What’s Next? Shaping the Future of Fintech in Latin America

Quona recently teamed up with other leading investors and partners in Latin America — QED Investors, Kaszek, and Finnovista — to explore both the challenges and opportunities created in the region by the COVID-19 pandemic. The conversations, held via a live Zoom event with three founders from fintech leaders Konfío, Creditas, and Kavak, enabled a robust discussion about what’s next for fintech in Latin America.

Watch the full event video below:

KONFIO

Quona co-founding partner Jonathan Whittle kicked off the event by speaking with Konfío founder and CEO David Arana on the state of MSME lending, changes accelerated by COVID-19, and tips for lending startups. Konfío is an MSME lender focused on underserved MSMEs in Mexico. Quona co-led Konfío’s Series A in 2016, and the company has since scaled significantly, attracting substantial debt and equity capital from global investors.

Here are key takeaways from Jonathan’s chat with David:

Real time data has been crucial. In a crisis that hit MSMEs particularly hard, being a digital fintech company enabled Konfío to leverage real time customer data (vs. external reporting) to segment their customers into three categories and respond appropriately:

1. Companies with business models that were directly put under a lot of stress and were struggling
2. Companies that were not affected terribly, but were being cautious in the face of uncertainty
3. Companies that were doing phenomenally well and had actually seen growth and obtained different kinds of users

A tech + touch model has been uniquely important. This was a uniquely challenging time where the Konfío management team got involved in a humans-first, digital-second strategy with their customers. They focused on creating empathy with and understanding their customers, and used digital technology to scale that process and mimic human interaction. In a short period of time, they were able to offer support and payment plans to groups that were affected the most.

Partnerships and collaboration between fintechs and financial institutions/ larger companies will increase dramatically. COVID-19 has accelerated two themes: a severely underserved and hard-hit MSME segment, and a set of incumbent institutions that are wary of risk now more than ever. The situation will probably lead to more collaboration with incumbents, and Konfío has seen large companies and financial institutions reaching out. These behemoths have the regulatory backing and access to cheap costs of capital, but lack the digital speed to create products that can reach and effectively serve this customer base. That’s where fintech fits in.

Alternative lending will see some changes. Even in good times, it was difficult to secure debt — it took Konfío four years to secure its first large scalable debt line. But in times like this, alternative lenders are going to have to adapt. Two tips for lending startups: diversify debt sources with different types of debt investors, especially those that share a goal with your company beyond the transaction; and develop a strategy to secure a deposit base, which is the best, most efficient, and cheapest way to secure lending capital.

CREDITAS

Creditas is a next-generation lending platform democratizing access to secured auto, home equity, and payroll loans in Latin America. Quona has partnered with Creditas since our Series A investment in 2015. Creditas, like many Quona portfolio companies, deploys a customer-centric approach focusing on high engagement and deep data that has enabled the team to build and adapt sticky financial services products for their customer base. Their innovative model and scale has attracted significant equity funding, resulting in a $231M equity round last year. In the second segment of this webinar, QED’s Lauren Connelly Morton chatted with Creditas founder and CEO Sergio Furio and COO Ann Williams to glean their perspectives on diversity, extending customer life-time value, and more.

Similarly to Konfio, COVID-19 has impacted Creditas customers differently. Through increased contact with customers, Creditas has doubled down on having a pulse on the state of their customer segments to ensure they’re able to be supportive and maintain a healthy portfolio, which is critical right now. A few findings:

• For the 50% of consumers that use Creditas resources to fund their small businesses, many of which Creditas expects to struggle over the next few years, Creditas financing has become even more important. There are a lot of initiatives in place in Brazil, but they’re not fast or agile enough to meet the needs of this segment during the crisis.
• The 30% of Creditas customers that use the platform to pay off personal debts have still been able to pay despite high rates of furloughs, layoffs, etc. Creditas believes that customers are paying off its loans first because the loans are guaranteed by customers’ assets.
• The third segment of customers, which generally use Creditas for purchases, trips, etc. has dropped off.

Data is key and collateral is magic. As Creditas thinks about credit risk going forward, Sergio noted that two things that have been valuable for his team:

• Expand usage of data and get closer to the customer. Credit scores in Brazil are 60–90 days old and are not a valuable piece of data when assessing risk, especially right now.
• Think about risk beyond the credit component of customer behavior and repayment capacity — think about how you can effectively understand the liquidity of and price collateral.

Success = extending the lifetime value of your customer. Rather than setting out to build a robust platform off the bat, Creditas, similarly to giants like Amazon and MercardoLibre, started out by identifying a single pain point in the market, building a solution, and relentlessly creating the best platform to address that pain point. As the needs of Creditas customers changed over time, Sergio found value in adapting the Creditas platform to meet the needs of these customers. Creditas’ agility enabled the company to extend the lifetime value of its customers, reducing churn and lowering CAC. Per Sergio, “Once you get the cash flow generation of the fintech model, especially one like ours where you generate lots of recurring revenues, you’re in a much better position to serve those customers.”

Diversity is an asset. Creditas believes that its focus on building a diverse team that reflects the diversity of Brazil’s population has been more than a box-ticking exercise — it’s made the team stronger. Ann noted that there’s more work to be done here, but in light of current global conversations around racial inequality, the Creditas team has put a lot of emphasis on educating themselves and deepening the extent to which fairness and open-ness are embedded into their processes. This focus on diversity goes beyond race for Ann, who is also leveraging her position as an angel investor to widen the funnel for women and minorities.

KAVAK

Kavak is a full stack platform to buy, sell and service cars in Mexico. The company, which has embedded financial services into their platform, has also attracted significant global capital and is backed by both Kaszek and QED. In this segment, Kaszek’s Nicolas Szekasy (virtually) sat down with Kavak founder and CEO Carlos Ottati to discuss lessons learned through building Kavak and growing through COVID-19.

Embedded finance is an accelerant. In Mexico’s fragmented market, Carlos sees embedding financial services into their product offering as a way to accelerate the company’s opportunity while making it more profitable. This approach is not unique to Mexico or Kavak — embedded finance, which enables startups to boost growth and better serve customers by integrating financial services into their core business, is a theme that Quona has explored across all of our investment regions (more on p. 17 of our 2019 Year in Review report). Examples within the Quona portfolio include Sokowatch, which has layered financial services onto their supply chain platform for MSMEs in East Africa; BukuWarung, which started out as a bookkeeping platform for micro-enterprises in Indonesia and is incorporating a suite of financial services; and Contabilizei, which embedded a financial services offering into its accounting SaaS platform for MSMEs in Brazil. This is not a simple process, though, so Carlos shared key considerations for companies looking to embed financial services into their product: funding capabilities and cost; customer acquisition costs; and payment capabilities/willingness of customers.

Data is key to addressing a fragmented market. The buying, selling and financing of cars in Mexico is extremely fragmented, with every single player taking significant amounts of the value from the customer one time. Kavak is looking to address this through its platform, leveraging data to seamlessly bring together pieces of the car ownership life cycle for customers, expanding the lifetime value of their customer base.

Stable, sustained growth > growth spurts. The pandemic caught the Kavak team, which was growing at about 5–6x prior, off guard as they were far ahead of the demand in terms of what they thought they would need. Reflecting on lessons learned for 2020, Carlos emphasized the importance of pacing company growth to be more sustainable in the long term.