Fintech innovation is making serious headway in Latin America. As the ‘LatAm’ lead for Amadeus Capital Partners, this fall, in short succession, I visited Brazil (several times), Argentina and Mexico and also attended Money2020 in Las Vegas. Here are some observations on the state of fintech in the region.

LatAm fintech has big wins on the board now

Brazilian payment companies PagSeguro and Stone both had successful US IPOs this year, with each presently trading above $5B market cap. Coming on the heels of other notable exits in the region, including wealth advisor XP Investimentos’ 2017 $2B minority sale to Itau, and big 2018 exits for non-fintechs 99Taxis and Cornershop, these are important milestones. Major acquirers and institutional investors are stepping up to own LatAm assets and cash is going back into the local investment ecosystem.

‘Gen 2’ fintech is well underway in LatAm

There is a reasonably consistent pattern in the emerging markets in which Amadeus operates (which is everywhere except China and Russia): entrepreneurs tackle the core fintech categories first, addressing fundamental pain points in the financial system. The next generation of companies are built on these foundations. As a gross generalization, the sequence goes something like this:

  • Payments (online gateways and mobile point-of-sale solutions, or “mPOS”), money transfer and remittances, and top-ups to pre-paid accounts, are usually the first areas of focus (with a heavy or exclusive emphasis on mobile). Once it’s possible to move money around easily, consumer credit companies quickly emerge, offering payday loans and other unsecured lending products, in some cases via peer-to-peer (P2P) models. We’re seeing successful companies built in all these fields: Clip and Kueski in Mexico; RecargaPay and Afluenta in Argentina; Stone and Geru in Brazil, to name just a few.
  • The ‘Gen 2’ companies then emerge. This next generation of fintech companies aims to:

    • build digital challenger banks on a mass scale by serving the middle and lower economic classes that the incumbent banks have historically ignored;
    • build digital wallets that can execute most day-to-day transactions, such as merchant payments, remittances, transport ticketing, mobile top-ups, and bill pay, and that replace (mostly) cash;
    • make installment loans – bigger and longer term than their payday predecessors;
    • lend to consumers at the point of sale (a la Klarna or Affirm);
    • develop new lending models that help consumers, disrupt banks and create real business defensibility. For example, Creditas, backed by Amadeus, offers secured loans in Brazil. Home equity and auto equity lending in Brazil are huge opportunities and hard to do well. By embracing the complexity of these products and using collateral to lend at interest rates far below those of credit cards and other consumer credit, Creditas has the chance to redefine the lending landscape in Brazil while creating a highly defensible and valuable company.
    • lend to Small and Medium Size Businesses (SMBs)

SMB Lending

Perhaps the most buzzy sector in LatAm fintech at the moment is SMB merchant credit. Companies are taking a variety of approaches to the challenge of lending to merchants who often have no credit history and are new users of technology. Kubo, in Mexico, wants to bank the merchant digitally and use that relationship to establish creditworthiness. Cumplo in Chile and Mexico uses receivables as collateral. Other fintechs are starting as payments acquirers and then adding credit products. Some are partnering with cloud accounting and ERP software providers to get a digital hook into the merchant; from there they access the merchants’ cash flows, invoices and financial statements to assess creditworthiness. Powerful incumbents like Mercado Libre are also looking for new ways to serve their many merchants with credit and payments products such as Mercado Credito and Mercado Pago.

As a rule of thumb, Gen 2 companies will have higher barriers to entry (regulation, for instance) and require more capital to execute. Not surprisingly, many of the companies from Gen 1 are also the ones going after the Gen 2 opportunities: top-up players morphing into mobile wallets and bill pay; mobile lenders trying to become digital banks; mPOS providers starting to offer credit, and so on. With capital now more readily available in the region, these ambitious visions are much more viable.

Mexico is the latest fintech hot-spot

I heard two stories while I was in Mexico of teams of foreign entrepreneurs – one from China and one from India – who quit their jobs with big tech companies and moved to Mexico as a team, sight unseen, to start companies. They surveyed the globe and ranked Mexico as “the best fintech opportunity in the world” and just moved there. Gold rush time?!

Politics and regulation

Mexico, Argentina, and Brazil are going through remarkable political moments. All three have major political question marks over their countries, with Mexico and Brazil having just elected new presidents, and Argentina with a president whose mandate has become much more complicated during 2018.

Over the last few years, legislatures and ministers in all three countries have also been passing legislation to ease the path for fintech companies. From the Ley de Emprendadores (“Entrepreneurs’ Law”) in Argentina, to fintech sandbox rules in Mexico, to ‘fintech-lite’ licenses being created in Brazil, regulators are making it easier to start and close businesses, onboard customers and make loans, and are generally levelling the playing field for fintechs that aim to challenge the big banks and incumbents.

We have seen a sea change in these countries’ attitudes towards innovation in the financial sector in just a few years. In this time of political transition and turbulence, let’s hope this progress will be maintained.

The volume and velocity of capital in LatAm has increased dramatically in the last year

Elsewhere in the world, mega-rounds have become the norm in venture capital. A $100m Series C financing into a company two or three years old barely raises an eyebrow these days, even in markets that have previously received very little venture capital, like South East Asia or the Gulf States. In 2018, this mega-capital wave reached LatAm.

Capital for startups has historically been scarce in LatAm. Consequently the venture/startup ecosystem evolved into a conservative (and very lean) financing structure that required entrepreneurs to first demonstrate traction, then raise a bit of capital, prove the next phase, raise a bit more capital, and so on. In more mature venture ecosystems with high capital availability, this formula is reversed: you fund the opportunity and the team; if traction follows, you quickly double (or quintuple) down. The emphasis is on speed and scale.

Now we are seeing the historically conservative LatAm formula upended. Round sizes are increasing dramatically (not only in fintech) and a cohort of top-tier global investors and strategics are moving into the region. It’s not just the size of the financings – it’s the speed with which capital is filling the vacuum that is stunning. Consider:

  • Nubank is five years old and has raised over $700m, including most recently $180m from TenCent on a $4 billion valuation
  • Portal Finance, a two-year-old Colombian company doing merchant lending, recently inked a $200m joint venture with BTG Pactual
  • Ant Financial (AliBaba) and Berkshire Hathaway both bought into Stone’s IPO
  • Although not fintechs, three young LatAm logistics startups – Rappi, Loggi, and iFood – have each raised $100m or more in 2018, almost entirely from non-LatAm investors

The cat is out of the bag about the LatAm opportunity and certainly about fintech. I would expect more mega-rounds in the near future, at least until the private capital cycle begins to cool. Given the size of the opportunities, the increasing maturity and experience of local entrepreneurs, the major exits now occurring (including US IPOs), and a generally favorable regulatory and macroeconomic environment, these are truly exciting times for LatAm fintech.

Pat Burtis is a Partner in Amadeus Capital Partners’ San Francisco office and can be reached on pat@amadeuscapital.com.