Mapping fintech in latin america — Fintech Beat Podcast, Episode 89

Venture capitalists Ben Savage and Jonathan Whittle join Korefusion’s Alejandro Gonzalez Sanchez to break down investing in the immense region, and how it differs from the rest of the world.

Dr. Chris Brummer: Welcome to FintechBeat, where finance, technology, and policy come together. I’m your host Chris Brummer, and the future of finance is now.

Now, we at FintechBeat not only grapple with front-page issues, but we also like to take a peek at what’s happening behind the scenes. And in many instances around the world, to get a fresh look at financial technology and where it’s going. And today we have the opportunity to do just that by looking at FinTech in central and Latin America. Now, FinTech is exploding in this vast region, both in terms of the applications of financial technology to the world of business, and in terms of its use by an emerging class of sophisticated digital consumers and clients. And we have three people who are in the thick of it. Ben Savage, a partner at Clocktower Technology Ventures, which launched the first Latin America financial technology fund. Jonathan Whittle, a founding partner of Quona Capital and a long time investor in Latin America. And Alejandro Sanchez, the co-author of the LATAM KoreFusion 2020 LATAM FinTech report. Together, they bring unmatched perspective to the question of FinTech in Latin America and how both push the boundaries of how one thinks about both technology and the region.

Jonathan, thanks so much for joining the show.

Jonathan Whittle: Thanks. Appreciate it. It’s a pleasure to be on it.

Dr. Chris Brummer: Ben, thanks so much for joining the show.

Ben Savage: Thank you very much for having me. Appreciate it.

Dr. Chris Brummer: Alejandro, thanks so much for joining the show.

Alejandro Sanchez: No, thanks Chris for the invitation.

Dr. Chris Brummer: When we talk about FinTech, and I guess we’ll start with you first, Ben, the very concept and idea of FinTech can kind of differ depending on where in the world one is. I mean, when we talk about it, when we think about FinTech, does it look the same way, say in Latin America, as compared to the United States? And does FinTech in Latin America distinguish itself from other regions like Asia?

Ben Savage: Yeah, I think it’s a great question, Chris. And the answer is that Latin America, I think is unique in so far as it picks up actually a financial set of possibilities that you see in both North America and Western Europe. In really the US and Western Europe, as well as the kinds of possibilities that you see in Asia, where there are very different metaphors in FinTech for how consumers and enterprises are going to engage with next generation financial services. And that exists in part because the legacy financial services infrastructure in Latin America is quite different from the legacy financial services infrastructure in both of those regions, or really in all three of those regions. Where, it’s much more oligopolistic, and it only serves a relatively small percentage of the population in contrast. And so it creates opportunity sets that are frankly wider than what we see when we invest in the US and in Europe. And I think that are wider in some ways than what you would see if you were just investing in Asia, although that’s frankly not an area that we specialize in.

And one of the things that we think is so fascinating about doing FinTech for the next decade in Latin America is that it’s a bit of an open question which metaphors will dominate. Will they be Asian style for super app metaphors and the attendant way financial services roll into that? Or will it look much more like fragmented point solutions that are being gradually re-bundled? Which is what you’re seeing in the US right now.

Dr. Chris Brummer: That’s really interesting and a useful sort of kickoff to the conversation we’ve had on the show. Experts from all over the world, particularly those even talking about FinTech in Africa, and they’ve made sort of a similar intervention. Jonathan, again, you’ve been a long time investor and observer of Latin America. When you hear sort of the terms FinTech in Latin, does that ring a different kind of bell for you than when you think again about different parts of the world?

Jonathan Whittle: Yeah. So, I think that FinTech opportunity in Latin America, going back to the question that you posed to Ben and connecting it to the one you just asked now, is a bit different than what we see in the US and Europe, because the financial gap is so huge, right? So, you have a very large segment of the population that is completely unserved or underserved. So, there’s a very significant percentage of consumers across Latin America that don’t have bank accounts, or don’t have access to credit, or don’t have access to basic financial services that make their lives better. And access to financial services and credit for small and mid-size businesses is lacking across Latin America. So, you have, yes, a great concentration of financial services in a handful of banks. Those banks are… For example, in Brazil, almost 90% of banking assets are controlled by five banks, right? And those banks have been extraordinarily profitable. Some of the most profitable banks in the world are out of Latin America.

So, they’re actually being quite rational in serving certain segments of the population and not going down market, not going down to those harder segments to serve. But, that’s where financial technology comes in, leveraging a number of trends that have made the development and deployment of financial services much cheaper and much easier. Namely, the fact that now smartphone penetration across Latin America is extraordinarily deep.

So, you have a lot of these segments that are unserved or that are underserved, have the power of a computer in their hands. And so that’s really changed the way that some of the new entrants have been thinking about how to reach these underserved consumer and small business segments with products designed for them. And that now can be, again, developed and deployed at a cost that is a fraction of what was even possible say five years ago. So, that is… I think, when we look at the opportunity in financial in Latin America, much of it does revolve around this very low hanging fruit of opportunity that is right for the taking.

Dr. Chris Brummer: So, let’s take that a bit deeper. Alejandro, we’re seeing this massive transformation of financial services and you were the principal author of the big LatAm report on financial technology, quite literally creating a map and guide to how things are shaping out on a country-by-country basis. With some countries taking leaps and payments and others in crypto or cloud technology. How much variation are you seeing in terms of where the innovation is happening throughout the region?

Alejandro Sanchez: As Ben and Jonathan said, when we are analyzing the FinTech industry, we need to separate first the global FinTechs and the regional in Latin America or emerging countries’ FinTechs. Both factors are FinTechs. But, the activities, the challenges, the opportunities in Latin America and South America or emerging markets is completely different than developing economies. So, that’s kind of my first opinion. We need to divide Latin America and the rest of the world. But when we want to really understand the impact and the opportunity of FinTechs in Latin America, we need to dig deeper. Because even if it’s the same region, we can compare… Just to mention the two largest economies, Mexico, Brazil, and Mexico. It’s completely different. The necessities or the products and services being offered by FinTech is completely different. So, as you said, even though I started saying we are our region, but the markets within the region is completely different.

So, it’s a little bit difficult to connect all the points. But to give a quick answer to your question, there are trends in these five countries that we analyzed during our LatAm FinTech report. And I could tell you personally, for example, in Mexico, I guess it’s a huge opportunity in remittances FinTech. Why? Because one large part of the Mexican economy depends on remittances sent by Mexicans living and working abroad. So, having a very good service to send the money that Mexicans are earning abroad to their family in Mexico, that’s an excellent opportunity. If we go to another country, I will be giving you another example of opportunity. I will just focus on crypto because you mentioned crypto. So, one of the markets where we identified very interesting for crypto is Argentina. Why? Because of the currency and the situations that they have been having for the last decades. So, crypto gets very interesting. Mexico, another story. Columbia, other side.

Dr. Chris Brummer: Yeah, that is really interesting, particularly taking your view and your vantage point as a consultant. And sort of, as I said, just looking out how… Say, in one country, certain kinds of industries seem to be dominating. Brazil, and I’m looking at your report, enterprise, financial management is really big. And then in Mexico, lending and payments and that’s fascinating. I would suppose as a venture capitalist, particularly a venture capitalist based in the United States, venturing offshore is always a little interesting. Especially if you’re going to venture into something offshore involving financial technology. Jonathan, how did you make your way into this? And was it that layer of differences between countries that attracted you? Or was it just a kind of a FinTech bug and you just saw other parts of the country offering… Actually, other parts of the world offering really interesting opportunities and that’s what brought you to investing in the region?

Jonathan Whittle: Yeah. So, my entire career has actually been focused on Latin America. I’m an old Latin American guy. I grew up in Spain, grew up in Central America, so Spanish is a second first language. And I’ve spent a lot of time in Argentina, lived in Brazil and elsewhere. So, all of my career has been in the region and on both sides of the table. So, I started out, actually, with three benched-backed companies in the telecom space that managed one of the first venture funds for the region for a better part of a decade. Then launched to start my own payments company in Brazil, and then came back to the right side of the table to co-found Quona. But all along, the companies that I’ve been involved in have been bringing a market approach to solving the problems of society and making people’s lives better, right? And during the telecom boom, was really about laying the infrastructure for telecommunications, for internet access, for mobile connectivity. It was really cool to be a part of that, to be part of companies that scaled really rapidly in that space.

As I then moved to the venture side, began to invest in financial services companies kind of early on before it was before it was called FinTech. And when I left to start my payments company in Brazil, that was 2010, 2011, FinTech wasn’t even a term, right? But that company was focused on bringing, basically, account services to the unbanked in Brazil. Then called pre-paid, now is kind of morphed into what challenged banking is. So, think as a precursor to the challenge of banking. What I found compelling about co-founding Quona was addressing this massive need that people around, people across emerging markets have for access to good quality financial services that really do make a difference in their lives and make a difference in their businesses. So, as I look at Latin America, I saw the foundations set for a truly revolutionary movement in venture investing to support these companies that are addressing the massive needs. Taking advantage of the fact that the banks, frankly, have been fat and happy and ignoring a lot of segments.

And to be part of a venture that both is investing in companies that are going to deliver amazing returns for investors and are achieving massive scale. A lot of our companies are doing that. While at the same time, having a real positive impact on society, making people’s lives better, offering them products and services that we take for granted, that they don’t have access to. So, that’s a bit of what’s motivated me to get to this point, but it’s been a… I’m an old guy, right? So, this is almost a 30 year journey since I started working in Latin America as part of these you venture-backed or venture initiatives.

Dr. Chris Brummer: And Ben, what attracted you to FinTech in Latin America?

Ben Savage: FinTech itself, I think, is just kind of inexorable end point of my career, which started as a VC in the beginning of the dotcom bubble. And then I sort of left the venture business for actually 10 years and worked both in the hedge fund space, but also founded what in hindsight would now be called a FinTech company at the time, as Jonathan said, there weren’t really people talking about FinTech. And then came back to the venture business after kind of 10 years away to focus on what I believe is going to be a really generational transformation of the financial services industry globally.

And I think of myself, honestly, as a financial services investor first and a VC second at this point. And it really is the opportunity to just take the big picture of what’s likely I believe to happen in financial services over the next decade or two. Which is, a fundamental reinvention in many ways of how financial intermediaries actually function. And how the industry sort of sits between counterparties that want to transact with each other, and can now do that with much more efficacy, can bring more people into the financial system, and can actually create more things that people can transact between each other. All of which is kind of a turbocharge for GDP. I think FinTech is going to save the world, right? And I think it’s going to do that because 10 years ago there were enormous barriers to enter the financial services industry.

It costs a tremendous amount of money to just build a bank, to take deposits. Jamie Dimon used to talk about a regulatory moat for JP Morgan Chase. In the letter that he put out this week, he’s calling for regulation of the FinTech, right? So, it went from a moat to an anchor in not a lot of time. Because what’s happened is, one of the early indications of this transformation is that we’ve taken these very high fixed costs to launch financial services and turned them into variable costs. And it’s very analogous to what, say like Amazon, has done with cloud computing. And this Latin American market is the perfect place to kind of apply this. Where you have… It’s five banks in every country in the region, right? And I agree with Alejandro, it’s very different country by country. It’s not always the same five banks, but it’s five banks in every country that dominate the share.

Very different ecosystem than what you see in the US, or what you see in much of Europe where it’s more heterogeneous. This is the perfect sandbox for new entrants to show up and be disruptive, both by taking out the incumbents and by pulling people who are outside the system in. And at the same time, actually having a real impact on these economies. Because if you think about the classic function of financial services as intermediating transactions and boosting productivity, boosting growth, I think what we’re going to build with financial technology in Latin America is going to have a profound consequence on the region’s overall health and wellbeing economically as well.

Dr. Chris Brummer: Can I just pick up on that idea? Particularly the regulatory moat question, and also Jonathan’s original observation, again, about the banks in Latin America sitting sort of pretty. How hard is it? And I know it really depends country to country. I mean, Mexico, for example, sort of was very active and at least trying to signal to the rest of the world that it was going to take sort of an advanced posture on FinTech and financial technology. Also, as part of an effort to attract foreign direct investment. But how hard is it, if you do have a handful of legacy banks? Either regulatorily, or politically, or any other way to sort of enter into an entirely new financial ecosystem, whether or not you’re a homegrown FinTech or an international FinTech. Jonathan, in your experience, how hard… How much of a barrier is that? I mean, did you see a moat, if one will, in Latin America, that as a venture capitalist, you have to be aware of? Or does it operate in some way differently than here in the United States?

Jonathan Whittle: So, I think Brazil and its approach to creating space for financial technology companies is an example for many of the other countries in Latin America. Let me explain what I mean. The support of the regulator to create the space for FinTechs to arise and to thrive can’t be underestimated. Now actually, where that support is, is not present. Those FinTech companies that are able to figure it out, end up having a bigger regulatory mode. So, at some point, that competition just makes the whole environment more competitive. I would say more interesting, but more competitive. What we’ve seen in Brazil is a central bank that has been extraordinarily enlightened. These are career technocrats. Actually, very well paid, that are there for life and whose focus really is about financial inclusion.

And they recognize that in order to break the hegemony of these large banks, they need to create space for and support new entrants. And that has developed into a really strong conviction over the past few years, with very strong engagement with the FinTech leaders in community. And there’s some very concrete and specific examples of what they’ve been able to do. They’ve created special licenses for new entrants in the lending space, new entrants in the payment space. These are well structured, well instrumented licenses with very clear oversight, but also clear rules about how to be able to secure these. They’re now pushing forward with full open banking regulation, and instant payments regulation, which has forced the banks to allow for instant deductions from any bank account, anywhere, instantaneously that was implemented just in the last year.

Other countries in Latin America are following Brazil’s lead. Some successfully, some not so much. But I do think that part of the reason why financial technology has really taken off and is coming into its own over the past 2, 3 years in Latin America is tied to that support of the regulator. That makes it pretty clear what you need to do to stay on the right side of regulation and to secure the licenses and such that you need. Taking away that uncertainty, so that you can focus on product and execution, and not on these regulatory uncertainties. But, that’s not a common story across all of Latin America. Some are getting it right. Some not. The good thing is, the largest country that has the greatest weight, from an investment perspective, is the one that is far out in front in terms of support for the space.

Dr. Chris Brummer: I have to say that I can see where you’re coming from. I myself have personally been to Brasilia. You see up close how the country’s central bankers are very tuned into issues of financial technology. Jumping onto this conversation, Alejandro, clearly technology, GDP, and per capita income can all play an important role in impacting the shape of FinTech, as well as regulatory innovation. How do you see the mix of factors really shaping up?

Alejandro Sanchez: What Jonathan said is correct. Brazil is being the leader of intake development in Latin America. That’s 100% fine. And we are trying as a region to connect with that kind of pace of development. Just to complete kind of the regulatory framework, I also see two markets that are developing kind of roles to play in the FinTech aspect or ecosystem in the region. Mexico is one of the few countries with a law for FinTech. And Chile, they are actually writing currently the draft in the congress to have the first Chilean law of intake this year. But, as Jonathan said, this is a little bit different in Mexico, in Brazil, it’s being driven by the congress. Brazil, by the central bank. So, two regulators but at different vision. So, that was just trying to complete what Jonathan was saying, because yeah, Brazil is the perfect example for Latin America. But, we are following.

And as you were saying, there are other aspects to analyze the development of FinTech. One could be GDP. So, again, if we compare the total numbers of FinTechs, of course, Brazil is the largest and the most successful market in Latin America. But, there are other stories that I could just give our listeners, is for example, the investment, the foreign investment that each one of the markets has received. So, of course, Brazil, largest economy also considering GDP, number of FinTechs, and also capital raised. But if we connect these three points, we can see that other markets. But if we look at the ratios between GDP and capital raised, there’s a preference from the investor community to Brazil. There are other variables, but you can see those numbers, and we can ask personally the investor community if they are just having kind of preferred country and missing very interesting opportunities in other countries. And that’s just kind of connecting the numbers of GDP, capital raised, and FinTechs. So, yeah, Brazil totally is the largest one, but there are other aspects that we should be looking for.

Dr. Chris Brummer: That’s a Great segue back to Ben then. In a more concrete, venture capitalist standpoint, what do you look for? And maybe you can give maybe a concrete example of how exactly you go about identifying opportunities in Latin America. And what do the kinds of companies that you look for… Well, what kinds of features do they have? I mean, are you expecting different kinds of returns or different kinds of profiles as perspective investments then you would have if you were doing an investment, or funding, or providing capital for a founder in New York or Iowa?

Ben Savage: Yeah. It’s a great question, Chris. There’s a lot of depth to unpack in there. I mean, we are fairly focused on just one thing when we’re making investments anywhere in the world, which is the quality of the human capital that we’re partnering with. We really try to keep it as simple as we can and just back the very best entrepreneurs that we possibly can. And there’s a lot that goes into trying to think about what best means. And there’s a lot that goes into thinking about how you determine whether folks are good at the things you’re trying to do. But in a really stylized way, companies are just people at the end of the day. They’re people making decisions. And we think if we can find folks that are going to consistently make slightly higher than average quality decisions over and over and over again, that compounds over time into a company that will grow faster and be worth more than other companies.

At this point, I think there’s a bit of a playbook that’s somewhat universal for how to build a high growth company. The playbook has been exported from Silicon Valley all over the world. Now, not everybody knows the playbook as well as others, and it’s obviously evolving in real time. And you can’t just kind of rip out the plays and run them in Latin America, you have to adapt to the talent on the ground, to the culture and the ground, to the particularities of any given country. In some cases, of even cities. We have companies that are… Because part of the story in Latin America is mega cities that don’t exist, really, in Europe or in the US, in the same way that they do there.

And the regulatory regime as we’ve talked about, but really, it’s about picking the best people that you can. And that’s people whose values you believe in, who have a vision and a set of goals that you believe in. People who are attractors of capital and of talent. Because, so much of the way high growth enterprises are built today is they’re intentionally run inefficiently from a capital perspective, because capital is plentiful and cheap in order to grow as fast as possible. And so, I think we have a specific way of looking for that.

I wouldn’t say it’s fundamentally different, frankly, between what you’d look for, for someone in Iowa or in San Francisco or in Los Angeles where we are, versus in Bogota or in Sao Paulo. It’s just that you need somebody who knows the territory, right? And so, you wouldn’t… Like in the same way, if you’re trying to get from one part of town to the other part of town, sure you can buy a map, but it’s better if you just have somebody who’s been there and knows how to do it. And so, we’re looking for that.

Dr. Chris Brummer: So, now we’re getting to questions about not only opportunities, but also risk. Jonathan, you’ve obviously lived around the world and have had experienced navigating multiple cultures, regulatory ecosystems and economies. And given that rich experience, how do you engage risk? Whether economic, political, regulatorily, state-backed, with stated-backed institutions. And again, from this larger macroeconomic perspective, what specific risks to the region do you see?

Jonathan Whittle: Yeah. So, we’re a global emerging markets FinTech fund. So, that means that we have the ability to create a portfolio that is diversified across regions, across countries. I also think there’s a lot of value to being a specialist FinTech fund. Financial technology is a massive area, that are a lot of different segments within financial technology. And there’s a lot of innovation, a lot of just really cool things happening. Not just in developed markets, but in developing markets. And a lot of cross learnings that can inform us as investors and add value to our portfolio companies, as we connect the dots, if you will, between what’s going on in Latin America and Southeast Asia and India and Africa and the like. So, the part of our risk mitigation strategy is geographic diversification.

The other is really leveraging off of our understanding of this space to make decisions that also allow us to create a diversified portfolio across various sectors within FinTech. But look, investing in emerging markets, I think it’s really important. This is something that players that have less experience and or commitment to the regions sometimes don’t understand. And they get freaked out when it happens, is that crises come in waves in Latin America. At least that’s been my experience for 30 years. And I know that this has been the experience in Latin America since written history. We have to expect that this is a region where there is volatility. We need to be aware of that. We need to keep our calm when things get rough, the sun will come out again.

There’s actually opportunity when things are rough, to actually double down, to invest in thesis and in companies that others are shying away from because they’re nervous about the region. I think in the long term, things do go up into the right, but the volatility is extreme. And I think part of being an emerging market investor and in Latin America in particular, is you have to have a strong stomach. And perhaps if you ask me where concerns are, a lot of our companies are scaling very rapidly and they’re raising capital from international investors who are willing to write big checks for companies that are proven that they have that human talent and really a found product market fit, et cetera. I think a risk is in those downturns, those are the first investors to prep to pull back, right?

So, we need to be aware of that and be careful not to get too far out ahead of our skis. Particularly, spend on burn rates, et cetera. Because, the situation can change pretty quickly. We know that there will be periods of volatility in the future. And so, we just need to be keenly aware of that. But that’s one of the reasons, again, why we decided to have a global platform rather than just a Latin America platform. And there is room in this world for all kinds of strategies. That’s the strategy we’ve chosen is to diversify, but also leverage the platform that is truly global.

Dr. Chris Brummer: Jonathan, thanks so much for joining the show.

Jonathan Whittle: Thanks so much. It’s been a pleasure.

Dr. Chris Brummer: Ben, again, really interesting insight. Thanks so much for joining us.

Ben Savage: Yeah. Thanks, Chris. Great questions. Great discussion.

Dr. Chris Brummer: Alejandro, thank you so much.

Alejandro Sanchez: Thank you for the invitation and also to listen to the comments from Ben and Jonathan. Thank you.

Dr. Chris Brummer: No one has a monopoly on good ideas or innovation. And Latin America is demonstrating time and again, that the region’s firms and people are poised to redefine the larger conversation of not only FinTech, but also financial inclusion and access. Still, as we heard from our experts, the details matter as does patience. And because of the vast differences in countries, populations, GDPs, and levels of development, the challenges facing the development of a unified theory of the sector may prove too vast for even the digital economy to broach quickly. But therein perhaps lies, the beautiful gay.

Thanks for listening. If you enjoyed the show, please be sure to subscribe on Apple, Spotify, or wherever you get your podcast. And we’d love to get your feedback if you’d like to get in touch. Just hit me up at Chris Brummer DR. That’s @-C-H-R-I-S-B-R-U-M-M-E-R-D-R. We’d love to hear from you.