2021 was a banner year for Latin-American neobanks, driven by generous funding from prominent investors in the US, Latin America, the UK, and continental Europe. Will the boom come to a crashing end this year amid rising inflation and interest rates, the war in Ukraine, the plunge in the stock prices of technology companies, and the threat of an economic recession? Though the immediate future looks rather grim, there are plenty of reasons to be optimistic.
About that record year. In 2021, $15.7 billion of risk capital were deployed in ventures in Latin America, about the same as all the money invested over the past ten years, resulting in 18 new unicorns, or start-ups valued at more than 1 billion dollars, such as Brazilian-Argentine e-retailer Tiendanube and Mexican cryptocurrency exchange Bitso. According to a recent study by Endeavor Mexico, a support organization for global entrepreneurs, and Mexican private equity firm Glisco Partners, approximately 80% of venture capital investment in Latin America was concentrated in Brazil and Mexico, the two largest economies in the region, and 62% came from foreign funds.
The study points out that, unlike last year, the more adverse market conditions coupled with the losses suffered by large venture capital firms, including SoftBank, Tiger Global, and a16z, mean that investors will be much more selective when deploying their funds. This, in turn, will translate into “a slowdown in investment activity, a freeze on hiring and even layoffs, market capture strategies versus continuing international expansion, as well as less favorable valuation conditions.” We are already seeing a wave of layoffs in tech companies.
However, Alfredo Castellanos, Glisco’s managing partner, stresses that Latin American economic reality still offers multiple opportunities to drive the growth of tech companies: “the scenario for Latin American companies is much more encouraging than for innovative companies from other regions,” he says.
Digital banking is precisely one of those fields in which disruptive start-ups are grabbing market share from staid traditional banks. Already four of the nearly 50 Latin-American neobanks, NuBank, C6 Bank, Neon, and Ualá, are among the top global neobanks by number of users and fund-raising, among several criteria.
Going forward, there are several reasons backing up the optimism.
About half of the people in the region, most of them living in rural and economically underdeveloped areas, lack access to formal financial services according to the Inter-American Development Bank.
Neobanks also have lower infrastructure and technology costs, as well as the nimbleness that young consumers and businesses are looking for.
A third reason for optimism is the increasing number of migrant workers who have historically struggled to find affordable services to send remittances back home and to whom the new financial technologies serve well.
Furthermore, the onset of the Covid-19 pandemic led to an e-commerce boom in the region and even though growth has slowed recently, prospects remain bright. E-commerce calls for services that boost the exposure of merchants in foreign markets and reduce the costs of cross-border transfers through multi-currency accounts and lower exchange rates.
Finally, small and medium-sized companies (SMEs) require financing and neobanks can take advantage of a lack of trust between them and traditional banks, which charge high interest rates and are slow to respond to their needs.
Brazil and Colombia are the countries in Latin America where traditional banking has yielded the most to neobanks, according to a recent means of payment report by Minsait Payments and Analistas Financieros Internacionales (AFI), with younger groups more inclined to operate with neobanks. In both countries, a little more than 26% of banked people consider neobanks as their main financial institution.