Mexico Fintechs firing up focused on consumer lending, digital payments and insurance

April 2, 2020
American reporter based in Brazil. Californian, Bay Arean, Embaixador do beisebol (disse um amigo.)
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entrepreneur.com
Mexico’s new fintech law, far from perfect, is giving a boost to the sector and closing the gap with early adopter, Brazil.

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In Latin America’s tech boom, Mexico has been overshadowed by Brazil when it comes to tech start-ups, fintech and venture capital.

Even Argentina, mired in economic turbulence, has more tech companies listed on New York’s two stock exchanges.

But Latin America’s second-largest economy is starting to catch up. In a country where fewer than half of all adults have a bank account, Mexico’s large unbanked and under-banked population is spurring growth in financial technology start-ups focused on consumer lending, digital payments and insurance.

The rise of venture capital in Mexico and a new regulatory framework that clarifies the country’s fintech environment are also fueling growth.

“I’ve seen really big growth in new companies,” says Julia Figueiredo, vice president at Silicon Valley Bank who oversees Latin America. “From the calls I take to open bank accounts with companies, it almost feels like they’re all fintech companies.”

“From the calls I take to open bank accounts with companies, it almost feels like they’re all fintech companies” ­­— Julia Figueiredo, Silicon Valley Bank

Mexico is home to at least 394 fintech start-ups, even more than the 380 in Brazil, according to a report last year by Finnovista. Two of Mexico’s fastest growing fintechs are Clip, a payments company that allows merchants to accept payments, and Kofio, an online small-business lender.

“The biggest success stories that we’re seeing to date are serving clients that didn’t have access to that service or product before,” says Sofia Garrido Freyria, a Mexico City-based senior associate with the American private equity firm General Atlantic.

And Mexicans are using the new tools they are being offered.

According to Ernst & Young’s Global FinTech Adoption Index 2019, which interviewed 27,000 consumers in 27 countries, Mexico ranked eighth in consumer fintech adoption at 72%, above the global average of 64%. It was also ahead of wealthier countries such as the United Kingdom, South Korea, and the United States.

With digital adoption growing briskly, early stage investors are knocking on Mexican entrepreneurial doors. Venture capital investment in Mexican startups in the first half of last year totaled $310 million, according to the Association for Private Capital Investment in Latin America (LAVCA). That was almost double the $175 million invested in all of 2018, which was Mexico’s best year since at least 2011.

In September, the Santa Clara, California-based Silicon Valley Bank led a group of venture capital investors from the United States and Europe to check out the scene. Already, “I have requests from other investors to do it again,” says Figueiredo.

“Did we win every battle? No. Did we get everything we wanted? No. But the outcome is actually a decent law” — Federico Antoni, ALLVP

On that trip to Mexico City and Guadalajara, the bank brought representatives from the well-known US accelerator Techstars, based in Boulder, Colorado, Andreessen Horowitz, the famed Menlo Park investment firm, and other venture investors. The visit echoed a previous trip it made to São Paulo and Rio de Janeiro in 2012.

The newfound attention is being noticed by Mexico’s veteran investors. “Seven or eight years ago, it was hard to get an appointment or an email response” from investors on Sand Hill Road or elsewhere in the United States, says Federico Antoni, co-founder of ALLVP, one of Mexico’s oldest venture capital firms and a host of Silicon Valley Bank’s visit. “Now every week we get a call or email from a new investor who wants to know what’s going on here.”

Dila Capital, a Mexican venture capital firm, started raising its fourth investment fund in early 2020. “Things have been accelerating at a tremendous pace in a very short amount of time,” says founder Alejandro Diez Barroso, alluding to both his funds getting bigger and Dila’s companies increasingly drawing foreign investors.

Diez Barroso saw firsthand the need for venture capital in Mexico two decades ago when he unsuccessfully searched for funds to build an advertising company. He debated launching his own venture fund, but initially decided the country’s laws did not adequately protect minority shareholders in companies.

In 2011, Diez Barroso took the plunge and founded Dila. Its most recent fund has a target size of $100 million, twice the size of its third fund raised in 2017.

The fintech sector accounts for six of the 20 companies in Dila’s third fund, and the new fund expects to bet on financial technology too. “The biggest problems in the market today are financial,” says Diez Barroso, and the biggest solutions are delivered via technology.

Another growing firm is Angel Ventures. Founder Hernán Fernández Lamadrid started the organization in 2008 as an angel investor network. In 2013 it raised $20 million for its first fund. That year it invested in Clip, becoming one of the payment app’s earliest backers. In 2018, it started to raise its second fund, the Pacific Alliance Fund.

Although praise is not unanimous, Mexico’s new fintech law is paving the way for new players in the segment by providing guide rails. “In general, I think it’s very positive,” says Eduardo Clavé, a managing partner who oversees fintech investments at Dila Capital. “Now we understand the playing field and what we can and what we cannot do,” he says, adding that the reduction of regulatory risks increases investor confidence in the sector.

The Ley para Regular las Instituciones de Tecnologia Financiera, or FinTech Law, enacted in 2018, requires all companies to obtain a license from the government in order to operate. Last September, the Mexican finance ministry said that 85 companies applied. In January, the first approval was issued to NVIO Pagos Mexico, an electronic payments company.

The law currently covers peer-to-peer lending, crowd-funding, payments, wallets, cryptocurrencies, and open banking, according to Eduardo Flores Herrera, who co-runs the fintech practice at the Mexican law firm Creel, García-Cuéllar, Aiza and Enríquez.

But the law has not come without controversy. “If you took a poll of even just 10 entrepreneurs, you’ll find them divided as to the impact of the law,” says Camilo Kejner, a managing partner at Angel Ventures.

“There are good parts and there are bad parts,” of the law, says General Atlantic’s Freyria.

Entrepreneurs and investors were deeply involved in the development of the law. “It was a good process where both investors and entrepreneurs felt we were heard,” says Antoni at ALLVP. “Did we win every battle? No. Did we get everything we wanted? No. But the outcome is actually a decent law.”

Not everyone is so positive. Fernández, at Angel Ventures, says that, “there’s significant disappointment because the first draft of the law was very promising.” He contends that bank lobbying groups had too much influence. “At some point, the banks started getting their hands on the law and so it pretty much lost most of its purpose.”

One criticism is that the requirements are too stringent. Since they are considered financial entities rather than technology companies, fintechs face the same regulations as do banks or brokerage firms, including capital requirements. “It presents a challenge for many companies,” notes Flores.

Still, the jury is still out as implementation moves forward this year. Flores, whose firm submitted at least 10 applications for licenses, including NVIO’s, expects a surge of approvals around May and June. The government has 180 days to rule, although the time can be extended during comment periods.

What’s certain is that Mexico is surging forward in the fintech race. “Brazil is four years ahead of Mexico,” says Silicon Valley Bank’s Figueiredo,” but they’re catching up really quickly.”

What’s more, companies are scaling up at rates that exceed what digital bank Nubank or other prominent Brazilian companies experienced, she says. “They’re growing faster than fintechs ever did in Brazil.”

As for the future, Freyria thinks that, “if there is no correction and the trends continue as they are, we are two to three years away from the first IPOs from Mexican fintech companies.”

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.

In Latin America’s tech boom, Mexico has been overshadowed by Brazil when it comes to tech start-ups, fintech and venture capital.

Even Argentina, mired in economic turbulence, has more tech companies listed on New York’s two stock exchanges.

But Latin America’s second-largest economy is starting to catch up. In a country where fewer than half of all adults have a bank account, Mexico’s large unbanked and under-banked population is spurring growth in financial technology start-ups focused on consumer lending, digital payments and insurance.

The rise of venture capital in Mexico and a new regulatory framework that clarifies the country’s fintech environment are also fueling growth.

“I’ve seen really big growth in new companies,” says Julia Figueiredo, vice president at Silicon Valley Bank who oversees Latin America. “From the calls I take to open bank accounts with companies, it almost feels like they’re all fintech companies.”

“From the calls I take to open bank accounts with companies, it almost feels like they’re all fintech companies” ­­— Julia Figueiredo, Silicon Valley Bank

Mexico is home to at least 394 fintech start-ups, even more than the 380 in Brazil, according to a report last year by Finnovista. Two of Mexico’s fastest growing fintechs are Clip, a payments company that allows merchants to accept payments, and Kofio, an online small-business lender.

“The biggest success stories that we’re seeing to date are serving clients that didn’t have access to that service or product before,” says Sofia Garrido Freyria, a Mexico City-based senior associate with the American private equity firm General Atlantic.

And Mexicans are using the new tools they are being offered.

According to Ernst & Young’s Global FinTech Adoption Index 2019, which interviewed 27,000 consumers in 27 countries, Mexico ranked eighth in consumer fintech adoption at 72%, above the global average of 64%. It was also ahead of wealthier countries such as the United Kingdom, South Korea, and the United States.

With digital adoption growing briskly, early stage investors are knocking on Mexican entrepreneurial doors. Venture capital investment in Mexican startups in the first half of last year totaled $310 million, according to the Association for Private Capital Investment in Latin America (LAVCA). That was almost double the $175 million invested in all of 2018, which was Mexico’s best year since at least 2011.

In September, the Santa Clara, California-based Silicon Valley Bank led a group of venture capital investors from the United States and Europe to check out the scene. Already, “I have requests from other investors to do it again,” says Figueiredo.

“Did we win every battle? No. Did we get everything we wanted? No. But the outcome is actually a decent law” — Federico Antoni, ALLVP

On that trip to Mexico City and Guadalajara, the bank brought representatives from the well-known US accelerator Techstars, based in Boulder, Colorado, Andreessen Horowitz, the famed Menlo Park investment firm, and other venture investors. The visit echoed a previous trip it made to São Paulo and Rio de Janeiro in 2012.

The newfound attention is being noticed by Mexico’s veteran investors. “Seven or eight years ago, it was hard to get an appointment or an email response” from investors on Sand Hill Road or elsewhere in the United States, says Federico Antoni, co-founder of ALLVP, one of Mexico’s oldest venture capital firms and a host of Silicon Valley Bank’s visit. “Now every week we get a call or email from a new investor who wants to know what’s going on here.”

Dila Capital, a Mexican venture capital firm, started raising its fourth investment fund in early 2020. “Things have been accelerating at a tremendous pace in a very short amount of time,” says founder Alejandro Diez Barroso, alluding to both his funds getting bigger and Dila’s companies increasingly drawing foreign investors.

Diez Barroso saw firsthand the need for venture capital in Mexico two decades ago when he unsuccessfully searched for funds to build an advertising company. He debated launching his own venture fund, but initially decided the country’s laws did not adequately protect minority shareholders in companies.

In 2011, Diez Barroso took the plunge and founded Dila. Its most recent fund has a target size of $100 million, twice the size of its third fund raised in 2017.

The fintech sector accounts for six of the 20 companies in Dila’s third fund, and the new fund expects to bet on financial technology too. “The biggest problems in the market today are financial,” says Diez Barroso, and the biggest solutions are delivered via technology.

Another growing firm is Angel Ventures. Founder Hernán Fernández Lamadrid started the organization in 2008 as an angel investor network. In 2013 it raised $20 million for its first fund. That year it invested in Clip, becoming one of the payment app’s earliest backers. In 2018, it started to raise its second fund, the Pacific Alliance Fund.

Although praise is not unanimous, Mexico’s new fintech law is paving the way for new players in the segment by providing guide rails. “In general, I think it’s very positive,” says Eduardo Clavé, a managing partner who oversees fintech investments at Dila Capital. “Now we understand the playing field and what we can and what we cannot do,” he says, adding that the reduction of regulatory risks increases investor confidence in the sector.

The Ley para Regular las Instituciones de Tecnologia Financiera, or FinTech Law, enacted in 2018, requires all companies to obtain a license from the government in order to operate. Last September, the Mexican finance ministry said that 85 companies applied. In January, the first approval was issued to NVIO Pagos Mexico, an electronic payments company.

The law currently covers peer-to-peer lending, crowd-funding, payments, wallets, cryptocurrencies, and open banking, according to Eduardo Flores Herrera, who co-runs the fintech practice at the Mexican law firm Creel, García-Cuéllar, Aiza and Enríquez.

But the law has not come without controversy. “If you took a poll of even just 10 entrepreneurs, you’ll find them divided as to the impact of the law,” says Camilo Kejner, a managing partner at Angel Ventures.

“There are good parts and there are bad parts,” of the law, says General Atlantic’s Freyria.

Entrepreneurs and investors were deeply involved in the development of the law. “It was a good process where both investors and entrepreneurs felt we were heard,” says Antoni at ALLVP. “Did we win every battle? No. Did we get everything we wanted? No. But the outcome is actually a decent law.”

Not everyone is so positive. Fernández, at Angel Ventures, says that, “there’s significant disappointment because the first draft of the law was very promising.” He contends that bank lobbying groups had too much influence. “At some point, the banks started getting their hands on the law and so it pretty much lost most of its purpose.”

One criticism is that the requirements are too stringent. Since they are considered financial entities rather than technology companies, fintechs face the same regulations as do banks or brokerage firms, including capital requirements. “It presents a challenge for many companies,” notes Flores.

Still, the jury is still out as implementation moves forward this year. Flores, whose firm submitted at least 10 applications for licenses, including NVIO’s, expects a surge of approvals around May and June. The government has 180 days to rule, although the time can be extended during comment periods.

What’s certain is that Mexico is surging forward in the fintech race. “Brazil is four years ahead of Mexico,” says Silicon Valley Bank’s Figueiredo,” but they’re catching up really quickly.”

What’s more, companies are scaling up at rates that exceed what digital bank Nubank or other prominent Brazilian companies experienced, she says. “They’re growing faster than fintechs ever did in Brazil.”

As for the future, Freyria thinks that, “if there is no correction and the trends continue as they are, we are two to three years away from the first IPOs from Mexican fintech companies.”

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.