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Why Citi and other big banks are investing in Latin American fintechs

Why Citi and other big banks are investing in Latin American fintechs

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Large banks worldwide are investing more heavily in Latin America’s fintech sector.

Companies such as Citigroup, JPMorgan Chase, Goldman Sachs, Santander, and Scotiabank are making investments — which could lead to partnerships — in recognition that many unbanked Latin Americans are turning to fintechs rather than banks to meet their financial needs.

“We invest in start-ups that are distinct and have future partnership potential,” said Luis Valdich, managing director of venture investing at Citi Ventures. “We then work with the start-up and the relevant Citi line of business to help the potential partnership materialize.”

As an example, Citi Ventures has invested in PPRO, a U.K.-based cross-border aggregator of local and alternative payment methods targeting emerging markets such as Latin America. “Citi’s Treasury and Trade Solutions uses PPRO as a partner for its Spring by Citi consumer payments offering for institutional clients,” Valdich said. JPMorgan also invested in PPRO.

A discussion with Connie Theien of The Federal Reserve, Elena Whisler of The Clearing House, and Laura Weinflash of Early Warning, moderated by Craig…

Valdich sees Latin America as a prime market for fintech disruption, as the population is twice that of the U.S. and significantly younger. Latin America also has a high percentage of unbanked/underbanked consumers and small businesses, low credit card penetration and relatively costly and friction-full financial products, he said.

“We invest in start-ups that are distinct and have future partnership potential,” said Luis Valdich, managing director of venture investing at Citi Ventures.

Americas Market Intelligence estimates that 120 million Latin Americans used digital-only bank accounts or mobile wallets in 2020. Consumers also use prepaid cards, buy now/pay later loans and other forms of point-of-sale finance.

Although it plans to sell Citibanamex, the Mexican bank it acquired in 2001, Citigroup is pursuing other Latin American fintech investment opportunities through Citi Ventures. Fintech sectors of interest to Citi Ventures in Latin America and globally include embedded fintech, serving the underbanked, and technology powering the future of commerce such as cross-border payments, said Valdich.

In November 2020, Citi Ventures took a stake in Arcus, a Pan-Latin American digital bill payments-as-a-service platform. Mastercard purchased Arcus a year later.

“Mastercard is a Citi partner, and the bank intends to continue working with Arcus post-acquisition,” Valdich said. “In many Latin American countries, the norm is paying bills in person with cash as opposed to digitally — this is a huge area of opportunity for Arcus.”

Citi Ventures also invested in the Brazilian real estate marketplace Loft. “In Brazil, there’s no Multiple Listings Service, making the process of buying and selling real estate opaque and slow,” said Valdich. “Loft is filling a gap in the market here.”

Fintech investments in Latin America totalled $9.8 billion in the first nine months of 2021, up 211% compared with the full year in 2020; the increase was driven mostly by venture capital funds and private equity firms, according to the investment data firm CB Insights.

These investments set records for number of deals funded, acquisitions and initial public offerings, Valdich said.

Scotiabank has two objectives for its Latin American fintech investments, which focus on payments, personal and small-business lending, and human-resources-related platforms.

“The first is learning about new products and technologies,” said Daniel Kennedy, the bank’s vice president of distribution excellence for international banking. “Our investments allow us to uncover opportunities and learn about transformative market trends and technologies. Our second objective is partnering with fintechs to deepen our capabilities and expand our offerings to customers.”

In the last three years, Scotiabank has invested in several Latin American fintechs through its partnership with the U.S.-based venture capital group QED Investors. These include Nubank, the Brazilian neobank, which achieved a $41 billion valuation at its December 2021 IPO; Kavak, a Mexican second-hand car sales platform that offers financing; Cora, a Brazilian digital challenger bank; and Worky, a Mexican human resources, payroll, and employee benefits platform provider.

“Recently, we’ve had the opportunity to focus on niche lending products such as Solfácil, which provides loans for solar panel installation in residential houses,” Kennedy said.

Goldman Sachs’ investments in Latin American fintechs include the Argentine digital wallet issuer Ualá, which was valued at $2.45 billion in a $350 million August 2021 funding round; the Brazilian buy now/pay later provider Provu; and the business-to-business lender Credijusto.

In 2021, Goldman Sachs provided a $160 million credit line to the Mexican small-business lender Konfío and a $74.5 million credit line to Latin American e-commerce platform MercadoLibre. It also led a $125 million debt financing round for Colombian BNPL provider ADDI in December.

Latin America generates 40% of Santander’s profits. The bank plans to invest $6 billion between 2022 and 2024 in the digital transformation of its Latin American operations.

Since 2014, Santander’s Mouro Capital (previously called Santander Innoventures) has invested in 41 Latin American fintechs, including the Mexican neobank Klar and the Brazilian secured consumer lender Creditas, said Santander spokesperson Ovidio Cordero. In January, Creditas raised $260 million in a funding round valuing it at $4.8 billion, which is expected to lead to an IPO.

In June 2021, JPMorgan said it was taking a 40% stake in the Brazilian full-service digital bank C6 Bank, subject to regulatory approval. The investment was part of JPMorgan’s strategy to build a global online retail bank, which also led it to launch a U.K. online bank in September.

“JPMorgan sees that C6 could be the next Nubank, and they could make money out of it,” said Francisco Javier Alvarez-Evangelista, an advisor at Aite-Novarica.

In 2020, JPMorgan invested in the Brazilian banking-as-a-service provider FitBank. “JPMorgan and Fit Bank’s agreement involves developing new products along with cross-selling into different parts of JPMorgan and our international expansion, initially in Latin America,” said FitBank CEO Otávio Farah.

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