Mike Packer is a Partner at QED Investors, a venture capital firm focused on investing in early-stage disruptive financial services companies in the US, UK, and Latin America. Since first investing in Latin America in 2015, the firm has made 18 investments (and counting!) in the region including Nubank, Creditas, QuintoAndar, Loft, Konfio, and Credijusto. Mike is passionate about finding the next wave of fintech’s disruptive entrepreneurs and business models– particularly in lending, payments, and anything that helps small businesses thrive.
Fintech is hot right now and I believe the fintech opportunity in Latam is massive. Plenty has been said about the size of the underbanked and unbanked populations and the growth in mobile penetration, so here are five more reasons to invest in Latam fintech.
1. A growing digital economy that requires fintech solutions
Boosted by a rising middle class, the digital economy is thriving across Latin America. There are 200M+ smartphone users and 400M+ WhatsApp/Facebook users and they all want to transact online. Sao Paulo and Mexico City are often cited as some of the largest ride-hailing cities on the planet. At the end of 2019, Netflix had almost 30M subscribers across Latam. Spotify sees its highest growth in the region. E-commerce is just beginning to take off and is bound to catch up to the world. Retail e-commerce penetration is still around 5% in Latam compared to about 10% in the US or 30% in China. The digital economy needs fintech solutions – to make and accept payments, to manage fraud and risk, to transact with transparency, to connect to financial institutions, and to finance growth. One example of the type of solutions emerging is Fairplay, a start-up in Mexico (recently backed by QED) which offers loans to e-commerce companies to accelerate digital marketing spend.
2. The fastest-growing payments market in the world
In McKinsey’s 2019 Global Payments report, Latin America is referenced as the fastest growing payments market in the world, representing a $200B revenue pool in 2018. With an expected growth of 7%, this market will continue to get bigger and fintech companies will drive a significant amount of this growth. A great example of this today is what Mercado Libre has been doing with Mercado Pago. The company recently announced Mercado Pago payment volume growth of 99% (!) from Q4 2018 to Q4 2019 – this volume comes both from on platform and off-platform. That kind of growth can only come from a huge tailwind in the market. In the world of payments, I also expect we will see a continued movement away from cash and plenty of opportunities to capitalize on platforms to be built around B2B payments.
3. More unicorns to come
We have already seen a handful of unicorns emerge in Latam fintech – Nubank, EBANX, and QuintoAndar are all cited in the latest CB Insights fintech report. In the public markets, three monster fintech IPOs have come out of Brazil in recent years – PagSeguro, Stone, and XP. These companies demonstrate a clear path to success for the next group of potential unicorns. I believe we’ve just seen the start of companies that can get breakout momentum in fintech. Not only are there additional opportunities in consumer banking, merchant acquisition, and wealth management, there are plenty of other verticals to be explored at scale including SME banking, capital markets, and online payments. Another area that we have been paying close attention to is companies that add fintech into their core offerings. One of our investments, Loft is an example of this. Loft is in the business of buying and selling real estate but adding financial services into the mix increases the market opportunity. Fintech enables additional transactions and captures additional revenue. Real estate is one example and I suspect there are many other verticals that will look to fintech solutions to ignite growth.
4. Talent moving to the start-up ecosystem
Most early-stage investors will preach about the importance of finding high-quality talent. I do the same. In our Latam portfolio, we are working with remarkably talented entrepreneurs and teams across the region. More recently, we are seeing the acceleration of talent moving into start-ups. Now that the market has seen some exits and other companies are reaching breakout potential, talent sees the value in founding and joining early-stage companies. We invested in minu last year, a company offering payroll advances to employees in Mexico. The company was founded by Nima Pourschasb and Rafa Niell, two veteran banking executives who decided to start their own company. I expect we will continue to see examples like this.
5. Easier than ever to start a fintech company
The capital has arrived. According to CB Insights, $2.1B was invested across 139 VC-backed fintech deals in 2019 – a 3x increase in investment over 2018. In addition to capital, regulators are starting to embrace innovation. Open banking is coming. The market wants fintech solutions and the early wave of “fintech as a service” is arriving. I expect we’ll continue to see the number of fintech companies increase. The network effects in the fintech ecosystem are just starting.
It has been an amazing run for Latam fintech, but the best fintech opportunities in the region may just be in front of us.