You, me, and the world already know investors are extremely interested in fintechs in Latin America. In 2021, financial services startups received US$ 12.9B in 313 deals. Here's something you might not know: B2B fintechs, the ones that provide their solutions to other companies, represent a 44% piece of that pie.
Yep, that's a huge chunk. And there are many reasons for the growth of consumers interested in financial services, and companies willing to satisfy that need by hiring B2B Fintechs.
Ever-increasing access to the internet and a sustained young population are living with financial services that are still mostly serviced by incumbents. In Latin America, these incumbents concentrate between 70% and 85% of the market. This comfort zone leads to customer dissatisfaction with the current state of services and a huge chunk of the population excluded from the financial system or underserved. By supporting excluded or underserved customers and companies, B2B fintechs can be greatly beneficial in producing financial equality, social impact, and economic growth in the region.
Even after a lot of years of growth in the fintech space, in Latin America and the Caribbean, there are only 55% of bank account ownership, 41% of debit card ownership, and 19% of credit card ownership.
Do you still see plenty of space for disruption here? We do.
That's why we investigated further on The LatAm Tech Report – which you can download for free, just saying. Want a glimpse? Here are five signs that we're at a turning point for the B2B Fintech market.
The fintech world is an ecosystem in and of itself. What began way back in the early 2000s, with PayPal offering the first alternatives to banking, evolved to a whole different scale. We're in a new game right now, with neobanks, lending and payment platforms, personal finance, wealth management startups, and much more.
Don't know what that is? Don't worry, we all went through that same phase. Open Banking is the sharing of data and services among licensed financial players. And that's a feast, particularly for APIs, software that allows two applications to talk to each other.
Open Banking allows APIs to do their work, and that in turn offers infinite possibilities for networking between fintech players, product and services innovation, and financial inclusion for a huge chunk of Latin Americans.
And by including more people in the financial system in a region that still has significant groups of unbanked or underbanked people and businesses, fintechs can increase their market size and keep on growing.
That helps explain the extraordinary expectations regarding Open Banking – which was worth US$ 7.2B globally in 2018 and is expected to jump to US$ 43T by 2026. Some examples of B2B Fintechs in Latin America that are taking advantage of this trend are Belvo and Pomelo.
Have you ever heard the phrase "every company will be a fintech company"? It was said by Angela Strange, a general partner at the well-known venture capital firm a16z, in an episode of our Latitud Podcast.
That means every company can offer financial products and services thanks to Banking-as-a-Service, enabled by your most recent friend, Open Banking.
BaaS leads us directly to the holy grail of embedded finance: with it, retailers, gig economy players, marketplaces, and other non-financial companies can offer credit cards, tailored loyalty programs, and even advanced salaries.
Think of it as a redefinition of an outdated infrastructure that has served basically the legacy players for decades, in which transactions were only made a certain way with financial institutions.
That seems extreme to you? Well, in fact, embedded finance is already imprinted in our minds as something natural. EY found that 68% of customers were willing to consider a financial service product offered by a non-financial service company.
Our bet at Latitud is that BaaS will be the real leveler of financial inclusion in Latin America. And as such, it's also big business: in 2020, BaaS generated US$ 2.41 billion globally, and it's expected to rise to US$ 11.34B by 2030.
Like in Open Banking, some examples of B2B Fintechs in Latin America that are taking advantage of this trend are Belvo and Pomelo.
Lending is the crux of the problem for businesses in Latin America and an essential space for disruption. The numbers are staggering: the regional financing gap is close to US$ 1.2T, the second highest in the world for SMEs.
Traditionally, you'd need around a year at a traditional bank and minimum capital requirements in order to request a loan. Processing that loan wasn't fast either, and the rates would be quite high, due to a historical lack of competition.
That's because they are still hard for traditional banks to assess in terms of risk, which in turn means it's hard for millions of SMEs to have accessible credit. It can be so difficult that, according to a 2022 study by tech company Mambu, 56% of owners look for company money among friends and family first.
In that same study, 68% of LatAm SME entrepreneurs said they eventually couldn't access financing or, if they did, it was insufficient. And that's a problem that goes beyond these founders. Without it, they couldn't:
Cue the lending fintechs, which can originate the loans themselves or charge fees to facilitate them for financial institutions. Now there's a growing number of credit and microcredit fintechs aiming at customers traditional banks reject or underserve. Currently, 1 in every 5 fintechs in LatAm is in the lending business. These fintechs work across a lot of business models, from Buy Now Pay Later (BNPL) solutions to complete lending platforms.
One interesting trend in the landscape of B2B lending is revenue-based financing. It provides working capital for companies without requiring a lot of capital requirements upfront or diluting the company's stakes. The data availability means that B2B Fintechs in this area can offer flexible payment schedules, that adapt to the sales and revenue cycle of each business.
Plus, these alternatives born in the digital space fill in a gap commonly seen in the world of brick-and-mortar lenders: the lack of banking infrastructure in many places in Latin America. Before, if there was no physical bank branch in their cities, businesses couldn't be clients of a bank and ask for a loan. Now, they only need access to the internet to become a client of whatever digital lending fintech they choose.
Of course, there are also fintechs focused on helping these brick-and-mortar lenders bring in more efficiency – let's remember incumbents still own between 70% and 85% of the financial services market in Latin America. By modernizing their credit analysis and concession process, these B2B Fintechs in the digital lending space are also helping to increase financial inclusion.
There are many new ways of walking the lending requested > loan granted road. And that is good news for everyone – from businesses asking for loans to B2B Fintechs that serve these businesses or other lending institutions.
Some examples of B2B Fintechs in Latin America that are taking advantage of this trend are Fairplay and Truepay.
While we're on the talk about helping businesses, they really are a huge opportunity for B2B Fintechs – and not only for the ones in the lending space.
According to SELA (Sistema Económico Latinoamericano y del Caribe), there are almost 13 million SMEs in Latin America. They account for 90% of the companies and 25% of the regional GDP.
That means enormous opportunities for SME-focused B2B Fintechs. And after the worst moments of the pandemic and the urgent demand for digital transformation, their interest is rising. An Intuit study showed that almost 50% of Brazilian SMEs were now more digitally adept than before.
As dLocal's Sergio Fogel said in our recent Vamos Latam Summit, businesses usually know exactly what tools they need – yet they need someone to build it. "The B2B client probably knows the industry better than you do, but they have issues executing a product."
In The LatAm Tech Report, we pointed out that there's especially a window of opportunity for B2B Fintechs working in the back-office, in segments such as accounting, finance, and procurement. There's a customer base out there: a 2020 LABS study found that 43% of SMEs in Brazil still used paper-based financial management.
Having a legal business means fulfilling repetitive and time-consuming tasks, such as expenses, payroll, and taxes management. These can now be automated and/or outsourced to scalable fintech companies, leading to more transparency of information, efficiency of resources, and eventually profitability.
Some examples of B2B Fintechs in Latin America that are taking advantage of this trend are BHub and Clara.
B2B Fintechs are not only restrained to the back-office when helping other businesses. They are also in the retention space, offering advanced salaries to help companies retain their best talents and customized loyalty programs to retain their customers.
Installment payment players are showing up across different verticals, and payroll is one that has gathered very interesting traction. Some payment platforms offer credit cards and salaries advancements solutions to employees.
Like B2B Fintechs in other segments, these offerings are also aimed at the unbanked or underbanked populations, which through their employers have access to different financial services like never before.
Another front is loyalty programs. Programs that help retain and reward customers have existed almost forever. But this time is different: APIs enabled by Open Banking have allowed fintechs to design specific reward programs for companies, that will help them build better and deeper relationships with their customer.
Some examples of B2B Fintechs in Latin America that are taking advantage of the on-demand payroll trend are Castor and Xerpa. On the customized loyalty program front, we have Reworth.
Now that you know the current and short-term trends for B2B Fintechs, want to know what are the opportunities and challenges for B2B Fintechs in the medium and long term? Download the full version of The LatAm Tech Report.