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How Fintechs play an important role in ensuring the financial recovery of Latin America in times of Covid?

June 8, 2020
Por
Carlos Alonso Torras
Carlos Alonso Torras
Investor @FinTech Collective * Harvard MPA/Wharton MBA
📷
smartbrief.com
As a Spanish-Brazilian citizen and enthusiast of the region — who has lived in four of its cities over the course of eight years — I wish to share some thoughts on the Covid-19 pandemic’s impact, focusing on the outcomes within the field of financial technology (fin-tech).
Contenido para Usuarios 🔒

Macro impact on Latin American venture capital

As Covid-19 has bulldozed its way through the world, paralyzing economies and causing unprecedented quarantines, a great sense of trepidation has arisen as far as its effect on emerging markets. Rightfully so; given the damage caused in developed economies, it would be foolish to not fear the effects on less prepared ones. The focus on Latin America has been significant. Unfortunately, Brazil is closing the month of May as thefourth highest nation worldwide in number of Covid-19 deaths.

The initial impact was felt early in the pandemic, as the collapse in oil prices prompted massive FX devaluations in the region’s main currencies. Capital flights soon approached record levels; in the January to March period alone, preliminary IIF figures showed a $13.8 billion equity outflow (for Brazil only), which exceeded the one recorded from August 2008 to February 2009. Similarly, over $5 billion were pulled out of Mexican bond funds in March, the most since the IIF’s data series began in 2009. Growth expectations were low entering the year to begin with — S&P Global projected regional growth under 2% for the seventh consecutive year, and the fiscal health of the region’s major economies far from ideal. Political risk had also increased in the last two years with the elections of Bolsonaro in Brazil and Lopez Obrador in Mexico, combined with a wave of social unrest in the second half of 2019 that, among others, shook the exemplar of stability in the region: Chile. Lastly, given the high urban concentrations of these countries, and relative size of their informal economies, there is further cause for skepticism in economic performance and social stability going forward.

The investor community reflected the new reality. Between Q4 2019 and Q1 2020, China’s deal count suffered almost a 50% drop (with Covid-19 in full swing there already), while Latin America’s deal count went down almost 60% (though relatively Covid-free at that point int time). Admittedly, the region’s banks are much better capitalized than going into the GFC, but the magnitude of the challenge is also incomparable. Ricardo Hausmann — now Harvard professor and former Chief Economist of the IDB — has mentioned that this will be a long war, to be fought on numerous fronts. Governments are going beyond previous notions of accommodative monetary policy and, internationally, most LatAm players will likely need to resort to some combination of debt moratoria, enhanced liquidity lines between central banks and access to reserve assets. One must also be careful to not generalize across economies. While the governments of Chile and Colombia moved diligently, other players — most notably Mexico — lagged, which is having health and economic consequences.

To put things in perspective, despite the macro concerns already existing prior to Covid, 2019 was, by far, the best year in history for the region’s VC ecosystem. LAVCA revealed that, funding in the region more than doubled to a record $4.6 billion in 2019, from about $2 billion in 2018. This constitutes a 900% increase from 2016 investment amounts. Even excluding SoftBank’s $5 billion, headline-generating Innovation Fund, the region would have had record funding levels. As growth equity capital became more available, transaction sizes increased (11 deals $100m+ in size last year) and, perhaps most importantly, 37% of the total funding included at least a global co-investor, alongside a regional player.

Financial technology — Fundaments of growth in the region

Having gone from what appears to be heaven to hell, it is worth taking an introspective look at the phenomena that made this growth possible to begin with. Despite regional economic downturns and political instability, the region’s middle class grew to 26% of total households by 2018, an increase of 23% since 2008. A significant COVID reversal is now expected, but these are nevertheless impressive figures. Smart phone penetration is at approximately 65%, and expected to reach 80% in the next five years. It is the second-fastest-growing mobile phone market in the world. Higher in urban areas, where Latin America stands out too (at nearly 80% of population, only behind North America). In the regulatory arena, parties across the political spectrum are committed to the goal of financial inclusion (more on that later). Human capital has improved too, as universities honed into tech capabilities and the repatriation of talent (motivated by early successes in the private and public markets — such as the 2018 IPOs of Stone and PagSeguro) has filtered it back into the ecosystem. Lastly, with absurdly concentrated banking sectors (over 80% of AUM in Brazil, for its top 5 banks), the large majority of the region’s population lives unbanked or underbanked, feeding the now-renowned slogan that “cash is king” in Latin America. Or was, at least.

This begs the question of how such a landscape will respond to the COVID-19 challenge. While concerning for many reasons, I see significant opportunity. Most of the foundational pieces described remain in place, and some have, if anything, accelerated their arrival. Arvind Subramanian — Harvard Professor and former Chief Economic Adviser to the Government of India — speaks about the importance of “critical junctures” during a nation’s (or region’s) development. These are important points of inflection that make lasting differences, and Latin America might be facing one in the form of accelerated digitization. After years of unimpressive growth and chronically crippling causes of inefficiency, this could an opportunity to substitute the historically accepted notion of employment driven GDP growth with the implementation of efficiency boosting digital tools conducive to productivity-driven GDP growth. Such a conversation was well under way before the specter of Covid-19 emerged. McKinsey pointed out last year that digital tools can uniquely accelerate change across both supply and demand side challenges, thus offering new, cost effective ways to solve old problems.

E-commerce is booming as consumers embrace no-touch solutions; even in 2019, Mexico and Argentina were in the top 10 ranking of countries worldwide that saw the greatest volume increase in e-commerce. Efforts are needed — and being seen — in the public sector also. Government-to-person (G2P) payments are an important on-ramp to financial inclusion. As physical cash has become a health liability, the combination of digital identity, mobile and payments becomes increasingly important in the mobilization of resources. Financial inclusion often starts with payments, which act as a gateway to other services, such as savings, credit and insurance. The infrastructure challenges ahead are huge, particularly in a region scared by a high incidence of fraud; again though, this presents opportunity.

Perspectives at the vertical level

More specifically across fin-tech verticals, I’d note the following:

· Payments: with significantly more room to grow relative to developed markets, a decline in volumes caused by contracted economic activity is being accompanied by soaring user adoption. Gross remittance flows have decreased, but also gone more digital. With lessened mobility and high mobile penetration, there’s reason to believe that the embedding of payments in non-financial services will continue. This raises an important need for supporting infrastructure, as investors focus more on the backend to find the type of companies that will enable this migration. Players like Minka — which works to empower real time payment capabilities in Colombia — stand out.

· Lending: digital lenders are arguably the most affected by the pandemic, having faced a combination of lower net interest margins, falling loan growth, rising delinquencies and defaults. Consumer loan demand rises with need, but limited funding is leading to lower loan growth rates. A purging effect is expected as activity contracts, and the algorithms of alternative credit scorers are properly tested for the first time. Outstanding technological capabilities and early investments in data science should prove a differentiating factor for unsecured lenders, such as Sao Paulo-based Rebel. Accustomed to crises, local lenders are being quite resourceful, resorting to measures such as adjusting client payment schedules (the priority is to keep the client paying, above all), diversifying sourcing channels (example: commission based client referrals), or extending additional liquidity to their most reliable clientele.

· Banking: declining economic activity and tighter funding conditions are ominous for digital banks across the world, and perhaps even more so for emerging markets. The argument can also be made that the biggest names will struggle to sustain high valuations when they fundraise again. Particularly as success in regional expansion remains largely unproven. With lower rates, differentiation becomes more of a challenge. However, traditional banks will be slow to mobilize their machinery online. With branches shut to varying degrees, and with already limited coverage, the need for digital accounts is far greater than in developed markets. Take the Mexico example, where just over 40% of adults have a bank account; in 2019, the digital banking sector grew 200%. This reasoning can also be extended to the underserved SME segment, where startups like Oyster (servicing the Mexican market) will need to account for the demand left unattended as large banks further retrench into traditionally profitable lines of business.

· InsurTech: a historically under penetrated market in Latin America, it is now arguably one of the greatest opportunities. In the expected demand downturn for car insurance, pay-as-you-drive solutions might prove the exception, with room for growth in aggregators (price comparison portals) also. As health becomes a pressing concern in what is ultimately a sanitary crisis (and one with high chance of recurrence, where medical bills can easily pile up), health & life insurance can become more appetizing to Latin American consumers. If paired with the boost in telemedicine, this is intuitive in the medium term, though entrenched regulation and special interests complicate the argument. Business disruption coverage might also become more popular, but here it is worth remembering that Latin Americans have been through several economic crises in the last few decades, which shed doubt on the likelihood of a significant behavioral shift. The need for cyber solutions, however, is clear in an accelerated shift to digital, and given the high incidence of fraud in the region, again. From a regulatory standpoint, it is also one of the least defined of these verticals. With few, if any, licensing regimes or other requirements that are specific to technology-enabled business models in the areas of insurance distribution and underwriting.

· Capital markets: the situation in LatAm is arguably different to that of developed markets, where some anticipate gravitation towards established wealth management shops who have matched the “zero commission” models of digital players, and offer human advice in times of high volatility and anxiety. With rates at historic lows in several players within the region, the appetite for yield will arguably move savers within the rising middle class towards alternative products offering a better yield. Nevertheless, and unlike developed markets again, the prospect of inflation still haunts a region that has not forgotten the 1980s. Furthermore, risk aversion might grow in the post-pandemic world, as feelings of vulnerability might grow among small investors, increasing demand for emergency saving plans. Robo-advisors will undergo their first significant test and should see revenue drops accompanied by AUM reduction. Having been built on high CAC models, their ability to overcome recessionary times largely stands to be proven.

· Digital identity: along the lines of the enablement argument, digital identity services — including on-boarding, biometric authentication, or transaction verifications — become more crucial than ever to tackle the high incidence of fraud in the region, given the accelerated, and thus somewhat disorganized, push to digital. As e-commerce proliferates and the volume of digital business transactions increases, companies that uncover new ways to add security — in KYC procedures, for instance — without subtracting convenience will be rewarded. Early players have already emerged, with Brazilian startups like IdWall or Acesso Digital having achieved funding and product market fit, but the space arguably remains ripe for new entrants. There is significant cross over with the public sector, as governments will see pressures to distribute aid and benefits with greater agility going forward. Regulators within government ministries and Central Banks are grappling with whether their KYC provisions are appropriate during a crisis. Several markets, including Mexico, allow basic account registration without an ID.

Risks and opportunities

While my general tone is optimistic, I am not oblivious to the massive issues ahead. There is little use in discussing the medium term if you cannot survive the short term, and many will not be able to make it there. Bridge rounds are becoming necessary as means of weathering the storm, to then raise a bigger round later, in better terms. In the WFH period, looking inwards to focus on tech and product development is a valuable lesson that Chinese startups taught us when Covid-19 first broke out there. Companies that are structurally positive but cyclically negative should persevere and survive; those that are countercyclical are best suited to capitalize on short term plays.

The worst is yet to come for many, particularly those that lagged in reaction, such as Mexico. That is particularly preoccupying for its SMEs, since the AMLO government initially prioritized cash transfers to families in need over working capital, and large banks have significantly retrenched their credit offerings. Comparatively, Mexican digital penetration is said to be 3–5 years behind Brazil’s, which will make government action inherently slower. But things for the others look far from easy. By April 8th, 90% of on premise food service SMBs in Colombia, 70%+ in Brazil, and 30%+ in Mexico had closed.

Yet, as history has repeatedly demonstrated, there is opportunity in times of crisis. And Latin Americans are used to these. In Mexico, an association of private sector players named Consejo Mexicano de Negocios has sought alternative avenues for negotiating with the IDB, targeted at supporting SMEs. In Brazil, the national development bank (BNDES) opened itself to the idea of partnering with fin-techs as US legislators hesitated to do the same for its PPP program. Let’s not forget that Brazil’s 2015–16 crisis saw the birth of some current super stars, such as Nubank (and Mercado Libre itself coincided with another crisis: the dot-com bust). In fact, Brazil has seen five recessions over the last 20 years. The region’s regulators have reaffirmed their commitment to financial inclusion and open banking. Brazil’s Central Bank committed to having the latter fully operational by end of 2021.

Also, times of crisis free up talent for recruiting opportunities, softening the HR frenzy of the last few years. This should result in new founders and/or further strengthening of the winners that make it through the crisis. As ironic as it might seem, there’s also a sense of lucky timing, in that several of the largest ecosystem players raised important rounds last year, and regionally active funds such as Kaszek, Monashees or Valor have significant dry powder to pursue new investments. Consolidation pressures are noticeable. As foreign growth equity capital dries up and smaller startups find themselves raising rounds in locally denominated terms, well-funded startups and incumbents are left with interesting acquisition opportunities.

Concluding remarks

Fin-techs are being summoned to play an important role in ensuring the financial recovery of Latin America, and thus its social reconstruction also. The process has already begun as destruction continues to unfold, and they are in a unique position to extend flexible financing and leverage digital solutions to mobilize economies in unprecedentedly agile ways. Infrastructure needs will be massive in the years ahead and coordination with traditional banks and governments will be crucial to ensure effectiveness. The quality of the current response will set a precedent for future opportunities. SMEs — despite short-term vulnerability and dependence on fiscal stimuli — remain the backbones of these economies. Their rush to digital entails a process as complicated as it is filled with entrepreneurial opportunity.

The current world might seem surreal, and we are in many ways living in unprecedented times. With so much talk about a “new normal” and a past — just months ago — that will never be repeated, there’s room for ample confusion and frustration. Perhaps in that sense, Latin America is actually in an advantageous position. As the birth place of “magical realism”, it has never been accustomed to normality.

Las opiniones compartidas y expresadas por los analistas son libres e independientes, y de ellas son responsables sus autores. No reflejan ni comprometen el pensamiento u opinión de Latam Fintech Hub, por lo cual no pueden ser interpretadas como recomendaciones emitidas por la platafomra. Esta plataforma es un espacio abierto para promover la diversidad de puntos de vista sobre el ecosistema Fintech.

Macro impact on Latin American venture capital

As Covid-19 has bulldozed its way through the world, paralyzing economies and causing unprecedented quarantines, a great sense of trepidation has arisen as far as its effect on emerging markets. Rightfully so; given the damage caused in developed economies, it would be foolish to not fear the effects on less prepared ones. The focus on Latin America has been significant. Unfortunately, Brazil is closing the month of May as thefourth highest nation worldwide in number of Covid-19 deaths.

The initial impact was felt early in the pandemic, as the collapse in oil prices prompted massive FX devaluations in the region’s main currencies. Capital flights soon approached record levels; in the January to March period alone, preliminary IIF figures showed a $13.8 billion equity outflow (for Brazil only), which exceeded the one recorded from August 2008 to February 2009. Similarly, over $5 billion were pulled out of Mexican bond funds in March, the most since the IIF’s data series began in 2009. Growth expectations were low entering the year to begin with — S&P Global projected regional growth under 2% for the seventh consecutive year, and the fiscal health of the region’s major economies far from ideal. Political risk had also increased in the last two years with the elections of Bolsonaro in Brazil and Lopez Obrador in Mexico, combined with a wave of social unrest in the second half of 2019 that, among others, shook the exemplar of stability in the region: Chile. Lastly, given the high urban concentrations of these countries, and relative size of their informal economies, there is further cause for skepticism in economic performance and social stability going forward.

The investor community reflected the new reality. Between Q4 2019 and Q1 2020, China’s deal count suffered almost a 50% drop (with Covid-19 in full swing there already), while Latin America’s deal count went down almost 60% (though relatively Covid-free at that point int time). Admittedly, the region’s banks are much better capitalized than going into the GFC, but the magnitude of the challenge is also incomparable. Ricardo Hausmann — now Harvard professor and former Chief Economist of the IDB — has mentioned that this will be a long war, to be fought on numerous fronts. Governments are going beyond previous notions of accommodative monetary policy and, internationally, most LatAm players will likely need to resort to some combination of debt moratoria, enhanced liquidity lines between central banks and access to reserve assets. One must also be careful to not generalize across economies. While the governments of Chile and Colombia moved diligently, other players — most notably Mexico — lagged, which is having health and economic consequences.

To put things in perspective, despite the macro concerns already existing prior to Covid, 2019 was, by far, the best year in history for the region’s VC ecosystem. LAVCA revealed that, funding in the region more than doubled to a record $4.6 billion in 2019, from about $2 billion in 2018. This constitutes a 900% increase from 2016 investment amounts. Even excluding SoftBank’s $5 billion, headline-generating Innovation Fund, the region would have had record funding levels. As growth equity capital became more available, transaction sizes increased (11 deals $100m+ in size last year) and, perhaps most importantly, 37% of the total funding included at least a global co-investor, alongside a regional player.

Financial technology — Fundaments of growth in the region

Having gone from what appears to be heaven to hell, it is worth taking an introspective look at the phenomena that made this growth possible to begin with. Despite regional economic downturns and political instability, the region’s middle class grew to 26% of total households by 2018, an increase of 23% since 2008. A significant COVID reversal is now expected, but these are nevertheless impressive figures. Smart phone penetration is at approximately 65%, and expected to reach 80% in the next five years. It is the second-fastest-growing mobile phone market in the world. Higher in urban areas, where Latin America stands out too (at nearly 80% of population, only behind North America). In the regulatory arena, parties across the political spectrum are committed to the goal of financial inclusion (more on that later). Human capital has improved too, as universities honed into tech capabilities and the repatriation of talent (motivated by early successes in the private and public markets — such as the 2018 IPOs of Stone and PagSeguro) has filtered it back into the ecosystem. Lastly, with absurdly concentrated banking sectors (over 80% of AUM in Brazil, for its top 5 banks), the large majority of the region’s population lives unbanked or underbanked, feeding the now-renowned slogan that “cash is king” in Latin America. Or was, at least.

This begs the question of how such a landscape will respond to the COVID-19 challenge. While concerning for many reasons, I see significant opportunity. Most of the foundational pieces described remain in place, and some have, if anything, accelerated their arrival. Arvind Subramanian — Harvard Professor and former Chief Economic Adviser to the Government of India — speaks about the importance of “critical junctures” during a nation’s (or region’s) development. These are important points of inflection that make lasting differences, and Latin America might be facing one in the form of accelerated digitization. After years of unimpressive growth and chronically crippling causes of inefficiency, this could an opportunity to substitute the historically accepted notion of employment driven GDP growth with the implementation of efficiency boosting digital tools conducive to productivity-driven GDP growth. Such a conversation was well under way before the specter of Covid-19 emerged. McKinsey pointed out last year that digital tools can uniquely accelerate change across both supply and demand side challenges, thus offering new, cost effective ways to solve old problems.

E-commerce is booming as consumers embrace no-touch solutions; even in 2019, Mexico and Argentina were in the top 10 ranking of countries worldwide that saw the greatest volume increase in e-commerce. Efforts are needed — and being seen — in the public sector also. Government-to-person (G2P) payments are an important on-ramp to financial inclusion. As physical cash has become a health liability, the combination of digital identity, mobile and payments becomes increasingly important in the mobilization of resources. Financial inclusion often starts with payments, which act as a gateway to other services, such as savings, credit and insurance. The infrastructure challenges ahead are huge, particularly in a region scared by a high incidence of fraud; again though, this presents opportunity.

Perspectives at the vertical level

More specifically across fin-tech verticals, I’d note the following:

· Payments: with significantly more room to grow relative to developed markets, a decline in volumes caused by contracted economic activity is being accompanied by soaring user adoption. Gross remittance flows have decreased, but also gone more digital. With lessened mobility and high mobile penetration, there’s reason to believe that the embedding of payments in non-financial services will continue. This raises an important need for supporting infrastructure, as investors focus more on the backend to find the type of companies that will enable this migration. Players like Minka — which works to empower real time payment capabilities in Colombia — stand out.

· Lending: digital lenders are arguably the most affected by the pandemic, having faced a combination of lower net interest margins, falling loan growth, rising delinquencies and defaults. Consumer loan demand rises with need, but limited funding is leading to lower loan growth rates. A purging effect is expected as activity contracts, and the algorithms of alternative credit scorers are properly tested for the first time. Outstanding technological capabilities and early investments in data science should prove a differentiating factor for unsecured lenders, such as Sao Paulo-based Rebel. Accustomed to crises, local lenders are being quite resourceful, resorting to measures such as adjusting client payment schedules (the priority is to keep the client paying, above all), diversifying sourcing channels (example: commission based client referrals), or extending additional liquidity to their most reliable clientele.

· Banking: declining economic activity and tighter funding conditions are ominous for digital banks across the world, and perhaps even more so for emerging markets. The argument can also be made that the biggest names will struggle to sustain high valuations when they fundraise again. Particularly as success in regional expansion remains largely unproven. With lower rates, differentiation becomes more of a challenge. However, traditional banks will be slow to mobilize their machinery online. With branches shut to varying degrees, and with already limited coverage, the need for digital accounts is far greater than in developed markets. Take the Mexico example, where just over 40% of adults have a bank account; in 2019, the digital banking sector grew 200%. This reasoning can also be extended to the underserved SME segment, where startups like Oyster (servicing the Mexican market) will need to account for the demand left unattended as large banks further retrench into traditionally profitable lines of business.

· InsurTech: a historically under penetrated market in Latin America, it is now arguably one of the greatest opportunities. In the expected demand downturn for car insurance, pay-as-you-drive solutions might prove the exception, with room for growth in aggregators (price comparison portals) also. As health becomes a pressing concern in what is ultimately a sanitary crisis (and one with high chance of recurrence, where medical bills can easily pile up), health & life insurance can become more appetizing to Latin American consumers. If paired with the boost in telemedicine, this is intuitive in the medium term, though entrenched regulation and special interests complicate the argument. Business disruption coverage might also become more popular, but here it is worth remembering that Latin Americans have been through several economic crises in the last few decades, which shed doubt on the likelihood of a significant behavioral shift. The need for cyber solutions, however, is clear in an accelerated shift to digital, and given the high incidence of fraud in the region, again. From a regulatory standpoint, it is also one of the least defined of these verticals. With few, if any, licensing regimes or other requirements that are specific to technology-enabled business models in the areas of insurance distribution and underwriting.

· Capital markets: the situation in LatAm is arguably different to that of developed markets, where some anticipate gravitation towards established wealth management shops who have matched the “zero commission” models of digital players, and offer human advice in times of high volatility and anxiety. With rates at historic lows in several players within the region, the appetite for yield will arguably move savers within the rising middle class towards alternative products offering a better yield. Nevertheless, and unlike developed markets again, the prospect of inflation still haunts a region that has not forgotten the 1980s. Furthermore, risk aversion might grow in the post-pandemic world, as feelings of vulnerability might grow among small investors, increasing demand for emergency saving plans. Robo-advisors will undergo their first significant test and should see revenue drops accompanied by AUM reduction. Having been built on high CAC models, their ability to overcome recessionary times largely stands to be proven.

· Digital identity: along the lines of the enablement argument, digital identity services — including on-boarding, biometric authentication, or transaction verifications — become more crucial than ever to tackle the high incidence of fraud in the region, given the accelerated, and thus somewhat disorganized, push to digital. As e-commerce proliferates and the volume of digital business transactions increases, companies that uncover new ways to add security — in KYC procedures, for instance — without subtracting convenience will be rewarded. Early players have already emerged, with Brazilian startups like IdWall or Acesso Digital having achieved funding and product market fit, but the space arguably remains ripe for new entrants. There is significant cross over with the public sector, as governments will see pressures to distribute aid and benefits with greater agility going forward. Regulators within government ministries and Central Banks are grappling with whether their KYC provisions are appropriate during a crisis. Several markets, including Mexico, allow basic account registration without an ID.

Risks and opportunities

While my general tone is optimistic, I am not oblivious to the massive issues ahead. There is little use in discussing the medium term if you cannot survive the short term, and many will not be able to make it there. Bridge rounds are becoming necessary as means of weathering the storm, to then raise a bigger round later, in better terms. In the WFH period, looking inwards to focus on tech and product development is a valuable lesson that Chinese startups taught us when Covid-19 first broke out there. Companies that are structurally positive but cyclically negative should persevere and survive; those that are countercyclical are best suited to capitalize on short term plays.

The worst is yet to come for many, particularly those that lagged in reaction, such as Mexico. That is particularly preoccupying for its SMEs, since the AMLO government initially prioritized cash transfers to families in need over working capital, and large banks have significantly retrenched their credit offerings. Comparatively, Mexican digital penetration is said to be 3–5 years behind Brazil’s, which will make government action inherently slower. But things for the others look far from easy. By April 8th, 90% of on premise food service SMBs in Colombia, 70%+ in Brazil, and 30%+ in Mexico had closed.

Yet, as history has repeatedly demonstrated, there is opportunity in times of crisis. And Latin Americans are used to these. In Mexico, an association of private sector players named Consejo Mexicano de Negocios has sought alternative avenues for negotiating with the IDB, targeted at supporting SMEs. In Brazil, the national development bank (BNDES) opened itself to the idea of partnering with fin-techs as US legislators hesitated to do the same for its PPP program. Let’s not forget that Brazil’s 2015–16 crisis saw the birth of some current super stars, such as Nubank (and Mercado Libre itself coincided with another crisis: the dot-com bust). In fact, Brazil has seen five recessions over the last 20 years. The region’s regulators have reaffirmed their commitment to financial inclusion and open banking. Brazil’s Central Bank committed to having the latter fully operational by end of 2021.

Also, times of crisis free up talent for recruiting opportunities, softening the HR frenzy of the last few years. This should result in new founders and/or further strengthening of the winners that make it through the crisis. As ironic as it might seem, there’s also a sense of lucky timing, in that several of the largest ecosystem players raised important rounds last year, and regionally active funds such as Kaszek, Monashees or Valor have significant dry powder to pursue new investments. Consolidation pressures are noticeable. As foreign growth equity capital dries up and smaller startups find themselves raising rounds in locally denominated terms, well-funded startups and incumbents are left with interesting acquisition opportunities.

Concluding remarks

Fin-techs are being summoned to play an important role in ensuring the financial recovery of Latin America, and thus its social reconstruction also. The process has already begun as destruction continues to unfold, and they are in a unique position to extend flexible financing and leverage digital solutions to mobilize economies in unprecedentedly agile ways. Infrastructure needs will be massive in the years ahead and coordination with traditional banks and governments will be crucial to ensure effectiveness. The quality of the current response will set a precedent for future opportunities. SMEs — despite short-term vulnerability and dependence on fiscal stimuli — remain the backbones of these economies. Their rush to digital entails a process as complicated as it is filled with entrepreneurial opportunity.

The current world might seem surreal, and we are in many ways living in unprecedented times. With so much talk about a “new normal” and a past — just months ago — that will never be repeated, there’s room for ample confusion and frustration. Perhaps in that sense, Latin America is actually in an advantageous position. As the birth place of “magical realism”, it has never been accustomed to normality.

Las opiniones compartidas y expresadas por los analistas son libres e independientes, y solamente sus autores son responsables de ellas. No reflejan ni comprometen el pensamiento o la opinión del equipo de Latam Fintech Hub y, por lo tanto, no pueden interpretarse como recomendaciones emitidas por la plataforma. Esta plataforma es un espacio abierto para promover la diversidad de puntos de vista en el ecosistema Fintech.

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