Credix Insights: The Fintech Revolution in Latin America
Over the last decade, the world experienced a big wave of innovation driven by new business models born out of the advent of breakthrough technologies and regulatory changes. This was marked by increasing levels of digitization and interconnectedness within the business world, and hit almost, if not all, industries. The financial services industry, with all its intricacies, didn’t go unscathed. New solutions were created and markets were disrupted, and by now it’s fair to say the transformation is irreversible.
The same period also saw the rise of a new business concept for these financial technology-first companies: FinTechs. FinTechs are firms using technology to create new or more personalized services than traditional companies in the financial services industry have been providing up to today. Although the disruption can be witnessed across the entire sector, the traditional borrowing and lending business has been one of the most impacted by this technological revolution powered by enhanced, API-driven data logic and models. That’s why a big portion of FinTechs positioned themselves as high-tech, non-bank lenders. These startups are intrinsically different compared to banks when it comes to capital formation, reserve requirements, or even licenses, and generally source their capital from the debt capital markets.
The credit FinTech business model has seen particular success in Latin America, where savvy entrepreneurs took advantage of the region’s underdeveloped debt financial markets to build prosperous businesses. According to a study conducted by the Inter-American Development Bank, in 2021 Latin America had more than 2,500 FinTechs, of which approximately a quarter are focused on credit. And the trend is up: the average annual growth rate of the number of credit FinTechs in LatAm was over 45% between 2017 and 2021, with companies headquartered in Brazil, Mexico, and Colombia leading the charge. Not only has there been significant growth in the number of players, but the total volume of loans in USD originated by non-bank lenders rapidly soared, growing 78 times from 2016 to 2021 in Brazil, surpassing $2.5bn per year. Furthermore, Brazil saw the consolidation of the first big players in the market. Take Creditas for example, a Brazilian credit FinTech founded in 2012 that reached unicorn status two years ago and currently runs a loan book of more than USD 1bn.
As previously mentioned, in order to succeed, credit FinTechs rely on capital markets-based funding strategies to grow their businesses. Those can be divided mainly into on-balance and off-balance strategies. The latter involves securitization structures while the former involves traditional loan agreements, commercial notes, and other instruments. With the ability to fully remove counterparty risk, off-balance sheet strategies are usually the most sought-after strategy by credit FinTechs scaling up their operations. Nonetheless, due to their more complex nature, debt financial markets’ players in LatAm often lack the proper infrastructure to enable off-balance debt funding at scale. This leaves FinTech companies with serious challenges to continue growing their businesses. On top of the lack of infrastructure providers, FinTechs also struggle to source capital from international investors due to the lack of standardization, bureaucracy and operational complexity (think FX hedging, cross-border payments, taxation, legal vehicles, bank accounts, on-site due diligence, language/culture barrier). Nevertheless, when this is solved at scale, there is a tremendous risk-return opportunity for the investors, which will drastically and positively impact the business of these FinTechs. This can best illustrated by an estimated yearly credit funding gap of more than $750B. This imbalance makes it difficult even for the highest quality FinTechs to raise debt capital, even though they offer highly attractive yields given the impressive quality of the underlying loans, and secure levels of over collateral and excess spread. However, having the right legal, financial, and technological infrastructures in place is crucial to successfully navigating and seizing existing opportunities. This infrastructure is exactly what we built and continue to develop at Credix.
At Credix, we deliver the infrastructure, through proprietary technology, and governance, via a fully legal and compliance stack, that enables international investors to access high-quality and locally sourced credit opportunities in LatAm with institutional-grade legal structures and risk-management practices. By leveraging blockchain technology to significantly increase the efficiency and transparency of our structured credit deals, we are at the forefront of innovation in asset tokenization. Additionally, Credix has open dialogues with government bodies from multiple Latin American countries and participates in local tech/regulatory programs like Next, sponsored by Brazilian Central Bank’s agency FENASBAC, to contribute to the development of the technology in a fully regulatory-compliant way.
Interested in learning more? Reach out to growth@credix.finance, join our newsletter here, and stay tuned for our next Credix Insights blog where we’ll dive deeper into topics such as regulatory updates, market segmentation, differences between Latin American countries when it comes to FinTech, and much more!
