Fintech Abroad, Latin America: Examining the region’s Buy-Now, Pay-Later landscape

Fintech Abroad, Latin America: Examining the region’s Buy-Now, Pay-Later landscape 

Fintech Abroad is a series that covers the companies, people and strategies that drive innovation in fintech outside of the United States. To read more articles in the series, tap here.

While the US largely sets the pace for the overarching financial service industry, there is an increasing number of sectors and technologies recently championed by foreign markets and entities. One financial service concept which has quickly spread roots on a global scale, and looks close to blossoming in Latin America, is Buy-Now, Pay-Later (BNPL).

Latin America (LatAm) has been quick to adopt this concept, showing development and adoption throughout its countries’ financial sectors. While fintech startups compete to introduce the BNPL model to LatAm’s consumer base, they face challenges with cross-border service expansion and balancing digital transformation with a traditionally in-person economy.

In the past 30 days, Latin American fintechs have raised almost $2.4 billion across 18 funding rounds. Okay, deep breaths, that number is certainly exaggerated by C6 Bank’s $2 billion corporate round which saw JPMorgan Chase take 40% of the company for its retail debut in Latin America. 

Outside of that mega-deal, the number becomes much more believable, with LatAm fintechs raising $362 million through 18 funding rounds; Mercado Bitcoin and Blu showed impressive Series B fundraises, with the companies pulling in $200 million and $57 million, led by Softbank and Warburg Pincus respectively. 

In order to find out more about LatAm’s burgeoning BNPL market, I talked with Lauren Morton, former Vice President of Capital One’s US Card Marketing Technology team and partner at QED Investors, about the region’s financial service industry, market trends across individual countries and the overall outlook for BNPL in LatAm. 

QED Investors was recently ranked fourth in Crunchbase News’ Top 10 VC Investors in Latin America Fintechs by Crunchbase News, following 29 such investments from 2016 to June 2021. 

Grow-Now, Prepare-Later

In comparison to credit cards, which currently only register 15% penetration in most LatAm markets, BNPL lending has taken off with over 45% of the region’s e-commerce payments made in installments. 

While installment and BNPL payment technology has been taking off worldwide, with companies like Klarna and Afterpay generating sizable revenue and funding, LatAm BNPL is more focused on in-store accessibility and a younger, lower-income demographic.  

“Most BNPL players I talked to have a target demographic in mind, they’re not all the same, but the majority if I were to pick one is the Gen Z millennial,” QED Investors partner Lauren Morton said in an interview with FinLedger.

“Someone who does not have a thick credit file, doesn’t really have a bank account that’s been open for 20 years. They don’t have access to the same traditional credit products, but still want to finance short term purchases. That could be, you know, a $100 pair of sneakers, a cell phone payment or something else.”

Digital payments have exploded in Latin America within the last year, due in large part to the COVID-19 pandemic requiring citizens to set up online banking to receive federal assistance money and the need to order online during quarantine. While e-commerce has accelerated in the entire world, Morton says the gas pedal has gotten pushed hard in Latin America. 

“In the past, there was so much friction in terms of fraud, the ability to make digital payments, people’s access to things outside of cash, and just a general lack of trust in the banking system. Most of which, people have been forced to kind of get over,” Morton said, explaining that solutions have scaled in a predictable way, but over 18 months instead of five to ten years. 

Although digital payments are becoming accepted across Latin America, the vast majority of purchases still happen in-person and in-store services still carry importance. Morton says that her firm, QED Investors, looks for hybrid solutions that work across multiple commerce options and can build retail partnerships, helping to accelerate online conversion. 

Compared to traditional SaaS companies, Morton stated an emphasis on user adoption, payback rates and repeat behavior metrics when evaluating BNPL startup services. 

She believes that generating brand loyalty is the most important factor for these platforms — not only to make unit economics favorable as companies scale but to also keep services relevant as their users build credit history, graduate out of base level BNPL services and start to look for advanced credit products and larger, long term loans. 

“So many of these loans are $50 or $100 to start, and the unit economics of that is hard to work around, unless you can get someone using the product in a repeated way, much more similar to the way someone would use a credit card.”

Data infrastructure now, market success later

As the number of BNPL platforms vying for control of Latin America’s market increases, it will be interesting to see what separates the winners from the losers at the end of it all. 

In order to compete and conquer in the coming-to-boil ecosystem, there are a slew of challenges both inherently tied to BNPL and installment-based loan services, as well as with the LatAm market in particular. One obvious obstacle for companies trying to scale and expand service is navigating cultural, financial and regulatory differences between countries. 

“An interesting challenge for a lot of these BNPL players who are trying to go cross-border is what works in one market may or may not work [in another]. From a regulatory perspective, but also from a consumer and data infrastructure perspective,” Morton said, comparing the differences between market maturity and government presence from country to country. ‘You really do need to customize your business model for each country.”

Morton believes that one key differentiator between a company’s success and failure in the BNPL landscape is a solid, fundamental understanding of data infrastructure. 

“We have seen it in every single lending model that we go after. How somebody starts with data and how the company starts learning plays a huge role in how quickly they can grow into their vision and how they can do that efficiently.”

She mentioned Brazilian digital service powerhouse Nubank as a great example of a company which started as a data company and later expanded into new markets. Morton says a data-first foundation and testing approach allows companies to test broadly, learn and optimize their underwriting structures, which is especially necessary when dealing with small credit lines used in BNPL.

At the moment, Brazil is by far the most developed country in the LatAm region from both a regulatory and market perspective, with open banking infrastructure in place and a large number of fintech startups already dominating their respective LatAm markets. Other countries have joined the race in recent years, however, with Mexico, Columbia and Chile all beginning to launch platforms and garner more attention (see: dollars). 

“We see a lot of activity in Mexico. It is a market with even less credit penetration than Brazil, that has more fraud risk and less credit data, so that underwriting challenge is even greater there,” Morton said, when asked about other countries starting to compete in the fintech market. “But I think it exacerbates the need for somebody to come in and really figure out how to offer loans in a safe way and consumers need that type of spending power.”

While the majority of BNPL startups focus on serving Gen Z, there are a number of other interesting loan and installment payment models springing up in the region. Colombia-based Addi focuses on providing larger loans with more credit-penetrated segments, while Mexico’s Graviti platform offers rural families access to purchase essential appliances with BNPL options. 

“My perspective on Buy-Now, Pay-Later is that it’s really hard to call it one product in one segment,” Morton said. “It’s actually a way of financing that you can apply to a lot of different problems that exist across Latin America.”

General fintech activity in Latin America

• The Central Bank of Brazil approves a capital increase of $139 million in JPMorgan Chase’s Brazilian operations. The news followed JPMorgan’s strategic agreement acquisition to purchase a 40% stake in Brazil’s C6 Bank for a whopping $2 billion. 
• Nubank launches its new premium card, ’Ultraviolete’, a numberless metal card that offers interest growth on 1% cash back returns, and releases a new application interface which integrates a number of services launched by the Brazilian virtual bank this year. The digital banking platform recently fundraised a $750 million Series G co-led by Berkshire Hathaway and Sands Capital Ventures in June, raising their total money raised to over $2.3 billion across 12 funding rounds. 
• The Central Bank of Brazil will incorporate and regulate a payment initiation service into its open-banking, real-time payment system PIX, according to a press release.  
• Argentinian digital wallet and crypto servicing platform Lemon Cash raises a $16.3 million Series A led by Kingsway Capital. The company plans to expand its LatAm operations into Chile, Ecuador, Peru and Uruguay by the end of 2022, and announced it is launching a crypto card in partnership with Visa in October. 
• Dinie, a São Paulo-based embedded lending API provider, raises a $3.8 million seed round co-led by Accion Venture Lab and K50 Ventures, 
• Brazilian cross-border commerce platform EBANX secures a $430 million investment by Advent International, with the company stating the investment will fund service expansion into Mexico, Columbia and Argentina and its planned US IPO. 
• Santander’s payment fintech arm PagoNxT announces expansion of Getnet service to Uruguay, in addition to 30 EU countries.