Jair Bolsonaro’s Contentious First Year in Office, Antonia Rojas Eing Joins ALLVP as the Youngest Female VC Partner in Latin America, Key Opportunities for Latin America’s Economies in the Decade Ahead, and More
Other featured stories include: Mexico’s Role as a Top Neobank Market to Watch in 2020, Five Opportunities for Fintech Disruption in Latin America, Layoffs Begin at SoftBank-Backed Delivery Company Rappi, and How Visa is Working to Develop Mobile Payments in Latin America
Jair Bolsonaro’s Contentious First Year in Office
Since he took office on January 1st 2019, Brazilian President Jair Bolsonaro has quarrelled with an array of foreign leaders and celebrities. Senior officials in his government express concern, especially when NGOs threaten to promote boycotts of Brazilian products and governments reconsider whether to ratify trade deals.
The economy minister, Paulo Guedes, claimed the world is “misreading” Mr. Bolsonaro during an interview in Brasília, the country’s capital, last month.
He has “bad manners, but great principles.. Instead of throwing stones at Brazil” people should be applauding, he says (The Economist).
Mr. Guedes hopes to shift the conversation from deforestation and police brutality to what he believes to be the president’s main project: a radical transformation of the nation’s economy that will enrich all Brazilians, including the poorest. This vision is “unapologetically liberal, or neoliberal, as its left-wing critics call it” (The Economist).
Guedes blames most of Brazil’s problems on the overgrown state, which “spends a lot of money on the wrong things”.
As reported by The Economist, since the 1980s, public expenditure as a share of GDP has trebled to 42%, a level similar to that of European welfare states. The quality of services, however, is that of much poorer countries.
Brazilian bureaucracy and complex tax system impede private enterprise, although the state coddles some industries at the expense of everyone else.
Forty years of closed markets have protected rent-seeking industries, Guedes says. “Imagine, 200 million suckers being exploited by six banks, six shipping companies. Everything in Brazil is six.”
Guedes proposes to simplify the tax system dramatically: reducing rates and expanding the base, privatizing nearly all state companies, and (after cutting red tape to enable businesses to withstand competition) opening the Brazilian economy to the world.
Bolsonaro’s government has made a start on this agenda, with a constitutional reform of the pension system which will save the government 855 billion reais ($210 billion) over ten years to lessen the danger that public debt will reach crippling levels. The reform, which took shape in 2019, grew confidence and subsequently led to a recovery in investment (see graphic below).
Graphic Courtesy of The Economist
The economy grew by 0.6% between the second quarter and the third, more than expected. Annual growth for 2020 is forecast to be at least 2%, which could make Brazil one of Latin America’s fastest growing economies.
It is not yet clear what will follow pension reform. Mr Guedes’s plans are a “wish list, rather than a reform strategy”, says Ricardo Sennes of Prospectiva, a consultancy.
Antonia Rojas Eing Joins ALLVP as the Youngest Female VC Partner in Latin America
Antonia Rojas Eing, the youngest female partner of Latin America’s major VCs, has joined ALLVP as a partner.
She first entered the investment world in Germany with a real estate angle.
“I learned the discipline and analysis needed to make an investment decision, and how to see the world from an international perspective,” she noted (Tech Crunch).
Rojas Eing has also worked on the startup side as well, pursuing an entrepreneurial project with an ed tech startup a few years ago. She experienced how difficult it was to raise early-stage capital in Chile: an issue she now aims to solve. After some time in the Bay Area pursuing a master’s degree in social entrepreneurship, she returned to Chile to invest in seed-stage startups with a fund called Manutara.
After months of mentorship with ALLVP, she will be joining the Mexico-based fund as their third partner. Rojas Eing says her first focus will be on enterprise SaaS in Colombia, Mexico and Chile.
“Latin America is the biggest untapped VC opportunity in the world, and ALLVP is all about transforming and improving the way Latin Americans lead daily lives,” she said.
As reported by Tech Crunch, ALLVP is one of the most active new wave funds in Latin America right now. The firm has more than $200 million in assets under management across three portfolios, having closed its third $100 million fund in 2018.
The firm, founded in 2012, was an early backer of Cornershop, the Chilean grocery delivery startup that raised $31.7 million and exited to Uber after a $225 million deal with Walmart unraveled after being blocked by antitrust regulators in Mexico. ALLVP also invested in Colombian cloud kitchen MUY and Mexican Opendoor clone Flat.
The male-dominanted industry presents a huge opportunity to invert the vast gender imbalance. Leaders in Latin American tech should implement tactical measures to encourage positive masculinity in its rapidly expanding startup culture, and subsequently promote more women being assigned to leadership roles at startups and funds.
“As far as ALLVP’s track record goes, partner Federico Antoni says that female founders made up 33% of their first fund, and that 20% of the companies in their second portfolio were co-founded or founded by a woman. The third fund has yet to invest in a female entrepreneur” (Tech Crunch).
Expanding the pipeline to reach more female entrepreneurs is a focus for ALLVP, and the fund says that while the firm’s team meets with only a third of pipeline opportunities, they offer meetings with any female founder.
Key Opportunities for Latin America’s Economies in the Decade Ahead
Latin America’s macroeconomic challenges seem unlikely to be solved soon. Currently, the region suffers from insufficient investment spending and fiscal accounts. Governments are spending beyond their means, and fiscal deficits averaged more than 4% of GDP in 2019, according to America’s Quarterly.
However, looking to 2020 and beyond, there are opportunities that could help the region boost its economic prospects.
While America’s Quarterly predicts an improved economic growth trend for the region this year, these gains will come from an undemanding base of comparison and are likely to be relatively modest. The one exception is Brazil, which is expected to see a GDP growth at or above 2% when taking into consideration the reduced domestic interest rates, increased investor and consumer confidence, and a relatively light political calendar. Mexico’s growth is expected to improve to a sub-1% rate due to stabilized oil production, higher fiscal spending and greater infrastructure investments. Argentina’s economy will likely experience a third consecutive year of contraction amidst its complex sovereign debt restructuring.
The region should be able to provoke sustainable domestic-led growth in the 2020s. In addition to promoting private investment and balancing fiscal accounts, policymakers in the region should focus on three key areas:
The first is to take advantage of the region’s “demographic bonus” and tap its female workforce.
As reported by America’s Quarterly,
“Latin America is fortunate to have a growing working-age population and declining dependency ratio. If accompanied by adequate investments in education, healthcare and infrastructure, this should support economic growth.”
Latin America also has vast potential for a “gender bonus” in the long run as its female labor force participation rate currently stands at just 57% – far below the 82% rate for men in the region and far behind most other countries.
A related task is bringing the informal sector into the economic mainstream. Informal employment- a large portion of which of women and younger workers- is prevalent: reaching almost 50% of the labor force in countries like Mexico and Colombia. A large informal economy uses public goods and services without paying taxes to support them, which can weigh heavily on a country’s growth. Formalization would improve economic growth potential and standards of living on a more sustainable, long-term basis.
The second opportunity is technological innovation. The region’s startup ecosystem continues to grow considerably, thanks in part to programs supporting entrepreneurship. In Brazil, fintech company PagSeguro Digital has been instrumental in lowering payment processing fees for both consumers and business owners. Governments can modernize and diversify their economies by intensifying technological innovation efforts.
The third opportunity is sustainability. Latin America ranks better than the average emerging market in the World Economic Forum’s Environmental Performance Index, but still trails developed countries. As home to more than 40% of Earth’s biodiversity and over 25% of the world’s forest cover, the region must promote initiatives to help sustain its development for the long term.
Mexico: A Top Neobank Market to Watch in 2020
Mexico- the second-largest economy in Latin America- counts for an estimated 42 million unbanked consumers. Only about one-third of small- and medium-sized businesses (SMBs) have access to banking loans.
As an increasing number of digital players recognize the opportunity to fill these gaps with digital banking and business lending products, neobanks- which are just starting to take off in Mexico- and will likely see a big growth year in 2020.
In addition to the underbanked conditions in Mexico, the country is a prime market for neobanks thanks to its favorable regulatory landscape and consumer demographics.
Regulators are also seeking to amplify financial inclusion. Banks’ lack of transparency and previous scandals have yielded low consumer trust and low financial inclusion. Mexico’s finance minister, Arturo Herrera, is spearheading efforts to increase financial inclusion.
The government has been looking to fintechs and banks to reduce cash in circulation, in effort of diminishing money laundering and integrating more Mexicans into the formal economy. Authorities have enacted some of the most supportive regulations for fintechs, including a fintech law introduced in 2018 (which will take full effect in 2020) that provides a regulatory framework for players looking to create new fintechs. This strong government support could ultimately help accelerate neobank growth.
As reported by Business Insider,
“The market is digitally engaged — which could make consumers receptive to neobanks. Mexico has a consumer fintech adoption rate of 72%. The median age in Mexico is 28, while 41% of the population is 25 to 54 years old, creating a wide base of young, tech-savvy consumers to which neobanks can cater. More than 60% of Mexicans used smartphones in 2017, a 10-percentage-point increase from 2015, and that figure is expected to tick up to 76% by 2025, per GSMA data.”
Concurrently, internet penetration stands at 67%: almost 10 percentage points higher than the global average. Mass penetration of smartphones and internet access makes digital-first services (like neobanks) easily accessible to the majority of the Mexican population.
There are two main areas where Business Insider expects to see neobanks in Mexico build momentum this year. Notable neobanks currently operating in each segment include:
1) Consumer lending
Only 15% of adults in Mexico have access to a credit card, and only 3% of credit applications from middle-class consumers are approved. This climate is attracting neobanks from other regions, such as Brazil’s Nubank and Spain’s Bnext, to expand into the country.
A notable neobank is Klar- which launched its digital bank account in 2019- and boasts a 5-minute account opening process and no minimum balance or transfer fees. Klar aims to provide underbanked Mexican consumers with an alternative to traditional credit card and debit services. To accomplish this, it assesses creditworthiness on the basis of account history rather than going through a credit bureau.
2) SMB lending
While SMBs account for nearly 90% of businesses in Mexico, there is a substantial lending gap for these businesses. Konfio is a Mexican fintech that provides SMBs with unsecured loans. The company has reached more than 1 million clients by leveraging technology to meet their lending needs.
As neobanks scale, another way to address the SMB lending gap in Mexico could be to partner with incumbents to leverage each other’s competitive advantages. Incumbents could provide the capital for SMB loans which can go through neobanks’ systems.
Five Opportunities for Fintech Disruption in Latin America
Over the past four years, investment in Latin American startups has more than quadrupled. Growth rounds are become increasing larger and more common, as notable international investors including Softbank, Tiger Global Management, and Naspers pour capital into companies looking to disrupt markets like Brazil, Colombia, and Mexico.
The rapid growth in Latin America’s startup ecosystem signifies that there are still entrenched problems to be resolved.
Nathan Lustig, a Managing Partner at Magma Partners, said his firm “invests in Latin America is to help build technological solutions to these issues that our team, entrepreneurs, and peers face every day, including the unfairness of the banking system, the bureaucracy of bill pay, and the challenge of renting an apartment in metropolitan cities” (NASDAQ).
According to Lustig, the institutions that people in the U.S. take for granted- such as online payment gateways and escrow- present opportunities for startups who could win the space in the Latin American market.
The five traditional industries that Latin America will likely see disrupted in the next two to three years include:
1) Online Payments
The frustration of not being able to pay for things online is a pervasive problem across Latin America. Legacy payment processors built by banks lack the necessary capacity to keep up with increased demand for online payments as e-commerce grows. Even established, well-known apps like Cornershop, Rappi, and Cabify don’t always accept credit cards from the US.
Various barriers are keeping Latin American companies from processing payments online, including lack of authentication technology, limits to cross-border transactions, and low financial inclusion. Up to 65% of adults in the region still don’t have access to formal financial services, meaning they have no credit, debit cards or bank accounts, and are therefore unable to pay online.
“…The recent success of Brazilian ‘Stripe clone’ and unicorn, Ebanx, provides optimism. Startups like Ecuador’s Kushki and Mexico’s Conekta are also among the first to expand across borders in Latin America, helping startups and corporations easily integrate online payments that do not bounce, redirect, or reject international cards” (NASDAQ).
Latin American banks are highly bureaucratic. Many Latin American have less than ten banking institutions, so these players are therefore unmotivated to compete to provide lower prices or improved services for their customers.
“Financial products from these institutions can occasionally border on predatory, with hidden fees and costs that leave customers feeling cheated and used by the industry.”
This climate is creating a growth opportunity for challenger banks- also known as neobanks- to capture new clients with mobile (and feeless) cards, allowing them to access financial services without visiting a physical bank.
As reported by NASDAQ, Brazil’s neobank, Nubank, is the most-downloaded and most valuable digital bank in the world, valued at $10B after successive funding rounds led by China’s Tencent. Argentina’s neobank Ualá was so popular that users downloaded the app in every province of the country within two weeks of its launch, leading to their $150M round led by Tencent and Softbank. Mexican neobanks albo and Klar also raised significant Series A rounds from US investors in 2019.
3) Paying Bills
Considering the majority of Latin America’s population lacks access to a bank account, most people still have to pay for their utilities in cash at banks or convenience stores.
Few startups have been able to successfully confront this issue. Mexico’s Saldo.MX, Chile’s Servipag, Colombia’s Nequi, and Peru’s Yape are working to make it easier for Latin American customers to pay their bills online. However, there remain open opportunities to provide a simple service to the large portion of the population that has access to the Internet, smartphones, and debit services, but is still forced to wait in line to pay their bills.
4) Buying and Selling Property
The barriers to entry surrounding access to real estate- including finding a property, getting a mortgage, and sorting out escrow- are higher in Latin America than many other regions around the world. Most Latin American nations use notaries instead of escrow, don’t have any centralized listing service (MLS), and do not require exclusivity for brokers. Mortgages are also only available for the wealthy and carry high interest rates (NASDAQ).
Softbank’s $250M Series D in Brazil’s QuintoAndar and ALLVP’s $4.6M pre-seed round for Mexico’s Flat showcase the lucrative opportunity to improve home rentals and purchasing in the region. Other notable startups in the sector include Brazil’s VivaReal, Emcasa, and Loft, Colombia’s La Haus, Mexico’s Homie and Chile’s Arriendo Asegurado.
Many of these services are only available in big cities, while medium-sized cities and rural areas are left with antiquated real estate systems that present potential for fraud and corruption. Colombia’s Suyo is working to tackle the issue of property formalization in underserved rural and urban areas, although Brazil, Bolivia, Ecuador, and Colombia still struggle significantly with land right concerns.
Securing credit in Latin America is notoriously difficult. Microloans- which reached Latin America in the 1990s to supposedly support low-income families- often carry staggering interest rates, between 50-120% or as high as 500%, entrapping consumers in debt.
Today, online microcredit startups in Latin America are taking the place of these small lenders, allowing people to access credit through their smartphones. However, as reported by NASDAQ, the risk models are still basic, meaning that interest rates have to stay high for these startups to be profitable.
However, Latin America has a competitive advantage in the development of invoice-backed lending, with almost 80% of worldwide electronic invoices originating in the region. These electronic records can provide detailed data on businesses’ transactions, debts, sales partners, and tax payments and can act as the basis for more sophisticated risk models. For example, Colombia’s OmniBnk uses such information to disburse small business loans up to $1M in as little as one hour.
Mexico’s Konfio also provides SMB lending services based on electronic invoice data. Both Konfio and OmniBnk have managed over $200M in debt financing to disburse these loans quickly. In addition, Mexico’s Credijusto- which recently raised a $42M Series A round co-led by Goldman Sachs PSI and Point72 Ventures- provides asset-backed loans and equipment leases to SMBs. Brazil’s Creditas is working to reduce borrowing costs for Brazilians by increasing the efficiency of lending systems using electronic data.
Layoffs Begin at SoftBank-Backed Delivery Company Rappi
Rappi, an on-demand delivery startup operating in Latin America, laid off hundreds of employees this week. As reported by Axios, on-demand delivery services are coming under increased financial pressure, as companies have been unable to make the model profitable.
The Bogota-based company operates in nine Latin American countries, including Colombia, Brazil, Mexico, Peru and Argentina.
Rappi told a Brazilian media outlet that it’s laying off around 6% of its workforce, or about 300 people.
A Rappi spokesperson stated,
“In 2020 we have decided to double down on our technology team and to focus on our user experience. In order to achieve this vision, we made the decision to reduce some areas and increase the size of others to achieve our goal for the present year and deliver an even better experience for our users. In total, the number of people who were impacted by the decision across [Latin America] was about 6% of the people in the company. This decision is not a reflection of our growth plans, and we are in fact actively hiring a large number of people in our areas of focus for 2020” (Axios).
How Visa is Working to Develop Mobile Payments in Latin America
Proximity mobile payments are transforming traditional payment methods in Latin America, providing consumers with a faster, more convenient and streamlined payment experience for their everyday purchases.
eMarketer forecasts that 13.3% of Latin America smartphone users ages 14 and older will make at least one proximity mobile payment. This statistic represents 33.4 million individuals or 6.7% of the region’s population.
Graphic Courtesy of eMarketer
eMarketer spoke with Rubén Salazar Genovez, Visa’s senior vice president of products and innovation for Latin America and the Caribbean, about how the company is working to further develop the region’s mobile payments ecosystem for their recent report, “Latin America Mobile Payment Users 2019: What’s Driving Adoption in Argentina, Brazil, Mexico and Other Markets.”
What role are traditional banks vs. fintech companies playing within the region’s proximity mobile payment space?
Consumers in Latin America are changing fast. They are constantly reinventing themselves and are willing to embrace the latest innovations. To be able to meet these interests, banks and the payments ecosystem at large need to act with even greater agility, speed and flexibility to accelerate the digital transformation in our region.
In order for this to happen, collaboration is key. By working together with a broad range of partners that tap into the agility of fintechs and the scale of big banks and merchants, innovation will be able to flourish in Latin America.
How important is cash for consumer purchases in Latin America?
Cash is still predominant in the region. Nevertheless, we have a very large opportunity to accelerate the adoption of digital payments—especially through the use of QR codes. QR codes complement other forms of acceptance, such as contactless payments, and help boost the migration of cash to digital payments.
In Peru, we recently launched a new payment solution enabled by Visa Direct that allows customers to “scan to pay” using QR codes. This first-of-its-kind solution in Latin America and the Caribbean will help businesses overcome the infrastructure and interoperability challenges for accepting payments by allowing consumers to make instant payments from their smartphones.
In any case, contactless payments are certainly chipping away at cash payments, but there is still a long road ahead.
What types of purchases do consumers in Latin America pay for with proximity mobile payments?
Contactless payments have been shown to be effective at converting cash to card-based payments, particularly in everyday spend categories such as quick-service restaurants, grocery, vending and parking. This has proven to be true as we see adoption rise in the region.
Public transport is an important catalyst for expanding the use and consumer habituation toward contactless payments. If a commuter pays for their ride on the train or bus twice a day to and from work using contactless technology, that is shown to increase habitual usage of contactless in other categories—like gas, coffee and groceries—based on internal spending data trends we’ve observed.
Could you elaborate on any recent regional partnerships that Visa has entered into?
Together with NovoPayment, we are delivering frictionless payments experiences for tens of thousands of delivery drivers that work for Rappi, the Latin American on-demand delivery platform. With Rappi, we are also partnering to expand financial inclusion through the RappiPay contactless Visa card, which can be easily topped-up in a number of ways.
As a certified Visa Token Service Provider, YellowPepper is helping us speed up the implementation of tokenized payments in the region, ensuring that nearly any internet-connected device can become a more secure place for commerce.
In Brazil, we recently partnered with MetrôRio to launch our first major open-loop transit contactless solution in Latin America. This solution is scalable and will be crucial for displacing cash and accelerating the adoption of digital payments. Now, transit riders in Rio de Janeiro have a simple way to pay for their fare with a contactless card, mobile phone or wearable device. Within just two months after its launch, MetrôRio has already processed 50,000 contactless payment transactions.