Why is Fintech so Important in Latin America?
Only 11% of Latin Americans have access to credit from formal institutions. In fact, in Chile, 37% of adults have no accounts with a formal financial provider, even though Chile has one of the highest levels of financial inclusion in the region.
In comparison, under 40% of adults in Colombia, Mexico, and Peru have formal bank accounts. However, in one of the most chronically underbanked parts of the world, improvements in financial technology have opened the doors for widespread financial inclusion throughout the Latin America.
More and more people are accessing mobile payments, credit systems, and P2P lending opportunities through recent advances in local fintech, and investors are catching wind of the enormous opportunity.
While there have been considerable advances in financial technology in Latin America in the past five years, many tools are still only available in the countries where they were founded. A report by Oliver Wyman, released in September 2016, provides a snapshot of local fintech players in Chile, Brazil, Mexico, and Colombia.
It is clear that many startups are providing similar services in each country, but few have made the leap to offer financial services more regionally. The challenge of offering regional services may define the Latin American fintech ecosystem over the next decade.
Regardless, financial technology in Latin America is filling a persistent gap in the access to financial services across the region.
Here’s a look at why fintech has become the startup buzzword of 2018, who is investing, and why you should be paying attention to Latin America.
Until 2016, less than half the population of Latin America had access to a bank account or debit card. Even fewer people had access to credit. In a region where micro, small, and medium enterprises (MSMEs) make up 99% of the private sector, financial inclusion for individuals and small businesses continues to be a significant challenge for economic development.
Despite being challenging to access, Latin America’s banking sector is relatively strong and profitable compared to the rest of the world. During the 2008 recession, Latin American economies were surprisingly resilient, growing around 3.8% in 2010, after a mere 2% contraction in 2009.
In comparison, exports in the US and Europe shrank by 10% in 2009, and did not bounce back for several years. This strength was bolstered by Latin America’s banking sector, which financed loan growth from domestic sources, avoiding the toxic investments that were crippling banks in the U.S.
Nonetheless, a 2016 study found that Latin American MSMEs are less competitive than their counterparts worldwide, in part because of a US$210 – $240B deficit in financing options. Across the region, small businesses struggle to grow because access to credit continues to be a highly formalized and bureaucratic process that excludes many business-owners. Since these enterprises employ at least 67% of the population regionally, the need for widespread financial inclusion is pressing.
Fortunately, in the past decade, access to technology and the Internet has changed how Latin America does business. Opportunities have surfaced to provide financial services to MSMEs and individuals that fall outside of the traditional banking systems.
By 2018, almost 50% of Latin Americans will have access to a smartphone. While mobile banking has long been accessible in places like Kenya, Latin America has also become a front for new technologies that increase access to financial services for all.
A recent report by Finnovista and the Inter-American Development Bank (IADB) found a total of 703 fintech startups in Latin America, over 50% of which were launched between 2014 and 2016. This sector received over US$186M in venture capital funding last year, and one-third of that went to startups.
It is clear that Latin America is at the forefront of a fintech revolution, with recent improvements in access to Internet and technology driving this boom.
Diego Caicedo, CEO of Portal Finance, a Magma Partners portfolio company, recently published an article laying out the current trends in the Latin American fintech industry and where they are leading the region. Electronic invoicing and factoring, digital banking, smart contracts, blockchain technology, and digital authentication processes are all driving efforts toward more inclusive financial institutions in Latin America. Specifically, these technologies are helping lower the risk of providing credit or signing contracts with individuals without traditional measures of creditworthiness.
Here are a few of the most exciting Latin American fintech startups using these technologies:
Kueski: A Mexican startup focused on providing small loans to middle-class individuals, which received US$35M in funding in 2016 in a round led by Variv Capital, Richmond Global Ventures, Rise Capital, and CrunchFund.
Clip: Latin America’s answer to Square, Clip simplifies cashless payments for small businesses. In 2016, General Atlantic made an undisclosed investment in Clip, after the startup had raised a US$8M Series A round led by Alta Ventures in 2015.
Konfio: An online lending platform for micro-business loans, Konfio is focused on extending lines of credit to MSMEs in Latin America by using an algorithm to measure creditworthiness for financially underserved people.
Portal Finance: Portal Finance helps SMEs find the most business-friendly terms from factoring companies. Portal Finance evaluates electronic invoices from companies and provides information to investors, which allows investors to make financing offers quickly and transparently. (Portal Finance is a Magma Partners portfolio company.)
Mesfix: Bogota-based Mesfix connects investors with SMEs that want to sell their invoices, allowing multiple funders to purchase part of a single invoice.
Cumplo: A Chilean crowdlending platform that connects companies applying for loans with networks of investors. Founded in 2012, Cumplo is certified as a B Corp and has helped raise over US$180M in loans.
FounderList: Latin America’s answer to AngelList. A crowdfunding platform that unites syndicates of private investors to finance startups across Latin America. (FounderList is a Magma Partners portfolio company)
QVO: An online payments system aimed to simplify transactions for small businesses.
Nubank: A São Paulo-based startup that provides mobile banking and credit card options for Brazil’s unbanked population. Since its founding in 2013, Nubank has raised over US$377M with several rounds led by Goldman Sachs.
Creditas: Creditas is an online secured lending platform that is working to lower borrowing costs for Brazilians by increasing the efficiency of lending systems.
GuiaBolso: Brazil’s only personal finance platform that allows users to fully integrate their bank accounts. GuiaBolso currently has over 3.3 million users and has raised over US$67.2M in funding.
Afluenta: Currently, this Buenos Aires-based startup is the only marketplace lending company for individuals and SMEs with operations in more than one country in Latin America. It now operates in Argentina, Mexico, and Peru, with plans to expand to Colombia and Brazil.
Ripio: One of Latin America’s foremost blockchain payments companies, Ripio is helping make the Latin American financial system more accessible through blockchain technology.
Wayniloans: Founded in 2015, Wayniloans is a peer-to-peer lending platform that uses bitcoin to cut out the intermediary and simplify the loaning process.
These startups only scratch the surface of the movement that is growing in Latin America. While Mexico, Argentina, Colombia, Brazil, and Chile are leading the fintech revolution, these technologies are also popping up in Peru, Ecuador, and Paraguay, where the population is still highly underbanked.
Following this wave of growth has been a rush of investment; 81% of venture capital deals in Latin America in 2016 involved fintech companies.
LAVCA pointed out that fintech companies received over US$186M in venture capital in 2016 and a majority of these rounds were led by syndicates of local investors, including VARIV Capital, Jaguar Ventures, FEMSA Comercio, KaszeK Ventures, Redpoint e.Ventures, Magma Partners and Valor Capital.
However, 2016 marked an inflection point in fintech investments, with more and more international firms paying attention to Latin American startups. In 2016, 26% of investments were made by partnerships between local and international venture capital firms.
QED Investors recently partnered with Scotiabank to create a platform that “will identify, invest, and promote the growth of innovative startups across the fintech spectrum that look to improve customer products and experiences in Latin America,” and Visa Brazil recently founded its own LatAm fintech accelerator to empower Latin American companies and help them grow.
Latin America’s fintech ecosystem used to be dominated by cross-border payments and processing solutions that helped bring US$74B of remittances into the region. But in the past five years, the fintech industry has finally moved forward. Smart contracts, electronic payments, and online lending companies are dramatically improving financial inclusion in Latin America, and this movement is just getting started.
Startups are providing individuals and MSMEs the resources they need to grow, which in turn has increased regional competitiveness and generated economic growth.