LATAM Fintech Boom: Beyond the Hype & Investment

Fintech's Rapid Growth in Latin America

Among global startup ecosystems, the fintech sector in Latin America currently stands out as particularly dynamic. Investment capital is being directed toward financial technology firms within the region at an accelerating rate, fostering a surge of startups that are rapidly generating private market value.

While the substantial amount of capital entering LatAm fintech startups might seem excessive, several factors justify this influx. This does not imply that every investment and subsequent valuation increase is entirely rational.

Understanding the Investment Boom

However, a number of underlying conditions contribute to the impressive venture capital totals being secured by these companies, making them more justifiable than a first glance might suggest.

Favorable regulatory environments in certain Latin American countries are actively supporting the development and adoption of fintech solutions.

Furthermore, several startups, including Pomelo, Belvo, and Swap, are focused on constructing foundational infrastructure. This infrastructure aims to broaden access to financial services throughout the region.

The Latin American fintech market is also experiencing an increase in successful exits. This indicates not only the potential for investors to recoup their investments in the region’s startups, but also the possibility of reinvesting previously locked-up capital, creating a positive feedback loop.

Capital Inflow and Market Dynamics

Before delving deeper into the rationale behind this investment surge, it’s important to acknowledge the sheer scale of funding being channeled into Latin American fintech startups this year.

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The increasing exit activity demonstrates that capital can be successfully returned to investors. This, in turn, allows for the reinvestment of funds, further fueling the growth of the startup ecosystem.

Significant Capital Inflow

Data from CB Insights reveals that while Latin American fintech companies experienced substantial growth between 2015 and 2020—raising $138 million and $3.14 billion, respectively—2021 represents a uniquely significant period of expansion.

It has become increasingly common to observe increasing dollar amounts in venture capital markets or specific startup sectors reaching unprecedented levels in recent quarters. However, these records are frequently accompanied by stable, or even declining, deal volumes. This trend is not evident in the LatAm fintech landscape.

Both the total funding amount and the number of deals in the region are poised to surpass the figures from 2020 and 2019, and have already begun to do so.

While the overall dollar value will ultimately be more notable than the deal count, both metrics are projected to exceed previous records.

Quarterly Performance

Focusing on quarterly data rather than annual or year-to-date figures, Latin American fintech startups recently achieved their second-highest quarterly performance ever. The third quarter of 2021 was only surpassed by the second quarter of 2021.

Excluding the second quarter for comparison, Q3 2021’s results are more than double any previous quarterly record.

Although Q2 2021 was exceptional, the numbers from Q3 are remarkable in their own right. The $2.58 billion raised by financial technology startups in the region during the second quarter exceeded the total funding for any prior year, with the exception of 2020.

This represents an extraordinary achievement for a single quarter.

Funding Stage Distribution

Fortunately for entrepreneurs, the funding has been distributed across various stages of startup development. Thus far in 2021, 68% of deals for LatAm fintech startups have been early-stage, 14% mid-stage, and 12% late-stage.

The proportion of late-stage deals is slightly higher than anticipated, but the pipeline of new ventures appears robust.

Driving Factors

Several factors are contributing to the increase in funding, deals, and early-stage startups.

The Shifting Landscape of Latin American Fintech

Brazil frequently emerges as the primary focus when discussing the fintech sector in Latin America. This nation served as the birthplace of the prominent neobank, Nubank, and continues to demonstrate substantial activity within the industry.

According to data from CB Insights, Brazilian firms – specifically MercadoBitcoin and Cora – secured two positions among the ten largest Series B fintech funding rounds globally during the third quarter. Furthermore, a notable development occurred with TC, previously known as Traders Club, achieving the eighth-largest global IPO by valuation, listing on the Brazilian B3 stock exchange.

Brazil’s progress is significantly aided by recent regulatory advancements, including the nationwide electronic payment system Pix and the Open Banking framework. Bruno Yoshimura, a general partner at ONEVC overseeing the firm’s Brazilian operations, highlighted the Central Bank’s positive influence. He stated, “The Central Bank has been performing exceptionally well, and Pix represents a truly impactful structural shift.”

Yoshimura further noted the rapid adoption rate, stating, “The fact that over 105 million individuals have registered within a relatively short timeframe is remarkable.” He anticipates that both Open Banking and Pix will foster a more competitive environment, stimulating further innovation.

However, opportunities also exist for startups operating within more complex economic climates. Gabriel Gruber, CEO of Argentine fintech Exactly, playfully remarked on Twitter that Argentina’s adoption of policies supporting cryptocurrency was unmatched.

His comment, however, wasn’t a reference to intentional promotion like that seen in El Salvador. Instead, it was a commentary on the impact of foreign exchange controls and the government’s monetary policies, which are driving demand for alternative financial solutions. Irigoyen added, “The utility of cryptocurrencies is particularly evident in markets characterized by unstable currencies and/or significant inflation.”

Latin American Fintech Landscape

Providing financial technology services in Latin America continues to present greater challenges compared to other global regions, particularly regarding cross-border operations. However, companies like Belvo, Pomelo, and Swap are actively working to streamline these processes.

Gaston Irigoyen, an Argentine entrepreneur, recently stated to TechCrunch that launching a fintech company in a Latin American market currently requires approximately 18 months. Pomelo’s objective is to reduce this timeframe, aiming to align the speed of market entry in LatAm with that of Europe.

Infrastructure and Development

Belvo, a fintech API startup, is focused on improving the underlying infrastructure. Co-CEO Pablo Viguera recognizes that this is a relatively recent development.

He explained that offering the fintech services and products currently attracting investment was previously a lengthy and resource-intensive undertaking. This hindered companies from realizing their potential. While significant progress has been made, achieving parity with Europe, or even the U.S., still requires further advancement.

Unmet Needs and Opportunities

Latin America possesses a distinct advantage over more established markets: a larger proportion of unmet financial needs. This translates into increased opportunities for startups.

According to Pomelo’s Irigoyen, roughly 50% of the population remains unbanked. Consequently, fintech companies have been instrumental in modernizing and broadening access to financial services for several years, resulting in robust and widely adopted products.

Market Underpenetration

This observation aligns with the market analysis presented in Nubank’s F-1 IPO prospectus. Nubank emphasized that the markets in which it operates are significantly underserved in terms of financial services when compared to developed economies.

Nubank attributes this to “prohibitively high costs for financial services,” stemming from a “highly concentrated” banking sector in Latin America.

The company’s prospectus argues that this concentration, while maintaining the status quo for established banks, simultaneously fosters a favorable environment for disruption. New entrants can leverage advanced technology, data analysis, and superior customer service to create a more competitive landscape.

Accelerated Adoption

Irigoyen also highlighted the role of the recent pandemic. It has “fast-tracked both financial inclusion and the adoption of digital payment methods,” further accelerating the growth of the fintech sector in the region.

Significant Investment Meets Intense Competition

The surge in adoption of digital products and services spurred by COVID-19 has simultaneously reshaped the employment landscape. This shift hasn't always benefited startups, particularly within the Latin American fintech sector. Fueled by substantial new capital, LatAm fintech companies are actively deploying funds, leading to accelerated recruitment efforts.

However, these companies are encountering increased competition, both from domestic rivals and larger international firms that have become more adept at remote hiring since the pandemic began. As Viguera explained to The Exchange, “securing qualified personnel is consistently difficult, and demand remains high.”

This isn't unexpected, but Viguera further highlighted that the pandemic has prompted “a growing number of international companies to recruit in Latin America, recognizing the region’s vast talent pool.” This presents opportunities for local professionals to earn higher incomes and equity. Conversely, it creates a more challenging environment for local startups, who now compete not only with peers but also with established global technology companies possessing stronger brands and greater financial resources.

The Latin American venture capital landscape for fintech startups presents additional complexities. Yoshimura of ONEVC observed that their firm’s “investment rate has increased to 2.2x compared to last year, with fintech representing 50% of our deals this year.”

These figures suggest a rapid pace of fundraising among regional fintech startups, intensifying competition for talent. Furthermore, the sheer number of startups within the sector is expanding, exacerbating the challenges in the talent market.

The influx of capital is also heightening competition among startups as they strive for market share. Belvo was asked whether the increased capital investment was intensifying competition. Viguera acknowledged “regional competitors,” but emphasized that Belvo’s “pan-Latin American” service offering provides a distinct advantage.

The co-CEO also conceded that the market is “expanding, which we view positively for the industry, as more companies recognize the transformative potential of APIs in financial services throughout the region.”

While Latin America has the potential to foster numerous fintech success stories, the substantial capital inflows will likely maintain a competitive talent market and a fiercely competitive landscape until market consolidation eliminates smaller companies.

The Pursuit of Significant Returns in Latin American Fintech

Despite increasing competition within both the product landscape and the market for skilled professionals, the allure of the Latin American fintech sector remains strong for venture capital investors. This is because their primary focus lies on identifying investments capable of generating exceptionally high returns – those that can effectively return an entire fund.

As long as Latin America continues to foster companies with the potential for such substantial success, it will consistently draw significant venture capital investment.

The anticipated Initial Public Offering (IPO) of Nubank serves as a prime example. A detailed analysis of the company’s financial performance was recently conducted by The Exchange.

According to Yoshimura, Nubank is poised to redefine expectations for what is achievable within the Latin American market.

Prior to Nubank’s remarkable growth, there was a lack of compelling examples of venture capital-backed, business-to-consumer (B2C) companies attaining a substantial, double-digit market share within a large-scale industry.

Nubank’s forthcoming IPO demonstrates the potential to not only establish unicorn companies in Latin America, but also to cultivate decacorns, even while challenging established players in heavily regulated sectors.

The investor further explained that Nubank is establishing a benchmark for the scale of success a business can achieve during an IPO, prompting venture capitalists to more carefully consider the potential growth trajectory of companies under optimal conditions.

Consequently, Nubank’s IPO is anticipated to be a pivotal moment, setting the tone for future investment. A successful IPO, characterized by strong pricing and subsequent stock performance, is likely to sustain the current influx of capital into LatAm fintech.

A neutral IPO outcome may not be sufficient to significantly curtail investment. However, a considerably unfavorable result could potentially induce caution among investors.

Further Coverage

The Exchange will provide comprehensive coverage of the Nubank IPO as it unfolds.