Financial Technology firms (Fintechs) have become an extraordinary rapidly growing sector in Latin America (LATAM), and around the world. With $13.5 Bio. Venture capital funding in 2021, Latam has surely reached record numbers. In Mexico, there are currently more than 440 fintechs, like Nubank, Kavak and Clip, providing nationwide over 60,000 jobs. Mexico City, in particular, attracts countless fintechs, making it the Fintech Hub of Latin America for already well-known and just starting businesses.
But why exactly is Latam, especially Mexico, so interesting for Fintechs? Is it because of its attractive location, financial environment or government regulations?
The following article will answer these questions by introducing you to the venture capital ecosystem in Latam and the driving factors for the Mexican market.
Venture capital in Latin America
Venture capital has two main destinations in Latam: Brazil and Mexico. This can not only be seen in venture dollar movements but also in the number of unicorns (start-ups valued at over $1Bio.). In Brazil, there is an astonishing number of 21 unicorns, in Mexico, there are seven.
Most of the capital arrives from outside Latam, where funds typically follow a collaborative approach, choosing to invest jointly with a local fund to access the region. With its limited competition and rapidly growing popularity, the industry has one significant advantage that assures constantly increasing investments: It allows everyone to grow their business without fear of competitors.
Besides the start-up ecosystem, the political ecosystem needs to be attractive, too. In 2021, there were several elections in Ecuador, Perú, and Chile, and mid-term elections in Mexico and Argentina. It can be observed that investors seek out stability, given in more mature markets, such as Europe or USA. The outcome of political elections significantly impacts their confidence.
Looking at the corporate structure in Latin America, it can be said that in most countries, there are few large firms (e.g. CEMEX, Petrobras) followed by lots of small- and medium-sized companies (SMEs). This offers potential for a consolidation of the market as well as increased opportunities for corporate venture capital to identify new growth areas.
Industry
Whether fintech, ecommerce, or real estate: The focus of many emerging startups is to modernize existing structures and improve productivity. In the banking sector, for example, Pitchbook identified two significant opportunities: The largely underbanked system and the lack of innovative solutions for customers, since traditional financial institutions did not have any competition previously and therefore no need to constantly improve.
In Brazil, this potential has already been identified. It is one of the most profitable countries in banking, in which banks offer regulatory support and access to customers while fintech startups offer a new customer experience and better technology.
The industry with the currently highest growth rates, however, is ecommerce. Especially benefitting for those businesses has been the Covid-19 pandemic (c. 8% growth in 2020, 19% in 2021, which is far above the LATAM GDP growth rate). The ecommerce landscape is highly dominated by local players, like MercadoLibre. Amazon entered the Latin American market in 2015.
Fintech drivers in Mexico
#1: Fintech law
Mexico was the first country to pass a fintech law in 2018. It regulates certain activities and business models that have been in a gray zone before, providing fintechs with legal certainty. Furthermore, the law aims at improving customer security for payments, enables the operation with virtual assets and grants more freedom to crowdfunding and electronic money institutions. Therefore, it can be said that the fintech law opens up the market for competition and aims at creating a space in which banks and fintechs can both exist and collaborate.
#2: Internet and bank penetration
Overall, more than 75% of the population is using mobile devices and the internet penetration is estimated at circa 80 million. with continuously growing numbers. At the same time, 40 million people in Mexico are still unbanked.
This forms a perfect floor for the fintech ecosystem. Many people still live without a bank account and mainly do cash transactions, while the foundations (access to the internet and a mobile device) are given. Offering solutions fitted to this population’s needs provides new business opportunities.
#3: Workforce
The Mexican population is provided with an overall good educational system. Interests in technologies, innovation and entrepreneurship are on a peak, which is reflected in the high number of students in technical and financial areas. Combined with comparatively economic labor costs and a young population (29 years on average), it offers an excellent work-environment for fintechs.
#4: Location
Mexico is known for its attractive location. Bordering the United States and Central America, fast and uncomplicated international trade is guaranteed. Even Europe and Asia are well-reachable via air or sea, since Mexico is located with direct access to the North Atlantic Ocean as well as the North Pacific Ocean. Its beneficial location and emerging market economy were additionally able to convert Mexico into one of the countries with most Free Trade Agreements (FTAs) in the world.
Historically, there has been a close connection between the US and Mexico, given that many Mexicans live or study in the US. This close interaction and cultural exchange reduces the barriers to entry and gives foreign investors an overall business certainty, which fintechs have to rely on.
Final thoughts
In conclusion it can be said that in the past months, there has been lots of movement in the Latam Fintech sector. Especially Mexico and Brazil have been identified as leading markets with high potential. In Mexico, the beneficial location, workforce, low bank – but high internet penetration and especially the Fintech Law, enable further development and growth in the sector.
It is to see how things turn out in the upcoming years. But surely one of the most significant challenges having to be faced in the upcoming years is financial equality and inclusion. Not only offering benefits for the financially literate part of the society but also to improve financial literacy and access to similar resources.
Co-authors: Maximilian Gauland, Carolin Hüffel
