What’s in it for me:
- Learn how the financial institutions in Latin America are working with fintechs
- Find out which financial institutions are the most innovative
- Learn which countries in Latin America financial institutions have been working longer with fintechs
In my last post, I mentioned why fintechs in Latin America have the Perfect Storm on their side. However, financials institutions aren’t waiting to see what happens. The leading financials institutions in Latam have seem what is happening in more mature markets and are trying be proactive.
How financial institutions are defending themselves from fintechs in Latin America? Collaboration is the key word, here follows a highlight of how the main financial institutions in the region are working with fintechs. Just to be clear, here are structured programs that they developed to work with startups, I’m not counting hackathons or unstructured initiatives.
Brazilian banks are the leading institutions in Latin America, therefore, they were the first ones to start structured relationship with startups. They started earlier than their counterparts, learned through trial and error, and now are expanding their initiatives.
Bradesco: A pioneer in Latin America, Bradesco started working with fintech in 2014 with its competition InovaBRA, where the selected startups have the opportunity to develop a project with the bank supported by senior executives. When I worked at Wayra in Brazil, we had 2 startups (QueroQuitar and Qranio) that participated in this program. In 2016, Bradesco launched the first Corporate Venture of a Latin American bank, which has R$ 100 millions (around US$ 30 millions) to invest in startups. Last year, Bradesco launched its own coworking space for startup, InovaBRA Habitat, to compete with Itaú’s Cubo.
Itaú: Since 2015, partnered with one of the main Venture Capital firms in Brazil, Redpoint e.Ventures, to create Cubo, a huge coworking space that enables Itaú executives to be close with fintechs and also to identify the ones that they could work with. In 2017, Itaú annouced that it would increase 4 times Cubo’s current size to accommodate 210 startups.
Santander Brasil: Although the bank always had a good relationship with entrepreneurs, it didn’t had any specific program with startups. That changed last year when Santander launched an acceleration program together with Endeavor, the Empreenda Santander 2K17.
Banco do Brasil: The bank decided, in 2016, to create an advance laboratory in the Silicon Valley to co create with startups, called Labbs and is based at Plug’n’Play facilities. A year later, it opened a Labbs in Brasília.
Porto Seguro: This Brazilian insurance company is the most innovative in the market and launched the first acceleration program by an Latin American insurance company in 2015. The program is called Oxigenio and is a partnership with Plug’n’Play and operated by Liga Ventures.
Visa Brazil: Visa launched in 2016 its Visa Innovation Center in São Paulo to co-create payment solutions with startups. In the same year, it launched its acceleration program Ahead with the support of Startup FarmStartup Farm. In 2017, kicked-off another acceleration program called Track in partnership with GSV Labs and Kyvo.
Mexico is the second most important market in Latin America, Mexican financials institutions started to move a little bit later than their Brazilian counterparts, however, they are investing well in that relationship.
BBVA: Probably the most innovative bank in Mexico, BBVA has been working for the past few years with its regional startup competition, OpenTalent. In 2016, the bank bought the Mexican startup Open Pay. Last year, it launched BBVA Open Sandbox, an open innovation initiative to select startups to have the opportunity in work together with the bank to develop projects.
SURA Mexico: Sura just hosted last week its Demoday for its first acceleration program, Aceleradora Sura, with Bluebox support. Although Sura calls it an acceleration program, it’s more like an open innovation program to work in projects with Sura.
Citibanamex: The Mexican branch of Citi Bank moved took a little longer to start and, in 2017, partnered with Village Capital to accelerate startups in the region, Village Capital Fintech: Latam 2017.
Santander Mexico: In 2017, Santander Mexico decided to work more closely with startups, launching a digital factory called Spotlight, which is a coworking space for up to 120 startups to work closely with the bank.
Banregio, Visa, HSBC and Gentera: The beginning of 2017, Banregio, Visa, HSBC Mexico, Fiinlab by Gentera, Ignia, EY Mexico and White & Case, came together with Finnovista and Startupbootcamp to launch Startupbootcamp Fintech Mexico City. An acceleration program focused on fintechs in Latin America.
A part from Grupo Sura, the Colombian financial institutions aren’t moving as fast as the Brazilian and Mexico.
Grupo Sura: The Colombia pension fund, Sura, partnered, in 2016, with Veronorte to create a Corporate Venture fund, Sura Ventures.
Bancolombia: A few days ago, Bancolombia just signed a partnership with Plug’n’Play to participate on Plug’n’Play Fintech accelerator.
Chilean financial institutions are still starting to work with startups.
Banco BCI: The Chilean bank launched, in 2016, the BCI Labs as a acceleration program and a coworking space with the support of NXTP.
Banco Estado: The public bank kicked-off its open innovation program called Emprende + Empresas, which select startups to work closely with the bank in projects.
Also there are some regional initiatives that needs to be highlighted:
Scotiabank: The Canadian bank, that has some local operations in Latin America, partnered with the American Venture Capital fund QED, which is focused on Fintechs, to invest in fintechs in the region.
Visa: The payment giant is really concerned about its position in this new environment, therefore, it launched last year a fintech competition called Visa Everywhere Initiative, supported by Finnovista.
In summary, financial institutions in most countries in Latin America started to work with startups, however, most of them started in the past 2 years. Since Brazil is the biggest market in Latam, it was expected that Brazilian banks would lead and Mexican banks took a few years to realize that they needed to move. The most impressive is that Colombian and Argentinian banks are way behind on that regard.
It will be interesting to see how this relationship will evolve in 2018!
- Brazilian financial institutions are leading the relationship with fintechs with the main players having their on initiatives
- Mexican financials institutions took more time to start working with fintechs them their Brazilian counterparts but are investing a lot now. Most of them through partnership with companies that have experience working with startups.
- Colombian and Argentinian banks took longer to realize they need to cooperate with other banks.
- Many banks, instead of starting their own initiative, decided to partner with accelerators or startup specialities to start working with startups
- Still not many financial institutions are directly investing or buying startups
What’s in it for me:
- An increasing number of fintechs are growing in Latin America, understand why that is happening
- Have a better understanding of the financial environment in Latin America
- Realize the opportunity fintechs are exploring in Latin America
As you could see in my last post (2017, a Great Year to Latin American Fintechs), Fintech in Latin America is booming! But what makes Latin America a great place for fintechs to develop themselves? Why so many fintech entrepreneurs are bullish about the opportunities while so many financial institutions are scared to lose market?
Latin America has 5 factors that create the perfect storm for the fintech development, let’s take a look and analyze each one of those factors:
- High interest rates
Latin America has one of the highest interest rates in the world. In 2016, Brazil had a real interest rate of 40.4%, Colombia 8.3%, Paraguay 12.2%, Peru 12.4%. While developed countries such as United States, and China had rates of 2.2% and 3.1%(Source).
That happens even thought the federal fund rates in Brazil is currently the lowest in more than 20 years, 7% in December 2017.
Because of that financial institutions have a huge spread, in 2016 Brazil had a 22% spread and Mexico 9.1% compared to 5.5% in Germany and 5.2% in the United States (Source), which make them highly profitable, leading to our second factor.
- Banks huge profit margin
Banks in Latin America are much more profitable than their counterparts in the rest of the world. They have the highest Return on Equity (ROE) globally, according to the research McKinsey Global Banking Annual Review 2016, 22.6%, that would be 235% more than the global average, 9.6%.
Because of that, banks are very powerful in Latin America, influencing government and being profitable even during terrible crises. All this in expense of the population. This lead us to our third factor.
- A distrust in the financial institutions
Due to the many financial crisis that the region went through, high interest rates they charge, and many shady things they did and do, the financial institutions in Latin America have the greatest mistrust from their population in the world (Source).
In other countries, Banks trust is one of their greatest competitive advantage against fintechs, because people are skeptical to let small startups to handle their money.
However, in Latin America is pretty much the opposite. People don’t have bank accounts because they don’t trust financial institutions. They are more willing to trust fintechs than in banks which takes us to our fourth factor.
- A large number of unbanked people
According to the World Bank research The Global Findex Database, in 2014 , only 51% of the Latin America population with more than 15 years had a bank account. While in a global level that number was 62%, reaching as high as 92% in the United States and 99% in the United Kingdom.
Also, only 14% of the population had formal savings and 11% borrow formally, while Americans had 54% and 23%, respectively.
So, there is a huge untapped market that the current financial institutions weren’t able to reach so far due to the mistrust the population has on them but that fintechs can provide services. This is possible due to the massification of technologies such as the smartphone, which is exactly our last factor.
- A growing penetration of smartphones
According to GSM Mobile Economy 2017 report, smartphone penetration in Latin America was 55% in 2016 and expected to grow to 71% by 2020. In Europe, this number was 65% in 2016 and will be 76% in 2020. Therefore, Latin America is catching up Europe in a few years in smartphone access.
However, the impact of the smartphone in Europe is totally different than in Latin America, because Europeans already had access to internet through other devices. The smartphone is the first internet connected device that many of the Latin Americans have, which will add, by 2020, an extra 100 million people to the internet changing enormously the behaviour of those people, especially regarding access to financial services.
All of the factors mentioned above results on a high adoption of fintech services in Latin America, as showed by the EY Fintech Adoption Index, which shows Brazil with a 40% adoption rate and Mexico 36%, above the average of the 20 top countries of 33%.
Also, it makes the incumbents fear losing market to the fintechs more than in any other part of the world, with a whooping 93% of the incumbents fearing to lose part of their business to fintechs in the next 5 years. (PwC Global Fintech Survey 2017).
The whole scenario is attracting venture capitalists attention. Investment in Fintech, in 2016, represented 27% of all venture capital investment in technology in the region.
Banks know that situation and aren’t staying still, they’ve been working closely with startups for the past few years with initiatives such as Startupbootcamp Fintech Mexico City, InovaBra, Cubo, we’re going to discuss how those initiatives work in a later post.
As we could see, Latin America is an amazing place for fintechs with an unique opportunity to disrupt the market. It’s a great moment to be working on a fintech or investing on one. I’m very happy to be supporting amazing entrepreneurs to create great fintechs in Latin America through the acceleration and Scale program of Startupbootcamp Fintech.
And you, what do you think about the fintech environment in Latin America? Leave your comment below.
There are 5 main reasons that makes Latin America a perfect place for fintechs to grow:
- Financial institutions charge high interest rate with a high spreads
- Banks have huge profit margin, in expense of the population
- Banks aren’t seen as trustworthy as in other parts of the world
- Latin America has a large number of unbanked that don’t trust financial institutions
- Smartphone penetration is growing quickly and it is the first device a good part of population has that can connect to the internet
What’s in it for me:
- Learn what is happened in Latin America about fintech in 2017
- Find out the main investment rounds in fintech in Latin America in 2017
- Find out the main exits fintechs in Latin America had in 2017
In 2016, we had a boom of fintechs in Latin America with investments raising 30% in value (US$ 186M in 2016) and 81% in number of deals (38 in 2016) compared to 2015. Therefore, 2017 had all t be even better… and it was!
Last year was a great year for the fintech ecosystem in Latin America with many relevant investments, many milestones, and even a few first exits. There are now around 1,000 fintechs in Latin America with Brazil and Mexico leading with almost half of the total.
The following list isn’t supposed to be exhaustive, especially because many things happened in 2017, but rather be a highlight of the most relevant events.
- March (Mexico) –Startupbootcamp together with Finnovista launched its first acceleration program in Latin America focused in Fintech and based in Mexico City.
- April (Brazil) – Equity crowdfunding is regulated in Brazil (link Portuguese).
- April (Argentine) –MercadoLibre launched MercadoCredito to offer credit to SMEs (link Spanish).
- May (Latin America) –IDB launched with Finnovista a report about the fintech innovation in Latin America (link).
- June (Mexico) –BBVA Bancomer launched its open innovation initiative Open Sandbox to collaborate with startups (link Spanish).
- July (Mexico) –Sura launched its acceleration program to work with startups (link Spanish).
- July (Argentine) – Six Argentinian banks launched a fund called Arfintech to invest in fintechs (link).
- July (Latin America) – Visa launched a regional competition with Finnovista looking for the best fintechs in Latin America (link).
- August (Brazil) – Itaú announced that it was expanding 4 times its coworking space Cubo to accommodate 210 startups (link Portuguese).
- August (Brazil) –Bradesco launched a coworking space for fintechs to compete with Cubo (link Portuguese).
- August (Brazil) – A fintech hub was launched in São Paulo, the House of Fintech (link)
- October (Brazil) –Nubank started to offer a 100% digital bank account without fees to compete with Brazilian big banks (link).
- December (Mexico) – The Mexican Fintech Law was approved in the Senate, putting Mexico in the frontier of fintech regulation. (link)
- December (Mexico) –Startupbootcamp Scale was launched as the first fintech program in the region focused on supporting scaling fintechs (link).
- February (Brazil) –Creditas received an investment of R$ 60M (US$ 19M).
- May (Brazil) –Avante received an investment of R$ 38M (US$ 12M) (link Portuguese).
- June (Mexico) – ComparaGuru received a Series A investment of US$ 7M (link Spanish).
- August (Brazil) –Nubank received a debt round of R$455 M (US$140 M) to finance its revolving credit portfolio (link).
- September (Colombia) –Sempli received a Series A investment of US$ 3.6M (link).
- October (Brazil) –GuiaBolso received a Series D investment of R$ 125M (US$ 39M) (link).
- October (Mexico) –Konfio received a Series B investment of US$ 10M (link).
- November (Argentine) –Ripio raise US$ 37M from its ICO (link).
- December (Brazil) –Creditas received an investment of R$ 165M (US$ 51M) (link Portuguese).
If you there was any other relevant event that you think should be mentioned here, please let me know by posting a comment below.
As you can see, 2017 was a great year for fintechs in Latin America, but still we have a lot to go to catch up eith some more developed markets such as USA, UK, Singapore, and China. Even though, I’m confident that Latin America has a great potential for fintechs, next post I will explain why I believe this. Stay tuned!
What do you think about what happened in 2017? Do you think 2018 will be even better? Please comment and let me know!
- Latin America fintech ecosystem is growing rapidly with Mexico and Brazil positioning themselves as the leaders and Colombia and Argentine behind
- Financial institutions are even more interested in collaborating with startups, launching many initiatives
- The market is starting to see a few initial exits and some bigger rounds of investments
- Lending was the most relevant segment in Latin America in 2017
I wish a great 2018 to everyone and many more investments and exits for the Latin American fintechs!
What’s in it for me:
- Why is culture so important for startups?
- What is a Culture of Growth?
- What are the traits of a Culture of Growth?
“Culture eats strategy for breakfast”, I heard this phrase some days ago and since then it stuck in my head. This quote is attributed to the management guru Peter Drunk. I really appreciated because its highlight the importance of the culture in the success of a company.
I’ve been studying about the topic, especially focused on startups.
First of all, let’s understand better what is a startup. There are a couple of different definitions, here follow two relevant ones:
“Startup is an organization formed to search for a repeatable and scalable business model.”
serial entrepreneur and professor of entrepreneurship at the University of California Berkeley.
“A startup is a company designed to grow fast. Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of “exit.” The only essential thing is growth. Everything else we associate with startups follows from growth.”
co-founder of Y Combinator
Both definitions above, as most of the startup’s definition, consider growth and scale an essential part of a startup. The reason is that startups are focusing on a market opportunity that is based on technology with a limited window of opportunity and in a market with some degree of winners-take-all characteristic.
Although growth is so important, startups don’t have as many resources to achieve their growth as big corporations.
I guess the important question then is: How can a few guys in a garage not only fight but defeat big corporations?
Startups rely only on highly motivated and skilled team, so do many big corporations.
So, what is the difference? The difference is in their culture. While a startup has a Culture of Growth, most big corporations have a culture that undermines innovation and disruption, limiting their growth.
Culture is what drives how a team works and what it can accomplish. Most people already heard about the importance of culture, but what exactly is a corporate culture? The simplest and best definition of culture that I’ve seen is:
“Culture is what your employees do when you’re not around”
Robbert Sutton and Huggy Rao,
authors of Scaling Up Excellence
As companies grow, the founders won’t always be around to help the employees decide what to do, however, in a fast paced environment that changes all the time, such as in an innovative market, the company can’t rely only on the decisions made by the management team. Therefore, making sure that employees make the best decision for the company in incredible fast starts to be surprisingly important.
Based on that, my definition of culture is:
A set of values and behavior in a corporation that influences employees decision-making not only on big decision moments but also in daily activities.
Companies that have a culture that enables fast and reliable decision-making have an unfair competitive advantage.
Not only that, the right culture is a valuable asset to hire the best employees. People are motivated in two different ways: Intrinsic motivation and Extrinsic motivation.
Extrinsic motivation is related to rewards such as money, fame, and others. Startups don’t have enough resources to fight big corporations for the best talent regarding this kind of motivation.
On the other hand, intrinsic motivation is related to internal rewards such as a sense of accomplishment and belonging. Studies by Karl Duncker show that intrinsic motivation is more effective when working on a problem that needs innovation and hard thinking, which are the kinds of problems faced when disrupting a market.
Great people are more motivated by intrinsic values than extrinsic ones, therefore, startups use their culture to foster intrinsic motivation to attract the best talent and also to empower them to perform at their best.
Ok, but what is a Culture of Growth?
A Culture of Growth is a culture developed to enable high growth in a company, especially startups. Although each company will have its own and unique culture, I have identified 10 traits that are present in most companies with strong cultures that foster high growth. Below follow the list in no specific order:
- Owner’s Mindset
- Talk Straight and Feedback
- Customer Centric
- Communication and Transparency
- Result-Oriented and Data-Driven
- Excellence and Big Thinking
- Test and Learn
In the next few posts, I will detail each one of those traits and how a startup can implement tools to cultivate them.
I would like to hear how is in your company? Does it have all these traits? Does it work well?
- Culture is a set of values and behavior in a corporation that influences employees decision-making not only on big decision moments but also in daily activities;
- A Culture of Growth is a culture developed to enable high growth in a company;
- A great culture is an unfair advantage and helps attract the best talent;
What’s in it for me:
- Why Mexico is an interesting market for fintech?
- Why Kueski is an interesting startup?
- How Kueski works?
Talking to many investors, I realise that more and more they are interested in what is happening in Latin America. In the last year, we have seemed a couple of great investment rounds in Latin America’s startups from top tier investors such as Sequoia Capital (Nubank in Brazil), Andreessen Horowitz (Rappi in Colombia), Accel Partners (Cornershop in Mexico), just to highlight a few. Here follows a Techcrunch post by Julie Ruvolo, explaining more details, article link.
This way, I decided to start analysing the best startups from Latin America so that people could understand better what’s happening in Latin American startup ecosystem.
For this post, I selected one of the hottest startups in the fintech, Kueski. Kueski is a Mexican startup that received US$ 35 MM round from which US$ 10 MM is an equity investment co-led by Richmond Global Venture, CrunchFund, and Variv Capital (source), and US$ 25 MM is a debt round.
First, let’s start talking about Mexico. Why Mexico is an interesting market for fintechs?
Here follow some important statistic about the country:
- GDP of US$ 1.063 trillion (15th largest economy by GDP, and the second in Latin America) (source);
- A population of 128.6 MM people, 10th largest population (source);
- Only 27% of the population older than 15 years is banked (source);
- 17.3MM credit card issued, less than 13.5% of the population has access (just for comparison, Brazil has 28% credit card penetration and US more than 40%) (source);
- Even with credit card, Mexicans prefer to pay in cash in 47% of the transactions while only 36% of the times with credit card (source);
- There are 44.2 MM smartphone users, a penetration of 34.4% (source);
- 69 MM users of internet, a 56% penetration (source);
- Basic interest rate is no 5.75% (source);
- Credit card average interest rate is 32% (source) and default rate of 5% (source);
- 56.6% of the population are informal workers, which correspond to 23.6% of Mexico’s GDP (source);
- Private sector credit is 32.7% of the GDP while in Brazil is 67.9%, and US is 188% (source);
This data show the huge potential for fintech startups in Mexico. It’s a big country where most people are still unbanked without access to credit cards, but that have access to internet and smartphones. The credit private sector is still small compared to other countries.
Fintechs can exploit these conditions to delivery financial services in new ways. And that’s exactly what they are doing, as Mexico became the most active fintech ecosystem in Latin America (source and more information).
Let’s talk about Kueski now. Kueski is a micro-loan startup from Guadalajara founded by Adalberto Flores and Leonardo de la Cerda in 2012.
Problem and Customer Segment
The problem Kueski is trying to solve is the Mexican population access to credit, especially for those that are unbanked. They decided to focus initially on the small and short personal loans.
How it work?
It’s quite easy; anyone can enter their website and request a loan.
Right now, they have a minimum limit of $1000 pesos (US$47.13) and a maximum of $2000 pesos (US$94.26) for the loans and also a limit of 30 days to pay.
After filling a form, they give you answer in 29 minutes regarding the loan request.
So, what exactly is their value proposition?
Money in developing economies is scarce, so it’s not as easy to get credit in Mexico as it is in the US, for example. Their value proposition is to give an easy and fast way to access credit to anyone, including the 73% of the population that is unbanked and doesn’t have access to this kind of financial services.
Quite an interesting value proposition, right?
But how works their business model works?
Kueski does the underwriting process and lends the money itself, charging an interest rate.
Since they use their own money to lend, makes a lot of sense the debt round of US$ 25MM they raised (credit line up to US$ 100MM – source). With that money, considering an average loan of $ 1500 pesos (US$ 70.70), they can borrow to more than 350,000 people, not considering taxes and reinvesting the money. That leaves them with a good working capital for the loans.
Their revenue model is an interest rate charged in principal of the loan. Due to the risk profile of this kind of investment, they charge a very high-interest rate, an average of 339.3% per year, which is quite high compared to the average interest rate of a credit card (32% per year). It’s important to remind that less than 13.5% of the population has access to a credit card.
Just making a rough calculation, with an average loan of $1500 pesos (US$ 70.70), even with a default rate of more than 60% they would still have a profit margin higher than 20%. Not bad, right? (I’m not considering tax and fees)
Although I don’t have data from their default rate, I would guess that it would not be so high since the default rate for credit card there is only 5%. Even though, Kueski has still two problems to deal with:
- They still don’t have a very good historical data to have a more probabilistic idea of their risk;
- They probably suffer an adverse selection because they will attract as customer people that couldn’t get loans with financial institutions with lower interest rate;
Due to the high-interest rate that they charge and the debt round they raised, I think they have enough room to overcome those challenges. Also, my guess is that their secret sauce is in the underwriting technology that they use.
I would love to understand better how they do it, but I couldn’t find much information about it. What I know is that they use social profiles as input for their underwriting process.
Another interesting side of their business model is how they make loans available for unbanked people. Since most of their clients (my guess) don’t have a bank account, they developed a partnership with a local Bancomer (local bank) and a chain of stores called OXXO, which is a convenient store that has more than 14,000 stores in the country.
Why is Kueski an interesting startup?
Mexico is a market where still most of the population don’t have access to credit. They are using technology and an innovative business model to untap a huge potential market. Also, as Kueski doesn’t have the pressure of banks as competition, this gives room for them to experiment and improve their underwriting process.
My guess is that they got the debt round and set the loan to a small amount to test as much as they can, this ways start to have some historical data and also to improve their underwriting process. It’s important to highlight that the underwriting process and the acquisition strategy are key to their business model to work.
After learning and improving the process, they will probably focus on higher amounts and more long-term loans using technology as a differential.
I don’t think they will try to compete directly with banks since their cost of capital is probably much higher, especially because there is still a huge market to explore.
What do you think? Would you invest in Kueski?
- Mexico is a hot market for fintech startups;
- Kueski is targeting a blue ocean market that doesn’t have many other options;
- Kueski underwriting process is probably what will make or break the company;
- There is still room in the market for Kueski to target larger and longer loans;