With over 22 million people in its extended urban area, Sao Paulo is not just Brazil’s most populous city—it’s one of the largest urban centers in the world. It’s also become one of the world’s most fascinating hubs for technology talent and innovation, notably in financial technology.
We witnessed this first-hand on a recent trip to the region. The moment we landed in Sao Paulo, we were immersed in this burgeoning tech ecosystem. Large posters advertising the company Nomad, a neo-bank, welcomed us at the airport; between meetings later on our trip, we ordered takeout via Rappi (food delivery), which was delivered on a Mottu (motorcycle-rental platform for gig workers). We saw companies use their Flash* employee-benefits card to pay for coffee.
Our trip to Mexico City a few months earlier was equally thrilling—and quite fintech focused. During our time there, we drove past billboards for Clara, a corporate spend-management platform, and Houm, a startup helping people find their dream homes. We discovered that street artists and local shops took Clip (point-of-sale) payments. People eagerly chatted with us about which stocks they were trading on Flink (an investment-brokerage platform).
The “why now” for this fintech renaissance in Sao Paulo, Mexico City, and the rest of Latin America is clear, and we think highlights a profound opportunity for founders building new fintech companies. The region is at an incredible inflection point when it comes to overall technology usage, adoption and innovation. Whether it’s empowering consumers and businesses with new financing and credit options, driving e-commerce adoption, or building out crucial infrastructure and streamlining operational logistics, a new generation of tech companies has emerged within the region – companies that are growing quickly and are anxious to alleviate acute pain points in the B2C and B2C realms. We believe there is significant value to be created here.
Fertile Soil for Innovation
No matter how you approach it, LatAm represents a huge addressable opportunity for Internet and fintech entrepreneurs specifically– both in terms of population and economic potential. The region is home to more than 600 million people (Brazil with around 200 million and Mexico with around 120 million, respectively). GDP is roughly one-third that of China’s (World Bank 2020), yet it is relatively similar on a per capita basis and significantly more than India’s.
What’s more, LatAm’s demographic skews younger than most advanced economies (the median age in the region is 31 years old), resulting in a high internet and mobile-penetration rate. (Brazil has the second highest time spent online by country in the world, 10 hours on average!) With this construct, we see significant opportunities for digitization of both consumer and business behaviors across LatAm emerging, particularly post-COVID. The pandemic has functioned as an excellent forcing function and accelerant of digital adoption.
Nonetheless, most technology sectors in the region are quite antiquated, notably in the financial services sector. There is vast inequality and structural disadvantages across the region. Most notably, large swaths of the population are unbanked and have little (if any) access to financial products and tools such as credit, while traditional institutions and incumbents have historically not catered to the majority. However, recently, government support and fintech-friendly regulation have leveled the playing field for newer players. In 2018, Mexico established a regulatory framework for fintech startups to better compete with traditional financial institutions. Brazil authorized its Open Banking initiative in 2019, and the first phase went online in early 2021; other nations, like Peru and Argentina, are following suit.
Simultaneously, we are excited by the wave of talent propelling innovation, spurred by early success stories like dLocal, Nubank, Rappi, and MercadoLibre. We are encouraged by the surge of brilliant technology entrepreneurs who are creating companies in a number of categories, which are highlighted below, and have the potential to revolutionize financial services as we see it.
Consumer-Facing Fintech: Driving Financial Inclusion
Today, there’s a considerable gap between consumer behavior and expectation versus the status quo of most consumer-facing experiences. For fintech, this is more apparent than in most categories: while consumer digital penetration is at an all-time high, digital financial innovation is still on the rise.
To put in perspective, internet usage in Latin America jumped to 72% of the total population in 2020 – up from 50% in 2015, primarily driven by young and connected populations. In the region, 74% of people now possess a smartphone and digital penetration is rife, yet financial innovation has been slow to follow suit: The consumer-finance industry in LatAm is still largely dependent on cash. According to a 2018 report by Mexico’s National Banking and Securities Commission and National Institute of Statistics and Geography, for instance, more than 52% of Mexico’s population was unbanked as of 2018. Additionally, just 31% of the population has access to credit products and 30% of the population has no access to any financial product. More than 86% of payments are made in cash. This is primarily due to structural disadvantages: Latin American banks have typically catered to the affluent at the expense of other economic groups, resulting in a very high level of financial insecurity and exclusion from the financial system throughout the region.
However, these structural disadvantages present a tremendous opportunity for financial innovation and the delivery of financial goods and services to a larger part of the population. Whether it’s giving consumers access to bank accounts (like Neon or Nubank), credit cards (like Stori or Vexi), ways to grow wealth (like Flink, Warren, or Fintual), or mandatory employee benefits (like Flash*), consumer-facing fintechs are introducing a whole new subset of consumers to the financial system, often for the first time.
At Battery, we are intrigued by, and gravitate toward, platforms that are or becoming the de facto “primary” account for consumers, generate high “share of wallet” on spend, and/or offer ongoing points of engagement on a daily or weekly basis. This category is certainly early; in turn, we believe there is significant opportunity for innovators to create sticky and lasting products while also enabling access to consumer features and services that were previously unavailable to a large part of the population.
Business-Facing Fintech: Empowering Companies (of All Sizes) to Operate, Grow, and Flourish
In general, the B2B financial-software and digital-payments ecosystem is still quite nascent in LatAm, similar to where the U.S. was 10 to 15 years ago (Bill.com and Coupa* were both founded in 2006). Today, affordable, cloud-based accounts payable and receivable automation technology, digital payments and lending is virtually non-existent in the region.
For the roughly 29 million SMBs in Latin America, this problem is particularly acute: While intra-business communications and payments are made and recorded with a patchwork of legacy tools, WhatsApp threads and manual processes, businesses are also required by law to record all transactions into government systems of record. To ensure compliance, SMBs must engage in lengthy processes of manual record-keeping, or hire costly accountants – which means that ledgers are frequently prone to mistakes and inconsistencies.
Our thesis is that this will dramatically change over the next few years as digital transformation accelerates in the region. Pen-and-paper and other legacy-tech solutions will be replaced by next-gen SaaS and digital offerings, and B2B payments will be no different. Interestingly, this shift is already occurring. In Brazil, for example, just over one-third of the country’s SMBs conduct 50-100% of business transactions using digital-payment platforms and messaging apps. That number is projected to jump to 72% by 2025, according to recent research reports.
We are excited by a new generation of products that have emerged to help companies address these traditional pain points across a variety of business use cases: Xepelin*, for example, offers a B2B payments suite for small businesses, helping cash-strapped businesses finance their invoices and improve their working capital cycles. Clara helps companies manage their expenses by providing corporate credit cards, while Clip provides POS systems for merchant acquiring.
The “Picks and Shovels” of Fintech: Providing Infrastructure to Enable Innovation
As fintech innovation and startups scale in LatAm (there are around 1,445 fintech startups in Brazil alone, an increase of roughly 6x since 2017), one thing has become abundantly clear: Building and launching financial products is extremely tough – requiring plenty of upfront time, capital, and localized know-how. Incumbents have historically underserved the market with outdated solutions (built on rigid legacy architecture), long implementation cycles, and high costs. Early fintechs – such as Nubank – had no choice but to build from the ground up, on top of their own infrastructure to guarantee a modern, seamless consumer experience.
In turn, we are excited by the “picks and shovels” of fintech: the tools that enable companies to build innovative companies by abstracting away the operational burden and technological complexities of building financial products in-house. Similar to what we saw in the U.S. with the emergence of Plaid (handling banking data); Marqeta (card issuing and processing); Persona (identify verification and KYC compliance); and Pinwheel (payroll), in Latin America we are seeing an emergence of B2B infrastructure companies. These include Belvo and Datanomik (which make open-banking APIs); Pismo (core banking and payments); Pomelo (card issuing & processing); and idwall (identity-verification and KYC compliance), among others.
These “picks and shovels” bring forth an opportunity not only for fintechs – who desire to go to market quickly and focus on core competencies – but also non-fintechs, who might want to provide financial services to their existing user bases (to unlock new products and verticals, increase revenue per use, drive retention, improve margins, etc).
There is a clear need for these “picks-and-shovels” companies to condense years of technical construction and maintenance into a set of APIs – acting as key infrastructure and an accelerant for the ecosystem’s go-forward innovation.
The Time is Now.
Over the past year, our conversations with hundreds of founders and operators have reinforced and galvanized our belief that now is an incredibly exciting time to build fintech companies in this region.
Investing in fintech in LatAm is an ongoing effort for our team and firm. If you’re building a company aligned with our thesis (or think there’s something we’ve missed), we’d love to hear from you!
This material is provided for informational purposes, and it is not, and may not be relied on in any manner as, legal, tax or investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any fund or investment vehicle managed by Battery Ventures or any other Battery entity.
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*Denotes a Battery portfolio company. For a full list of all Battery investments, please click here.