Is Latin America the hottest fintech market in the world? [StartUp City]

Is Latin America the hottest fintech market in the world? [StartUp City]

By Diana Narváez, Associate, Flourish Ventures

Originally posted on StartUp City

Fintech is booming in Latin America. Venture funding in the region hit $19.5 billion in 2021—more than three times the investment level from 2020. With 650 fintech deals in Latin America backed by VCs, it was a record-breaking year. Amid all this investment, fintech continues to attract the most capital when compared with other sectors, that was 39% in 2021, minting six new Fintechs unicorns. There are a number of factors that have fueled the surge and created the perfect environment for fintech adoption.

The numbers

First, let’s consider the Latin American (LatAm) venture market in closer detail. More than two-thirds of the VC funding went to capitalize growth stage startups, representing 7% of the total deal volume. Out of the 1,200 VC deals that closed in 2021, two-thirds were angel and seed stage. Funding into Series A and B stages went up to $5.5 billion in 2021, which is 3.4 times more capital than in the previous year.

Rounds of between $10 million and $50 million grew the most as a percentage of the total. 2021 also saw a surge of supergiant funding rounds over $100M, including Nubank ($750M), Nuvemshop ($590M), Rappi ($500M) and Loft ($525M). Brazilian startups captured the most in terms of total VC funding, followed by Mexico and Colombia. Along with increased funding, we also saw  increased valuations and B2B investment rounds outnumber B2C investment rounds.

These statistics speak to the exciting energy that is coursing through the LatAm startup and venture scenes. Not only are entrepreneurs building innovative, forward-thinking companies, but they are also building companies that are solving specific regional problems and capitalizing on the unique characteristics of the market. The fintech sector is a salient example of how talent and innovation are meeting local needs to create powerful momentum in LatAm.

The reasons

Now let’s consider why this growth is happening. The first is demographics. Latin America has a population of over 660 million people and approximately 15% are new to the growing middle class. Latin America also has a large unbanked population, representing tremendous opportunity for fintech innovation and growth. Finally, teens and young adults—early and willing adopters of new and mobile technology—represent a sizable 52% of the population.

These demographic trends, along with the pandemic, have accelerated the adoption of digital products. At over 70%, LatAm has the highest rate of internet penetration globally and high rates of mobile app usage. Internet users have grown over 125% over the past decade in the region and Latin Americans are the second largest consumers of social media. E-commerce is growing over 20% annually. While 92% of the LatAm population uses social media, only 23% make e-commerce purchases.

The pandemic has underscored the need for easy-to-use, digitally accessible and reliable financial solutions. That has created opportunities for personal finance solutions like digital banking and alternative lending products. An astounding 40 million people in LatAm were banked between May and September 2020 through online banking alone.

That online banking is soaring is no surprise, given that Latin Americans have been underserved by traditional banking players. The potential for disrupting a traditional profitable sector that has some of the lowest levels of customer service and out-dated technology makes it attractive to entrepreneurs. In addition, Government support and fintech-friendly regulation is leveling the playing field for newer players. Mexico, for instance, introduced the Fintech Law in 2018 to help promote innovation and the integration of new technologies with existing financial servicesIn Brazil, the Open Banking project is in its final stage marking the shift into Open Finance, which will foster competition in the financial sector by allowing/requiring the sharing of data between financial entities with the consent of consumers.

And then there’s the abundance of talent. In LatAm, there’s now a widespread acceptance of entrepreneurship as a career option. Talent is maturing and driving the growth of the startup ecosystem as Latin Americans return to their home countries (after studying and/or working abroad) to launch startups and startup alumni launch their own ventures. The so-called “startup mafia” concept—along the lines of Rocket Internet/Linio, Groupon, Uber and Rappi—has taken root, reflecting a growing maturity of the local community.

Of course, none of this growth would be possible without access to capital. Foreign investors are looking at LatAm as a great investment opportunity due to the huge potential for serving the middle class. Investors are also interested in the relatively low valuations (compared with more developed ecosystems) and high potential returns. Furthermore, serial entrepreneurs are cashing out and exiting, going on to become super angels to support the new generation of founders. Founder/operator funds, like 17Sigma (recently launched), have raised millions of dollars to invest in early stage deals.

The opportunity

There is so much growth, movement and maturation unfurling in the Latin American startup scene, and in fintech in particular. Digital/challenger banks like Albo and Neon; fintech and high-growth company enablers like Swap and Kamino; and embedded finance startups, like Dinie, Heru, Merce and Dolado are all showcasing the tremendous potential for fintech innovation in the region.

To sustain this growth, and to accelerate it, public and private sector organizations in LatAm should invest more heavily in innovation. Countries in the region average just 0.6% [as a % of GDP] in research and development, according to the World Bank. Compare that to Israel’s 4.9%, South Korea’s 4.5%, or the USA’s 2.8%. This needs to change and the time to support and invest in LatAm fintech is now.