Accelerating venture capital flows to Latin America signal that “it is now the best time” to invest in the region’s budding fintech market, Driss Temsamani, the regional head of digital channels at Citigroup Inc., told S&P Global Market Intelligence.
Funding to Latin America’s fintech space has topped $481 million through 23 deals during the second quarter of 2019, according to a report by CB Insights, which tracks investments in the space. For the first time, quarterly flows to the regional financial technology companies surpassed that of India and China, which saw $350 million and $375 million, respectively, in the quarter.
“This clearly gives a projection that it is now the best time to come to Latin America,” Temsamani said in an interview on the sidelines of the Argentina Fintech Forum in Buenos Aires. “Business models are much more mature than they were about five years ago. Many [companies] have been filtered out, but those that remain have scale and adoption and that is why they succeed in attracting those investments.”
A $400 million financing round by Nu Pagamentos SA, the Brazilian online bank, during the third quarter suggests that there may be sustained momentum. Two other fintech startups in Brazil, Quinto Andar and Ebanx, have garnered valuations above $1 billion, achieving the so-called “unicorn” status.
Temsamani noted that the price points for LatAm fintech investments are now “very attractive” in comparison to more mature markets; the ability to invest at the “right moment” in Europe, Asia or the U.S., he said, can now be “much more expensive.”
Investment scarce
Though now considered a top-growth market, fintech investment levels to Latin America have been scarce in recent years, leaving a rising crop of fintech entrepreneurs on the hunt for fresh capital. As of 2018, 1,166 Latin American fintech startups where registered, according to a joint research study but the Interamerican Development Bank and Finnovista. Many are using the additional funding to boost regional expansions.
In a region highly dependent on cash, digital payments startups account for one of every four fintechs operating in Latin America. E-wallet providers, the Citi executive argued, are crucial to the digital money ecosystem.
“In most cases, what holds a higher degree of maturity is payment intermediaries, which includes e-wallets and different payment alternatives, and also [fintechs] within the consumer to corporate segment,” Temsamani said.
“Whether it’s a small or large company, payments from the end-consumer are fragmented — credit and debit cards, checks, cash, prepaid cards,” he said of the Latin American market. But companies can begin to consolidate these channels with an e-wallet, he noted. “This is already digitizing cash. We will begin to see an informal economy with 40% to 50% on cash migrate toward a formal economy with digital money. It’s a radical change, and it is what you see in China or India today.”
Although funding and digital payments are picking up, the share of digital transactions in the economy still falls short of that of developed geographies. Several fintech specialists at the forum agreed that usage of digital financial services continues to lag substantially, even as smartphone penetration rates have expanded to allow nearly universal access to such products.
Discounts
In order to boost digital payments growth, Temsamani advocates for discounts as a key marketing tool. “People who today pay with cash might get a discount on the price if they negotiate. Others might drive for an hour in order to purchase a product at a discount without realizing how much they’ve spent on gas. Its the concept of discount that motivates them,” he said.
The executive suggests that offering price discounts when paying digitally — “10% or 20%,” he suggests — can drive more consumers to embrace the technology.
“It’s similar to the cost of dealing with cash in terms of insurance, security,” he added. “The industry should figure that number out and provide it as an incentive to the end-consumer.”