Why is LatAm skipping traditional banking?

The Latin America market is skipping traditional banking and moving straight to FinTech, according to Magma Partners managing partner Nathan Lustig in a research interview with FinTech Global.

The Latin America market has seen a three-year rise in total funding levels since 2014, growing from $45.8m up to $571m last year, according to data by FinTech Global. Not only has the amount invested increased, but so has the number of deals, with there being 89 transactions completed last year, compared to 61 in 2014.

Lustig said, “Latin America is one of the worst areas to be a consumer for finance… There’s a lot of room for innovation, with lots of people who don’t have basic things like credit cards, bank accounts or access to credit at reasonable rates.” This has led digital banking to be very profitable and full of opportunities to bring in traditional banking services that are already present elsewhere on the globe.

“In Latin America FinTech companies are jumping the traditional banking infrastructure you’d have in developed countries.” Lustig compared the situation to Africa, where there was not a widespread use of landlines, instead most people went to mobile phones. “We’re witnessing the first jump where an entire region is skipping banking for the vast majority and going straight to tech startups and FinTech companies.”

One of the companies to have really attract attention in the Latin America market is Nubank, a Brazilian digital bank which is entirely based on the internet. Since 2013, the bank has raised around $527m and last year it represented the two largest deals in Latin America, pulling in $219.3m across two rounds. Nubank has already raised another batch of funding this year, bagging $150m in its Series E led by DST Global.

There is a big opening for a range of different financial services in the region with online payments, marketplace lending and blockchain just being some. Since 2014, payments and remittances companies have taken the lion share of deals representing 29 per cent of the total deals in the region. The second biggest sector in LatAm is the marketplace lending space, with it accounting for 22 per cent of the 249 deals to close.

One reason for this big opening is because the lowest portion of consumers have not been served by the traditional banks, leaving many without a bank account or access to basic financial services.

He said, “Big banks in most Latin America countries just haven’t wanted to serve the lower 60/70% of consumers, so there haven’t been products before. Banks would argue that those types of accounts require huge amounts of compliance and don’t have much money that go with them. Others would argue that they’re just not profitable so don’t go after them.”

Regardless of this massive gap, there are still challenges in the market with pushback coming from some of the banks and regulators. Lustig said of how Cumplo, the first P2P lending platform to set up in Chile, was met with a string of lawsuits questioning the legality of the company and its processes.

“Like any growing economy there’s going to be some issues, but I don’t think you’re going to hold back the tide of innovation and startups that people are seeing in parts of the world that should exist here.”

Brazil and Mexico have led the way for funding In Latin America over the past four years. The two countries have completed the most deals in the space; however, Mexico’s activity is declining while Brazil’s stays stable. Mexico’s deal activity has fallen by 23 per cent between 2014 and 2017, while Brazil increased its deal share from 31 per cent to 36 per cent over the same period. Other countries in LatAm have also increased their activity in the FinTech space, with Argentina among the countries to see growth.

Lustig sees Brazil and Mexico continuing to lead the way for funding, due to their size, but does see countries in the region excelling in different sectors of FinTech. Maybe one country will find a niche in the market and build a solution that fits the market. It will then adapt the solution and expand it across to other countries in LatAm.

 

China to lead the way for LatAm

US investors, traditional venture capital firms and private equity firms have started to take more interest in the market. However, it is China’s presence that Lustig believes will really drive the growth of the space. This is partly down to some US investors not as willing to look at the LatAm space, while China will go in if the numbers make sense. It is also the region that China has a rather low penetration level, and so open to a lot of opportunity.

He said, “We think that China will be a big force in the region, and already is. We see that there is a lot of interest from Chinese companies, investors to back companies in the region, and also Chinese entrepreneurs that are seeing business models that worked in China start to launch and scale in the area.”

One of the other draws of China, is that too is a country that skipped parts of the traditional banking sector. Lustig stated how the country had skipped various areas such as getting credit ratings from an Equifax and instead went straight to databases. Along with their interest in the space, China has the potential to ‘really shape the ecosystem.’

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