportunities for fintechs, spurring the growth of the digital sector. South American giant Brazil is leading the way, as recent fundraising from EBANX, a payment provider, and Neon, a digital bank, show. “What I see in Latin America are pockets of huge growth in the major economies,” says Vargas-Favero. In addition to Brazil, the shortlist generally includes Mexico, Colombia, Chile and Peru.

In Central America, Panama could be an exception. “Although it is in its infancy, e-commerce is strong in Panama,” according to the PayU report. “This is due to a combination of its multiple free trade areas; strong links with other Latin American markets; competitive labor costs; and, in particular, well-established commercial infrastructure thanks to the Panama Canal. Smartphone penetration is high in the country and more and more people are now purchasing goods and services over the internet. According to Vargas-Favero, “Startups in El Salvador, Costa Rica and Panama will generally start with the six countries. “

Startups are gaining market share and brand recognition in all segments: from banking and credit to areas such as consumer investment and insurance, and payroll and point-of-sale services for small businesses. Cora (Brazil) and Xepelin (Chile) focus on small businesses. Xepelin also opened a boutique in Mexico, part of a cross-border trend. Brazilian lender Creditas has also expanded to Mexico, as has Ualá, a personal financial management mobile application developed in Argentina. Uruguayan payments company dLocal could lead the league, having spread to 29 countries in Latin America and beyond, including Asia-Pacific, the Middle East and Africa.

“You had strong founders who started companies five to nine years ago, most of whom had studied and worked abroad, mainly in the United States,” says Flores de Kueski, who speaks English, Chinese and Portuguese. “They were able to understand what was going on in the world as well as in their own country. “

The international mindset contrasts sharply with that of traditional banks, which tend to stay close to home, with a handful of champions generally dominating local markets. Itaú Unibanco is a notable exception, with operations in 20 countries outside of Brazil: seven in the region and the rest worldwide. Some observers attribute the penchant for cross-border movement among fintechs to the influence of venture capitalists. “There is a lot of pressure to establish that they can go beyond their home country,” says Carmelo Gordian, partner at the law firm Shearman & Sterling. “The best companies have points on the map. “

Latin American financial services companies have received more than $ 7 billion in investments since 2016, according to data from Crunchbase, a trade information company. The volume has grown from year to year, and 2021 should be no different: “The investment will almost certainly eclipse” the $ 2 billion recorded in 2020, according to the press branch of the firm. A report by the Association for Private Capital Investment in Latin America, a nonprofit organization, also highlighted the trend: Fintech startups accounted for $ 1.6 billion, or 40% of regional venture capital invested in the year. last.

The region has 27 strong national venture capital firms in five countries, according to SaaStock, a company that provides a community for entrepreneurs to software-as-a-service businesses. Seventeen of them are based in Brazil. Large foreign companies, especially American ones, including Goldman Sachs, QED and Andreessen Horowitz, have joined the party. “The growth in venture capital has been spectacular,” says Gordian. “It reflects what happened in the United States 20 years ago.”

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