A Case For Inclusion: The Rise Of The Fintech Ecosystem In Latin America

Archie Cochrane
Jun 27 · 8 min read

If you were to conjure up a mental list of innovative companies that have disrupted traditional business models in the financial services industry on a global scale, who would first come to mind?

Perhaps PayPal? The American poster child of payment systems that burst into the scene during the e-commerce boom of the late 1990s and early noughties?The newly public Dutch payment service provider, Adyen? Or maybe Ant Financial (formerly Alipay), the Chinese behemoth, originally the payments arm of the Alibaba Group, but now the most valuable fintech business in the world with a current valuation of $150 billion?

You would be forgiven if you could not name a global, game-changing financial technology disruptor born out of Latin America. But this is all beginning to change.

By exploring the financial technology sector in Latin America at a high level, highlighting key investment players and providing a snapshot of sector figures to date, important themes emerge across the region that have and continue to determine the direction of travel for the ecosystem.

Current Market Landscape

It is estimated that 60 percent of all the fintech startups in Latin America were founded between 2014 and 2016.

(View of the LatAm Fintech Landscape by Oliver Wyman)

A new generation of entrepreneurs see huge opportunity in the sector at large. This also highlights how little these new business models have been put to the test: they need to scale before they can become resilient, sustainable companies.

Below is a breakdown of the number of financial technology startups across the region. 89 percent come from the five main Latin American markets:

We are currently undergoing the maturity phase of the digital technological revolution. According to Anthemis’ Academic-in-Residence, Carlota Perez, this is the moment when core markets become saturated and the set of technologies and financial capital moves toward the periphery: towards the less-advanced countries.

I would argue that, based on the uptick in venture investment into the region reaching $1.1 billion in 2017 (double the circa $500 million invested regionally five years ago), this is now beginning to happen in Latin America. Fintech and food delivery are leading the way with much publicised investments in Nubank, iFood, Creditas and Rappi leading the way. Not to mention Walmart’s acquisition of the Chilean delivery business, Cornershop.

While it’s true that stalwarts of the Latin American venture scene like NXTP Labs, Monashees, Kaszek, VOX Capital, ALLVP, Magma Partners and others have been deploying early stage capital into the nascent regional ecosystem for a long time, the difference in the last few years is that we are seeing an acceleration of funds deployed by truly global players. Investors such as Insight, Naspers, Sequoia, Accel, a16z, to name a few, have placed large bets on the darlings of the ecosystem, namely, NuBank, Movile, Rappi, Clip, Creditas. Interestingly, Latin America is now the only region outside the United States that Andreessen Horowitz is deploying into actively. Finally, the recent announcement that SoftBank is directing $5 billion towards the region — led by group COO, Marcelo Claure, will only embolden local entrepreneurs. This is fantastic news for the aspiring regional cluster of growth-stage businesses. In the global innovation race, it seems like Latin America is finally starting to catch up.

Financial Inclusion Has Led the Innovation

Nascent financial services startups in the region are focusing on segments that were previously neglected by incumbents. 43 percent of those fintech companies surveyed by Finnovista claim that their mission is to serve those customers previously left behind by the traditional financial system. In a region where many consumers and SMEs across the income spectrum feel excluded from the formal financial system, this illustrates a sizeable market opportunity. The earliest fintech entrants in the region targeted financial inclusion, not purely for altruistic reasons, but because it made good business sense.

According to the World Bank, it is estimated that 2 billion adults (42 percent of the global adult population) are excluded from the formal financial system. In Latin America 49 percent of the adult population does not have access to a bank account, a figure vastly higher than the average of 6 percent in high income countries of the OECD. Due to its ability to optimize costs and improve the supply of products and services, fintech has become a hugely important driver for financial inclusion. Combined with a market opportunity that has the capacity to reach a segment of the population that was previously unserved by traditional financial services, and you’ve got an industry-shifting opportunity to address this market through the massive adoption of mobile technology. Back in 2016 the region had around 450 million smartphones, equating to circa 70 percent mobile penetration. This is anticipated to reach 76 percent by the end of 2019.

So, let’s take a look at some of the entrepreneurs taking advantage of these trends:

  • David Arana, CEO of Konfio, a leading SME lender based in Mexico, understood that while leading banks weren’t interested in providing financing solutions to small and medium enterprises, this customer type was the backbone of the national economy, representing 95 percent of all businesses in Mexico. By addressing this market need, he went some way in both furthering financial inclusion and building a highly successful business.
  • Clip, founded by my old colleague Vilash Poovala and Adolfo Babatz. Clip offers any business or person a solution to accept payments with credit or debit cards, services and spots — directly on a smartphone or tablet. The Clip reader connects via the audio jack to the device. Type the amount to be paid and insert or slide the customer’s card.

Clip is Mexico’s pioneer in fundraising: it was the first Mexican startup to attract Silicon Valley capital, steadily raising several of the largest rounds in the country. Among its investors are General Atlantic, American Express Ventures, Alta Ventures and Angel Ventures México. In May, Clip raised $20 million from SoftBank, in addition to the $39 million it raised previously, and is set to continue on its path to become Mexico’s largest acquirer by number of stores by the end of 2019.

Therefore, we see that financial technology businesses have the strategic and technological orientation to overcome two main obstacles that have thus far impeded the progress of financial inclusion:

(1) Limitations due to the lack of demand, reflecting the dearth of effective products adapted to the needs and that bring value to each segment

(2) High operational costs versus low profit margin of serving the excluded segments through traditional methods

Historically, impact investors have been the trailblazers with regards to seeking out and backing the businesses that have been leading financial inclusion in the region, but we are now seeing a broad appetite from mainstream investors across the globe as they begin to better understand the market potential.

Latin America is on the brink of a digital leap that will bring generalized, low-cost digital financial solutions to large population segments, leading to a more financially inclusive region.

Accelerating Consumption of the Middle Class

Latin America’s middle class is rapidly growing and currently represents about 30 percent of the population — similar to the level of China, and much more significant than the 3 percent of India (another much-touted growth market).

The consumption data reflects this huge and growing middle class. From as early as early 2010, per capita consumption already reached $3,986 in Brazil, $2,337 in Colombia, and $1,663 in Mexico. Whilst at the same time, per capita consumption in China and India were only at $1,401 and $354, respectively.

Compared to other emerging markets, Latin American families spend more money on areas that are not basic needs per se, like transportation, health, technology and others.

This means that Latin Americans have had middle-income status for a relatively long time and therefore have been able to form habits of consumption, establish brand awareness and a willingness to pay for new services. One could argue, such consumers will be comparably easier to acquire and therefore companies can reach a higher customer lifetime value: a strong validation of the market opportunity in Latin America.

An Increasingly International Ecosystem

Research suggests that foreign fintech startups are increasingly viewing Latin America as a genuine growth opportunity for their businesses. 86 foreign fintech startups have been identified as active in Latin America. 65 percent come from Europe, mainly from the United Kingdom (38 percent), Spain (31 percent) and Germany (9 percent); while 31 percent come from the United States and Canada, and only 4 percent of the 86 startups come from Asia — mainly from Singapore and Philippines.

As previously highlighted, two key elements of the attractiveness of the Latin American market to these business are:

  • a high rate of unbanked people
  • a high technological penetration

These two fundamentals have caught the attention of China, particularly, and its leading financial technology corporations.

There are a few deals worth highlighting:

  • Tencent entered the market last year via a $180 million investment into NuBank, and more recently a bet on Argentinian mobile bank, Uala. Seeing how SoftBank and Tencent outcompete each other on these larger deals will be fascinating.
  • Alipay, the payment arm of Alibaba, has entered the Mexican market via a partnership with Mexican payments provider, Openpay. This collaboration allows Alipay users to pay at any location that already accepts Openpay, which has over 17,500 points of sale across Mexico. I would view this collaboration as a toe in the water from Alipay. It would not be surprising to see a large acquisition of a leading payment provider in the region in the next few years, as Alipay look to improve their exposure to this growing regional customer base.

This accelerating theme of Chinese investment in Latin America is a topic that I will dig into in a later post, but for now, suffice to say, the geopolitical importance surrounding China’s encroachment on the United States’ backyard will come into increasing focus as we approach next year’s US presidential elections.

What’s Next?

I have highlighted some of the key trends found within the Latin American ecosystem at a very high level — barely scratching the surface when exploring the vast opportunities present on this continent. In future posts I will unpack some of these individual themes, but for now, if any of the above peaks your interest, or you are keen to learn more about what we are up to at Anthemis, please feel free to reach out.


Anthemis Insights

Thoughts on the future of financial services from the Anthemis ecosystem

Archie Cochrane

Written by

Associate — Venture Partnerships @Anthemis. Building and investing in FinTech ventures at the pre-seed stage. Previously @Naspers / @PayU

Anthemis Insights

Thoughts on the future of financial services from the Anthemis ecosystem