Nearly 10 years ago, I made a bold (for me) decision and decided to take the fall of my senior year off from college. Instead, I spent six memorable months backpacking across South America, where I quickly fell in love with the continent, the culture, the people, and so much more. That fall, I promised myself I’d find a way to link my professional life to this continent.
At the time, it seemed like a distant possibility but fast forward to today and I’ve finally been able to keep that promise I made to myself a decade ago.
It’s been the perfect time to jump back in. Latin Americans are the “heaviest users of the internet in the world”; local unicorns have “doubled in number and total value; and tech investment deals increased 210 percent in a five-year period, according to Atlantico’s Digital Transformation Index. Innovation driven by startups in the financial services is exploding across the region — and our team at Costanoa decided to expand our focus and begin backing Latin American founders. I’m thrilled to already have several investments in the region.
A strong combination of economic, technological and regulatory factors means Latin America is uniquely positioned in the world for outsized growth — and perhaps on track to outpace the US in some areas. Beyond my personal love for the region, there are three reasons we are especially bullish on fintech in Latin America.
Strong tailwinds from deep internet and smartphone penetration
The numbers today are impressive. Internet penetration stands at 70 percent, handily surpassing China and India at 59 percent and 50 percent respectively. Similarly, 67 percent mobile internet penetration outstrips China (56 percent) and India (50 percent). Smartphones comprise “69 percent of all mobile connections in Latin America”; by 2025, it’s predicted to reach 80 percent.
The pandemic also catalyzed change that benefits fintech. In Brazil alone, digital payments are skyrocketing, with ecommerce alone increasing penetration by 74 percent year over year (in a $120B online payments market). Mexico is projected to reach an ecommerce market volume of $21.8B by 2024.
A population that skews somewhat younger — as is the case for Brazil, Colombia, Chile, Mexico and Argentina — is also a strong positive signal: more digitally conversant and/or native users have a natural comfort level for these technologies, lowering barriers to widespread adoption.
A supportive regulatory environment and a rising middle class encouraging innovation
Regulation can cause innovation to flourish — or stifle its growth completely. In Latin America, clever policy has made it decidedly the former. Across the region, for example, laws designed to limit tax evasion have also supported fintech development.
In 2014, Mexico mandated that all businesses must document transactions through the use of digital invoices. In the subsequent decade, most Latin American countries, including Brazil, Colombia, Argentina, and Chile, passed their own versions of this law. As a consequence of this legislation, start-ups see real opportunity to optimize and meaningfully impact the digital invoicing process. This is just one example, but governments across Latin American countries have adopted policies that help promote financial sector innovation.
In Mexico, telecom reforms have paved the way for digital wallets and payments, through “lower costs for mobile phones and data [plus] more connectivity and usage.” Similarly, financial regulation reform — including “‘know-your-customer’ requirements” for banking — have opened access to financial institutions to wider swaths of the population. More people, the report notes, can now get debit cards quickly through ubiquitous chain convenience stores or even apply through their mobile devices for credit or debit cards, with home delivery of the card just hours later. Even large established institutions are jumping on the train: the Brazilian Central Bank launched PIX, a payments platform, in early 2021.
In short, policy is proving to be an accelerant to fintech growth. Additionally, the rising middle class across the region has made it clear that current banking systems, primarily designed for the affluent upper class, are not serving these populations effectively. This has created a leapfrog opportunity for fintechs. Challenger banks and platforms aimed at digitizing financial services are taking off on the back of increased demand from the rising middle class for access to financial services, such as credit.
A remarkable entrepreneurship culture is increasingly evident
The Latin American start-up ecosystem is indisputably on the ascendance, raising $9.3B in “just the first half of 2021.” Likewise, this year saw the emergence of five unicorns in the region, including Brazil’s ecommerce platform Nuvemshop and Nubank. As these businesses have grown, the entrepreneurial mindset has taken off in the region.
The quantity and quality of the companies we meet weekly has blown us away — their founders are technically savvy, interested in building great company cultures, see achievable growth paths, and are motivated to get there. There is a deep bench of technical talent across Latin America, with particularly high concentrations in Mexico, Brazil, and Colombia, and as startups become more ubiquitous, engineers are increasingly willing to take risks and join early stage companies.
We’ve learned a lot from the fintech investments we’ve made over the last nine years, adding companies like Noyo, BillGO, Highnote, and Vic.ai to our portfolio and working hand-in-glove with founding teams. It’s why we’re looking with great anticipation to Latin America as a proving ground for new and interesting fintech applications.
If you’re starting a related company or love talking about Latin America, payments, or fintech in general, don’t hesitate to email me at [email protected] or slide into my DMs on Twitter @amyecheetham.