March 23, 2017
The first part of the LATAM FinTech Series explores the region's challenges, in spite of which it is becoming a leading destination for expansion and investment for the world with FinTech leading the space and playing a pivotal role in economy building.
Argentina, Brazil, Chile, Mexico and Venezuela make up the Big 5 Economies of the region comprising over 25 countries across Central America, South America and Caribbean. While Colombia is a fast-growing FinTech market followed by Peru, Panama is increasingly finding itself become a test market for North American startups. Not to mention, Peru is Latin America's fastest-growing economy. The Big 5 still remain the leaders and any socio-politico environmental change in them tips the trade economies for the entire region. Hence, we limit our scope of this commentary only to the Big 5.
The foremost challenge for banks in the region is to establish trust. With the region reeling from a severe banking crisis that lasted more than a decade, it has been established that the Latin American financial system takes far longer to recuperate and the cost of restructuring is far higher. Repeated bank employee strikes that last more than a month, policy changes and the sky-high rates of interest have led to alienating not just a single bank from the masses but the entire financial ecosystem.
Consumers, on the other hand, prefer alternate channels of lending and borrowing to the bank. Card rates in Brazil are in triple digits and last checked, ranged north of 450%. Although there are talks by the current ruling government under Michel Temer to slash rates by to up to 181%, it is yet to be implemented and may lead to a fall in delinquency rates up to 35%. Venezuela, on the other hand, has had immense unrest post the devaluation of the VEF. In 2016, amidst speculations of the country being on the verge of debt default, Venezuela raised the price of gasoline by 6,086% and devalued the 37% in an attempt to boost the economy. With inflation being 180.9% in 2015, the government has taken steps right from demonetization to policy changes.
Apart from alienation and the high cost of banking services, the problem of poverty and underbanking has led to governments taking solid steps to restore economic growth by investing in people and taking up financial inclusion as one of the primary agendas. The FinTech industry emerges as a key growth enabler and alternative to traditional banking.
Although the region has been under recession for the last decade, World Bank reports state the region is expected to grow by 1.8% in 2017 and domestic markets and domestic demand are no longer enough to fuel growth. Globally, Brazil and Mexico are being eyed as the primary markets for expansion and Europe leads the race.
With Portuguese and Spanish being the primary languages of the indigenous population, most businesses and banks offer services primarily in local languages. This has led to the slow but steady foray of many European business houses including large banking giants such as the Santander Group into LATAM. Banco Santander, the Spanish banking major made its investment into LATAM as early as 1996 with its acquisition of Grupo Financiero InverMexico and occupies the second largest share of the assets in the domestic banking. This was followed by in 1999 by Banco Bilbao Vizcaya's merger with Argentanaria to create the BBVA group.
Today's new age FinTech players of the Euro are making a beeline for LATAM for the following reasons:
The language advantage gives an accelerated penetration through social media, establishes instantaneous audience connect and also saves marketing concept or pitch development effort to a great extent.
Bypassing the stringent laws of the Eurozone and to move to a larger unregulated market with a higher penetration of mobile devices is a win-win.
Opening up untapped markets where over 95% of the businesses are small businesses strapped for cash. Consumers are largely unbanked and the mobile penetration is high. The right solution can open up value for the FinTech and the local businesses in equal measure.
Stronger Euro – Also with most of the region in recession and, the expansion investments over the local players provides a boom to these foreign entrants.
Some of the European FinTech players expanding in the LATAM region:PaynoPain A digital payments gateway that has a history of success in the European Union is now eyeing the LATAM market with having certified itself for operation across Mexico, Colombia, Panama and the Dominican Republic in partnership with local players. Klarna A Swedish company with a proven track record in Euro now poised for growth in the LATAM. Klarna acts as a digital payments gateway for over 65,000 merchants and is now looking at consumer financing. Klarna's recent valuation is about 2.5 bn USD and is being strengthened with its acquisition of Wonga and expansion in LATAM. Fintonic A Madrid-based mobile payments company is seeking to make inroads into the LATAM with their personal finance management app starting with Chile. With strong recommendations from groups such as BBVA and over 250,000 users in the Spanish market, Fintonic is multibank in nature and has a mature API stack that is future-proof. iZettle A Swedish startup and was one of the first companies to develop a chip-card reader and app for smartphone-based mobile commerce which meets international security requirements. They later upgraded it to accept contactless payments. It went on to offer point-of-sale service software and is also experimenting with small business advance. Their entry markets in the LATAM have been Brazil and Mexico. FeedZai A data science company that was started by a team of aerospace engineers and came about as part of a Carnegie Mellon program to foster Information and Communications Technology in Portugal. Feedzai leverages real-time, machine-based learning to analyze big data in the e-commerce space. It offers services to payment providers, banks and retailers to prevent fraud in omnichannel commerce. Their entry to Brazil is poised for growth.
Despite the economic uncertainties of the region, venture capitalist firms continued to invest in LATAM with majority of the investment being channelized from North American VC Funds.
Key trends highlighted by the LAVCA report:LATAM had over USD 594 million deployed in 184 VC deals. FinTech dominates VC interest. 40% of IT Investment (in terms of dollars invested) in 2016 was a sharp rise in comparison to the previous year's 29%. Brazil's VC investment fell by 48% from 2015 but still has over 110 million USD deployed. Mexico led the mid-2016 statistics with over 47 VC transactions and over 63 billion USD deployed. Mexico shows a growth rate of 327% against the previous year's data.
The capital injection into LATAM has been slow and steady and yet forms the core strategy of some of the biggest names leading the digital revolution in banking.
ScotiaBank announced a tie-up with QED Investors in December last year to invest in select FinTechs in the region. ScotiaBank has independently invested in digital factories outside of Canada in Mexico, Chile, Colombia and Peru. QED Investors the boutique venture capital firm based in Alexandria, VA focused on investing in early-stage, disruptive financial services companies in the US, UK and Latin America has also made key independent investments in NuBank, Guiabolso, Pitzi, Bankfacil in Brazil, and has recently expanded this model to Mexico through its investment in Konfio.
500 Startups the Silicon Valley-based VC has investments in over 14 startups in the LATAM which include CLIP, Conekta, Konfio and ContaAzul to name a few. They also run a regional fund for Accredited US Investors called 500 Luchadores II which focuses on Spanish-speaking Latin America.
Founders Club has in its portfolio bitcoin-led startups such as Bit Pagos, BTCJam and BITSO.
Ribbit Capital the VC firm that invests globally in unique individuals and brands who are aiming to disrupt financial services has set its eyes on LATAM and has in its portfolio BTCJam, ContaAzul and ComparaOnline.
Tiger Global, Sequoia Capital and Peter Thiel's Founder's Fund, DST Global and Goldman Sachs have also invested in NuBank – one of the first FinTech disruptors to have been instrumental in drawing attention to the entire region.
A spate of recent events such as Mexico coming under the ire of the Trump administration and Venezuela's failed demonetization has posed further social-economic challenges in the region but what resonates loud and clear is that FinTech can play a major role to rebuild trust through new business models and extend mobile-enabled financial services to a majority of the unbanked. We may just be at the very start of a new journey for LATAM as we watch the phoenix rise.