By: Katie Llanos Small
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When former investment banker Álvaro Echeverría launched a fintech startup in Chile, he was not expecting it to be quite so challenging. The Spaniard already knew the local market, having worked for Santiago-based e-commerce company Linio. Seeing the quickly growing opportunities that new technology was creating in the region, he jumped in.
He launched Facturedo in 2015, alongside co-founder Hector García. The factoring company tapped into an already established local market, took advantage of widespread electronic invoicing practices and worked from a cutting-edge technology platform. And yet it soon became clear that executing on the opportunity would not be easy.
“The first market was the hardest,” says Echeverría. “It was a lot of work. I’m not Chilean, and in Chile who you are, who you know, matters a lot.”
Above all, attracting external financing was near impossible, he says. “I didn’t think it would be so hard to raise capital, and we struggled to get the resources that we needed.”
Despite not being a local, Echeverría is far from being the only fintech entrepreneur to have trouble raising capital.
Across Latin America, and in particular outside the hubs of Mexico and Brazil, founders of startups say that raising capital is supremely difficult. In fact it is often the biggest challenge for companies trying to get a foothold at home and one of the two biggest hurdles for companies that want to expand internationally. Founders of companies that want to grow regionally – such as Facturedo, which now operates in three Latin American markets – must also grapple with disparities in regulations between countries.
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Álvaro Echeverría, Facturedo |
Nonetheless, the region is awash with smart, determined entrepreneurs launching new technology initiatives in a bid to grow and modernize the region’s financial services. Brazil and Mexico lead the way, with hundreds of startups in each country offering new financial services tools.
Close to 400 fintech startups operate in Brazil, and the number grew 48% year on year, according to Finnovista, a regional startup accelerator. Mexico boasts more than 300 new companies active in its markets. That number has grown by 40% in the last year. Payments, remittances and lending companies make up close to half of Mexico’s fintech startups, while offerings in back-office technology for financial institutions are growing quickly as a segment.
Colombia also has a busy fintech sector, with Chile and Peru following, according to Finnovista data. Even in the smaller markets, governments are encouraging entrepreneurship and technology in financial services. Peru’s government, for example, has earmarked a NS5.7 million ($1.7 million) co-investment for a local venture capital fund, with the aim of spurring international growth among Peru’s startups.
Growth
Growing outside the home market is important for various reasons, says Juan Antonio Cabañas, chief executive and co-founder of Peruvian startup Latin Fintech. Expanding outside Peru could give the company access to deeper markets and new customers. A pan-regional presence also appeals to potential investors, such as venture capital managers, he notes. “It makes their life easier if you have a regional strategy.”
The company, which the World Economic Forum labelled one of the most-inclusive emerging market fintechs, is in the market for a partner for regional expansion.
“There’s a lot of opportunity still to capture at the local level… There’s the risk of losing focus if you pursue regional expansion at all costs”
– Juan Antonio Cabañas, Latin Fintech
“To grow, you need to partner, not just for capital but also for expertise and contacts,” Cabañas says. “It’s not just about looking for capital – but also some grey matter: someone who can sit on the board and who has experience in similar industries.”
But Cabañas says that the company is prioritizing local consolidation. Latin Fintech launched its first product, an online lending platform called Hola Andy in 2016. Hola Andy offers working capital loans to small business owners in Peru. The company prioritizes great user experience and quick decision making, all powered by innovative tech.
“There’s a lot of opportunity still to capture at the local level,” says Cabañas. “There’s the risk of losing focus if you pursue regional expansion at all costs”
That is clear in the company’s growth rate. In August, the company was lending out twice as much each month as it was three months earlier, says Cabañas. It aims to end the year with a three-fold annual increase in monthly lending volumes.
Cabañas came from traditional financial services, launching Latin Fintech with Javier Castro and Jorge del Carpio, after a long career as an executive at Citi and MasterCard. Despite extensive experience in financial services, he can point to multiple hurdles when it comes to setting up a new fintech lender.
Understanding the regulation and knowing what you are allowed to do is one, he says. Then there is actually building the technology. And finally, capital is paramount. For lending startups, that access to capital is even more critical than for other types of fintechs.
“The more you want to grow, the more capital you need,” says Cabañas.
Synergies
Just as in Chile, tapping into startup capital in Peru is tough. The country’s venture capital industry, however, is growing. Peruvian startups attracted $6 million in seed capital in the first half of the year, according to Pecap, Peru’s seed and startup capital association. Investment in the second quarter this year was the highest to date and a 45% jump on the same period a year earlier.
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Juan Antonio Cabañas, Latin Fintech |
“Venture capital investment in Peru is still very low,” says Cabañas. “This year the government is starting to push things along and it has invested in three funds.” But still it is very hard for startups to find capital at the seed stage, before a fund is big enough to get venture capital financing.
“After friends and family financing, there’s a big gap where no one is interested, before a company is big enough to attract venture capital financing,” he says.
In spite of the challenges, Echeverría saw a second market for Facturedo in Peru. The two countries might be fierce rivals, but cultural similarities as well as geographical proximity made it a logical next step after Chile. He launched the company in Lima, with Joel Villanueva as local co-founder, in 2017.
It was a smoother process than it had been in Chile, simply because he could point to the product’s success already.
“In the second country, you already have a working example,” he says. “It’s not just all about you.”
Echeverría points to a swathe of regional synergies that – along with personal ambition – propelled him to seek a bigger footprint for Facturedo beyond Chile.
“There are technological synergies,” he says. “The same technology can be rolled out to each country. And we can have a single regional team that supports each country.”
There is also the opportunity for cross-border factoring, he notes, citing a company that exports from Chile to Mexico that needs liquidity against its invoices.
But compared with his home region, even simple geography is a hurdle.
“The distances are bigger than in Europe,” he says, noting that day trips for meetings are rare. “You have to be on the ground for longer periods of time.”
But even operational in two countries, Facturedo continued to be fully bootstrapped, with all funding coming from the founders and their friends and family. Echeverría decided that Mexico would offer the answer. He saw Latin America’s biggest Spanish-speaking fintech market as posing more risks than in the Southern Cone – there is a lot more competition for a start – but Mexico also offered the best potential for growth capital.
Acceleration programmes
Just as startups themselves see benefits in regional expansion, so do their backers. Acceleration programmes – organizations that offer small capital investments and short-term mentoring to grow a new company – and investors are increasingly helping startups expand beyond their home market.
Buenos Aires-based NXTP Labs, for example, is the region’s biggest investor in tech startups. It runs a 12-week acceleration programme for fintechs that includes support for companies that want to expand regionally. Global accelerator Startupbootcamp runs a programme in Mexico City for fintech companies that want to grow internationally; the six-month Scale programme counts Facturedo in its 2018 cohort.
Startupbootcamp launched the Scale programme in Mexico this year to help LatAm fintechs that have been through an accelerator grow further.
“We saw there were companies with several years in business that were not ending up scaling,” says Fermin Bueno, co-founder and managing partner of Finnovista, which has led the Startupbootcamp Scale programme in Latin America. Scale offers investment, access to industry mentors and other assistance with developing the business.
Yet for fintechs, capital is only one of two big hurdles to growth: dealing with a maze of different financial regulations in each country is the other.
The four countries of the Pacific Alliance – Chile, Colombia, Mexico and Peru – have worked to align policies at the high level. The alliance aims to integrate the countries’ economies and, by banding together, negotiate with greater weight on the world stage. But at the day-to-day level for small businesses, the alliance’s impact is less clear. And the one area where it could add concrete value – streamlining financial regulations – is also one of the most tangled.
“The value of the Pacific Alliance depends on the type of business,” says Latin Fintech’s Cabañas. “I don’t know if it adds a lot of value in fintech. For lending, for example, access to capital is the most indispensable element. For importers or exporters, who have to deal with trade tariffs and the like, I think the regional alliance would be more relevant.”
Still, synergies between the four countries do encourage cross-border activity.
“I have never heard a fintech founder say that they will set up in another country because it’s in the Pacific Alliance,” says Bueno. “But we are seeing Chilean companies launch in Mexico and recently we are seeing more Peruvian founders who are interested in Mexico, for example. That’s because it’s a bigger market.”
Should creating a single set of rules for financial companies be a goal for the Pacific Alliance?
Christine Chang, who runs Startupbootcamp’s fintech Scale programme in Mexico City, argues that, despite the complications, it is an important target.
“Global standards would be the utopia,” she says. “But we would go through a super painful process to get there. If we’re looking for a global standard, it would be focused on best practices, perhaps from Europe; we are a long way from that… But we have to go that way.”
Regulation
As technology plays an ever-bigger role in financial services, regulators across the four countries are learning what they can from each other when it comes to supervising an evolving industry. In particular, Mexico’s fintech law is said to offer a template for the rest of the region.
The law, passed by Mexico’s government in March, sets out a framework for tech-based financial services on a standalone basis, as well as how they should share data with traditional banks via application programming interfaces (APIs). The law was hailed as a ground-breaking step for the country and its growing fintech industry. By clearly setting out rules and guidelines for financial technology companies, it offers certainty and stability for startups looking to grow and attract investment.
Policymakers had until September to set out much of the secondary regulation, which determines the operational details of the law.
“The rest of the region could learn from Mexico and bring that experience to their own countries and markets,” says Eduardo Morelos, programme director at Startupbootcamp in Mexico City. Indeed, Peru is already working on its own fintech law.
And even if rewriting the legal frameworks for the financial sectors across Pacific Alliance countries is too much to tackle, regulators could make things easier for local companies by harmonizing other elements.
“Global standards would be the utopia… but we would go through a super painful process to get there”
– Christine Chang, Startupbootcamp
“What they could do is to standardize some of the requirements between countries,” suggests Morelos. Regulators regionally could require lenders to file the same information in the same format, for example. “To the extent that regulators can create shared standards between the countries, it will make it easier for fintechs to report to the regulators and simplify how they comply with regulations.”
He also points to an opportunity stemming from new technology. APIs can simplify and speed up the process of sharing information between two different institutions. Latin American regulators could make use of such protocols to streamline the reporting process for all financial institutions, says Morelos.
Such harmonization is a goal not just for startups but also for banks keen to tap into pools of data being generated by startups.
“That data increases the types of services they can offer their clients,” says Morelos. “And the only way to do that efficiently is by generating standards for connecting and sharing data between themselves.”
Without capital, however, streamlined regulations mean little to new startups looking to grow.
At Facturedo, Echeverría began sizing up opportunities to raise capital in Mexico around a year ago. But ultimately it was a deus ex machina that propelled him there: the stunning rise in the price of bitcoin and its ilk in the second half of 2017. That amplified the savings he had accumulated in his years in investment banking in London.
“I would have gone totally broke if it wasn’t for the fact that I had invested in cryptocurrencies,” he says. “I won the lottery with that.”
The windfall enabled Facturedo not just to stay afloat but to also work on a launch in Mexico. The company opened for business there earlier this year with its first external financing, from the Startupbootcamp Scale programme.
Now he is optimistic, and not just about Facturedo’s future. Access to venture capital could get easier for Chilean companies in future, he believes. He points to the recent $138 million acquisition of his old shop Linio by Falabella, Chile’s retail giant.
“Development of M&A markets like this will help spur venture capital,” he says.
To partner, or go solo?
Banks across the Pacific Alliance are paying close attention to the swathe of new companies entering the financial services market.
In many cases, established financial institutions are eager to partner with startups. Such deals give them access to innovative technology that they can use to improve their offering to clients, often on a white-label basis.
Bancolombia, for example, was the first Colombian lender to sign up to the local fintech association, with the aim of developing alliances that could drive innovation within the bank. It also signed a deal with Plug and Play earlier this year. The Silicon Valley-based incubator aims to connect startups with corporate backers.
Mexican corporate lender Banregio is another that is explicitly seeking to incorporate innovative tech from startups. The Monterrey-based bank has a division that invites new companies to bring in their ideas.
At the same time, banks are developing their own technology in-house. In many cases, they are doing so through a digital bank under a different brand. Chile’s Banco BCI, for example, launched an online payments platform dubbed Mach in 2017. It is hoping to hit critical mass with the app, which allows any Chilean with a smartphone and local ID to sign up. By the end of the first quarter it already had 200,000 users.
Bancolombia is also working with this model. Its digital bank, Nequi, was launched in 2016.
A digital spinoff of this kind allows Bancolombia to experiment with new technology before rolling something out more broadly. A case in point is biometric authentication. Nequi has been offering voice and facial recognition to users in a bid to make their banking experiences as seamless as possible. But it ran into issues with the varying quality of smartphone cameras locally.
Better to find and fix such issues with Nequi’s 350,000 mobile-savvy users before rolling the tech out to Bancolombia’s base of 10 million traditional customers.
Katie Llanos-Small is editor of iupana, a publication focused on technology in financial services in Latin America and the Caribbean
