Fintech Latin America

5 Opportunities for Fintech Disruption in Latin America (Nathan Lustig, NASDAQ.com)

In the past four years, investment in Latin American startups has more than quadrupled. Growth rounds are becoming larger and more common, especially as international investors like Softbank, Tiger Global Management, and Naspers follow on in companies that have the potential to disrupt markets like Brazil, Colombia, and Mexico. 

The rapid growth in Latin America’s startup ecosystem is a sign that there are still significant, entrenched problems to resolve in the region. Part of the reason my firm invests in Latin America is to help build technological solutions to these issues that our team, entrepreneurs, and peers face every day, including the unfairness of the banking system, the bureaucracy of bill pay, and the challenge of renting an apartment in metropolitan cities. 

1. Online payments

For those who have never experienced this issue, it can be hard to imagine the frustration of not being able to pay for things online. However, this problem is still pervasive across Latin America. Legacy payment processors built by banks are unable to keep up with increased demand for online payments as e-commerce grows in the region. Even large, well-known apps like Cornershop, Rappi, and Cabify still mostly don’t accept credit cards from the US.

Several barriers are keeping Latin American companies from processing payments online, including lack of authentication technology, limits to cross-border transactions, and low financial inclusion. Up to 65% of adults in Latin America still do not have access to any formal financial services, meaning they do not have credit or debit cards, or bank accounts, to be able to pay online in the first place. 

While startups are launching in nearly every Latin American country to face digital payment needs, most of these companies have not been able to expand out of their home markets due to regulations. However, the recent success of Brazilian ‘Stripe clone’ and unicorn, Ebanx, provides optimism. Startups like Ecuador’s Kushki and Mexico’s Conekta are also among the first to expand across borders in Latin America, helping startups and corporations easily integrate online payments that do not bounce, redirect, or reject international cards.

2. Banking

Latin American banks are so bureaucratic that many people would prefer to go to the dentist than to try to open an account. Many countries across the region have fewer than ten banking institutions, meaning these players are unmotivated to compete to provide lower prices or improve services for customers. Financial products from these institutions can occasionally border on predatory, with hidden fees and costs that leave customers feeling cheated and used by the industry.

Institutions that people in the US take for granted, like online payment gateways and escrow, are still open opportunities for scrappy startups who could win the space in the Latin American market. Here are the five traditional industries that Latin America will likely see disrupted in the next two to three years.

This environment is creating a growth opportunity for challenger banks, also known as neobanks, in the region to capture disgruntled clients with mobile, feeless cards and allow them to access financial services without ever dealing with a bank teller. Brazil’s neobank, Nubank, is the most-downloaded and most valuable digital bank in the world, valued at $10B after successive funding rounds led by China’s Tencent. Argentina’s neobank Ualá was so popular that users downloaded the app in every province of the country within two weeks of its launch, leading to their $150M round led by Tencent and Softbank. Mexican neobanks albo and Klar also raised significant Series A rounds from US investors in 2019.

These challenger banks are winning the market by focusing on a select target client from the bank – in Nubank’s case, the top 10% of clients – and providing improved services to draw these consumers away from traditional banks. Other neobanks are providing services to the majority of the population that remains completely excluded from traditional financial institutions. These challenger banks have the potential to inject competition into the stagnant banking industry, lowering interest rates and improving financial services for Latin American consumers.

3. Paying bills

In the US, most tenants charge utility payments such as electricity, water, gas, Internet directly to their bank accounts or credit cards. Meanwhile, it is not uncommon to see Latin Americans lining up at banks and pay stations to pay their bills at the beginning of each month. In some countries, it takes up to five different payment methods to pay each of the bills throughout the month. 

Considering the majority of Latin America’s population still has no access to a bank account, most people still have to pay for their utilities in cash at banks or convenience stores. Most of these services are only available from 9 AM to 2 PM from Monday to Friday, meaning people have to line up during their lunch hour to pay. Late payments in certain countries can mean a mark against your credit score or even getting posted up on the wall of your apartment building on the “debtors” list. 

Few startups have tackled this issue successfully to date. Mexico’s Saldo.MX, Chile’s Servipag, Colombia’s Nequi, and Peru’s Yape are trying to make it easier for Latin American customers to pay their bills online. However, there is still a significant open opportunity to provide a simple service to the large tranche of the population that has access to the Internet, smartphones, and debit services, but still has to wait in line to pay their bills. 

4. Buying and selling property

The challenges associated with real estate, including finding a property, getting a mortgage, and sorting out escrow, are ubiquitous in any region; however, the barriers to entry are even higher in Latin America. Most countries in the region use notaries instead of escrow, do not have any centralized listing service (MLS), and do not require exclusivity for brokers. Mortgages are also only available for the wealthy, and even then, often carry high interest rates. 

Investments such as Softbank’s $250M Series D in Brazil’s QuintoAndar and ALLVP’s $4.6M pre-seed round for Mexico’s Flat prove that there is a significant and lucrative opportunity to improve home rentals and purchasing in Latin America. Brazil’s VivaReal, Emcasa, and Loft, Colombia’s La Haus, Mexico’s Homie and Chile’s Arriendo Asegurado are all similarly trying to make it easier to find a place to live.

Still, many of these services are only available in big cities, leaving medium-sized cities and rural areas with old-fashioned real estate systems that have large gaps for fraud and corruption. Colombia’s Suyo is tackling the issue of property formalization in underserved rural and urban areas, but Brazil, Bolivia, Ecuador, and Colombia still struggle significantly with land right concerns. Despite the recent wins of startups like QuintoAndar, there is still space to resolve challenges in Latin America’s real estate industry across the region.

5. Lending

Getting credit in Latin America is notoriously difficult. Not only do low financial inclusion rates make it challenging to analyze risk for consumers and businesses, but lenders also offer predatory rates to their customers, asking for more collateral and higher interest in the absence of risk data. Traditional banks have little incentive to try to drive down their rates for low-income customers or small businesses due to low competition, so these clients must resort to expensive, short-term loans if they lack liquidity.

While microloans reached Latin America in the 1990s to supposedly support low-income families, these credits often carry staggering interest rates, between 50-120% or as high as 500%, trapping many consumers in debt. Today, online microcredit startups in Latin America are taking the place of these small lenders so that people can access credit through their smartphones in just a few taps; however, the risk models are still basic, meaning that interest rates have to stay high for these startups to be profitable. 

Despite these challenges, Latin America has a competitive advantage in the development of invoice-backed lending, as almost 80% of worldwide electronic invoices originate in the region. These electronic records, stored in a standardized format by government collection services, can provide detailed data on businesses’ transactions, debts, sales partners, and tax payments and can act as the basis for more sophisticated risk models. For instance, Colombia’s OmniBnk uses this information to disburse small business loans up to $1M in as little as one hour. 

Mexico’s Konfio also provides small business lending services based on electronic invoice data. Both companies have managed over $200M in debt financing to disburse these loans quickly. Mexico’s Credijusto provides asset-backed loans and equipment leases to SMEs by using this information as well. The startup recently raised a $42M Series A round co-led by Goldman Sachs PSI and Point72 Ventures. Brazil’s Creditas is another online secured lending platform that is working to lower borrowing costs for Brazilians by increasing the efficiency of lending systems using electronic data. 

Mortgages and other kinds of consumer loans are still far from accessible in Latin America. The high interest rates and down payments for these services, as well as the red tape, bureaucracy, and paperwork involved turn many potential clients away. Improved credit services could provide much-needed liquidity to businesses and individuals in Latin America to prevent vulnerability to unexpected circumstances and foment consumption, within limitation. Startups that can create sophisticated risk models using alternative data sources have a competitive advantage to provide these services to underserved customers across the region.

Latin America is an exciting place to do business today. Startups are competing directly with traditional players and pushing these corporations to provide more competitive services and better pricing for their customers. In the long term, this disruption has the potential to improve millions of lives by making it easier for people to pay bills and taxes, buy online, rent an apartment, access financial products, and much more. Over the next two or three years, we will likely see winners emerging in each of these industries armed with the capital and experience to compete with incumbents.

https://www.nasdaq.com/articles/5-opportunities-for-fintech-disruption-in-latin-america-2020-01-06

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