Latin America fintech funding bonanza: Over US$1bn registered in Q1

As regional and foreign investors pump resources into fledgling and established fintech ventures in Latin America, the second half of the year will present both challenges and opportunities for the sector, BNamericas was told.

The region’s large population of smartphone-wielding unbanked and underbanked citizens is blinking brightly on the radars of fintechs and investors.

Metrics reveal industry financing activity accelerated apace in the first quarter of 2021. Fintech funding rose 22% sequentially in the first three months of the year to US$1.29bn, a record high. Investors chiefly focused on the digital lending, neobank and payment segments.

Some players, those exposed to higher-risk borrowers, will face credit quality challenges while the pandemic-induced crisis is also a chance for the industry to highlight and consolidate the role it plays in the financial inclusion sphere, said Sebastián Olivera, founder of Uruguay’s fintech chamber and Spain country manager of tax returns support platform TaxScouts.

Economic fallout from the crisis is impacting borrower repayment capacity and, in turn, fintechs in some market spaces, in line with what is happening in some traditional bank lending segments. 

Olivera said: “We envisage a challenging second half, where we will see a high rate of fintechs closing and plenty of M&A activity and where, in a scenario of even greater credit scarcity for some sectors of the economy, fintechs can prove once and for all their major contribution as access channels to credit.”   

“The challenge for all those that bet on achieving growth at any cost is, now more than ever, to demonstrate that this growth translates into active users who can be monetized,” said Olivera.

The same challenge exists for lending platforms that, because of their risk strategy, now face significant portfolios of past-due loans, he added.

In terms of regulatory challenges, cybersecurity and identity verification are seen as key “pain points” that need attacking.

Collaboration is key, said Olivera: “The fintechs could be a major catalyst of the necessary shift towards digital resulting from the global scenario.

“Government-financial system-startup ecosystem collaboration has ceased being an option and become – in many cases – the solution and the most efficient way of achieving financial inclusion.”

FUNDING OVERVIEW

Ninety fintech funding deals were reported in 1Q21, up 40% from 4Q20, according to a report from regional fintech industry forum Latam Fintech Hub.

In comparison, in full-year 2020, 199 deals and US$2.99bn in investment were reported, up from 82 and US$1.99bn in 2019. 

Of the US$1.29bn pumped into sector ventures in the first quarter (fintech and insurtech), US$862mn corresponded to equity and US$431mn debt.

Of the 90 rounds – 20 of which were undisclosed – 76 were equity and 13 debt, according to the report. 

The digital lending, neobank and payment technology segments accounted for around 80% of funding.

Investors include regional and foreign venture capital firms as well as state development, multilateral development and investment banks.

Edwin Zácipa, co-founder of Colombian fintech chamber Colombia Fintech, said the record funding figures were good news for Latin America, and forecast a bumper 2021.

“This is a significant result,” Zácipa told BNamericas.

He said that funding for the whole of the year could register at US$4-5bn. “This is positive for the ecosystem.”

Factors behind the performance, Zácipa said, include the role played by digital financial services providers during the pandemic, the availability of venture debt financing, the sale of receivables and heightened M&A activity, particularly in Brazil.   

FUNDING BY COUNTRY

Over the first quarter, Brazil, Mexico and Colombia accounted for the bulk of funding, 74.9%, 16.0% and 3.7%, respectively. Chile was in fourth place, with 3.2%, according to Latam Fintech Hub 

BIGGEST DEALS BY COUNTRY

Brazil: Nubank – US$400mn

Colombia: Payroll/pension deduction loan company Alphacapital – US$40mn

Mexico: SME-focused lender and credit card issuer Konfío – US$60mn 

Chile: Immigrant community-focused lender Migrante – US$30.9mn

Peru: Credit card issuer B89 – US$3mn

Argentina: Investment platform Inviu – US$15mn