Descubre el futuro de las finanzas en América Latina y el Caribe

The future of finance in LatAm & the Caribbean

O futuro das finanças na América Latina e no Caribe



Latin American fintechs seek refuge in wake of SVB collapse

Mar 20, 2023

By Eyanir Chinea

The US bank's failure leaves important lessons for the fintech ecosystem and increases uncertainty about the future for investment. Big banks stand to gain the most from the crisis

A few days ago, as it emerged that Silicon Valley Bank (SVB) was struggling to cover a hole in its balance sheet, industry chat groups were flooded with messages from Latin American fintech executives scrambling to find new banks where they could hold their cash.

The fear that gripped the sector between March 9 and 13 as the future of SVB hung in the balance was only allayed by the intervention of the US authorities, who promised that all of the bank's customers would gain access to their savings. Its clients included more than 2,690 fintechs, according to SVB data reviewed by CB Insights.

While prompt action by US regulators contained the fallout from the implosion of the nation’s 16th largest lender, when the dust settles, the Latin American digital finance ecosystem will have less access to capital, greater reputational risk and more difficulty moving money, according to a dozen people interviewed by iupana for this article.

“The investment channel for the region will tighten a little further,” says Gustavo Gawryszewski, the founder of Moner, an automated collections fintech in Brazil. “It’s a pretty significant issue: risk aversion has increased and emerging markets are typically going to lose.”

One consequence is less certainty for fintechs that constantly move money around the financial system, such as credit and payment settlement companies, as well as fledgling firms that need a lot of fresh capital to keep their business models running, hire staff, and develop technology.

“Undoubtedly, the biggest concern for startups now has to do with their liquidity and cash flows, considering that these companies —which are newly created or just starting out— operate their business model based on injections of liquidity from the venture capital ecosystem, and they now see this liquidity is beginning to tighten,” says Juan Ortega, a digital finance analyst in Mexico.

That likely means that not all the small fintechs in the region will make it to the end of the year, according to ecosystem sources consulted by iupana.

This situation has parallels with the dynamics that led to SVB’s downfall. Highly dependent on the technology ecosystem, the bank was wrong-footed as clients rushed to withdraw cash in the context of fewer fundraising rounds. The lender's lack of diversification left it exposed to the decisions of a relatively small group of venture capital funds and the companies they invested in.

“The startup-VC climate is unstable. Venture capital is investing less because risks have increased. It's not just the SVB episode: That’s just the icing on the cake. Companies’ cashflow has weakened and therefore we are seeing more and more layoffs and less room for maneuver,” says Carlos Aravena, founder of the Chilean edtech Políglota, which held funds at SVB and managed to move them to banks in Latin America.

“That’s why it’s important for startups to seek profitability and sales at any cost,” he adds.


A crisis for some, an opportunity for others

March has been a torrid month for lenders, large and small, in the US and Europe. Silvergate, a San Diego-based bank focused on the crypto industry, declared bankruptcy at the start of the month after struggling to recover from last year's collapse of FTX. Another crypto bank, Signature, followed suit. A few days later, SVB was shut down following the bank run.

The malaise engulfed another struggling US lender, First Republic, showing it wasn’t just tech lenders in trouble, while on the other side of the Atlantic, the Swiss central bank came to the rescue of debt-laden Credit Suisse, which subsequently agreed to merge with local rival UBS.

Industry analysts agree that Latin American banks are well positioned to withstand the shockwaves from the financial sector turmoil.

“Most of the region’s banking systems in the region are concentrated in large, solid and highly diversified banks. Consequently, the concentration by segment towards a single industry is relatively limited, which helps protect banking systems in Latin America,” wrote Marianna Waltz, head of ratings for the region at Moody’s, in a note to clients.

“In addition to strict market risk regulation in Latin America, banks in the region have frequently faced prolonged periods of high interest rates and inflation, which has helped their management teams build strong frameworks to control risks. market,” she says.

It’s against this backdrops that large banks in the region are becoming a destination for fintech capital.

“At Poliglota, we’re forging alliances with the main banks in Mexico, Chile, Colombia and Peru,” says Aravena.

Poliglota is backed by the Y Combinator accelerator. Close to a third of the incubator’s startups had exposure to SVB and it was one of the first companies to ask the US government to rescue the bank. Its Twitter petition was signed by some 600 company founders and CEOs.

While Mercury Bank, Brex and other US fintechs created to provide financial services to startups are also benefiting from the relocation of capital, major banks stand to gain most given they will always have the government’s support should they ever require a major bailout, says Moner’s Gawryszewski.

One example of how traditional banks benefit is HSBC's takeover of SVB's British subsidiary for just £1.

“Traditional banks grows bigger, eat up the little ones that go bankrupt, and thus new branches of their businesses emerge,” adds Ortega, the Mexico-based analyst.


Lessons from a bankruptcy

In the group chats with fintech founders and industry participants seen by iupana, what stood out most was the desperate search for banks to handle company cash. The chats went quiet over the weekend as executives tried to figure out how they would pay their fortnightly payrolls. Relief came last Monday when President Joe Biden announced that all SVB depositors would receive their funds.

Silicon Valley Bank also had capital invested in Latin America through a fund of about US$30 million managed jointly with IDB Invest, the investment arm of the Inter-American Development Bank. IDB Invest said it doesn’t expect SVB’s collapse to affect the fund’s investments.

Mexican payment unicorn Kueski held some of its money at the bank but recovered 100% of the funds, Fausto Ibarra, the firm’s product director, tells iupana.

“Fortunately, we have diversification in terms of the banks where our capital is held and our operations are entirely in Mexico: All the loans we give are in Mexico, for Mexican consumers,” he says.

But not all fintechs clients of SVB had their deposits with different institutions, which was one of the red flags that emerged from the bankruptcy. The bank signed exclusivity agreements with some customers to make it their main financial service provider, according to documents from the Securities and Exchange Commission (SEC) seen by CNBC.

The bank said its client base included 71% of the fintechs that made IPOs since 2020.

While the region may have avoided a direct hit from the debacle, industry experts stress the importance of reviewing regulation for what is a highly interconnected ecosystem. Eventually countries are expected to tighten regulation on a sector that has long been concerned about the negative impact of excessive official control on innovation.

“The first thing to understand is that the risk is always present. Conceptually, even US treasury bonds are risky—low risk, but risky,” says Álvaro Castro, director of Sumara Hub, a fintech law firm in Peru.

His comments bring to mind those of SVB’s chief executive officer, Greg Becker, who said in a letter to clients on March 8 told customers that the “vast majority of their assets were high-quality, government- and agency-issued, and low-loss loans.” His words did little to assuage client concerns.

“It’s true that regulation and supervision reduce risk,” says Castro. “The patrimonial requirements, the prudential tools help, but they do not eliminate it. As in any investment, you have to diversify."

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