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Kai Schmitz, IFC: The most advanced fintech markets at the moment are most likely China and the US. The developments that you see, in particular China, we expect to also translate into some countries in Latin America. We see a lot of that already happening in Southeast Asia. Not so much in Latin America today but both by involvement of Chinese companies in Latin America that I’m quite sure would come and also by general trajectory of the fintech industry, we will probably see a similar development. Such platforms will play a bigger role on electronic payments, digital payments, and form of mobile payments and otherwise will also drive it. E-commerce will be a major driver for more adoption of fintech and digital payments. A lot of this will ultimately drive from social networks as I said e-commerce, social media and so on.
Kai Schmitz, IFC: We look very broadly at fintech. We started about six or seven years ago, mostly focused on mobile payments. We have invested in some of the large mobile payment companies in the world. Actually, one of the largest was bKash in Bangladesh where we invested as of today, five years ago. Today, we actually sold part of that to a Chinese company, Ant Financial. We have then moved into other areas of payments also on the retail side, mobile payments, other types of electronic payments, online payments by both investing in direct payment providers and also the infrastructure that sits behind it and moved on from that to a range of other verticals.
Right now, we have quite a big portfolio and various types of fintech lending companies both on the small business lending and consumer lending side and across the world. Anything from China to Brazil. We are beginning to be more active in capital markets which we think is going to be a very big area for fintech in the future and already is in the US. We’re actively monitoring other areas, newer technologies such as blockchain. We’re looking at cryptocurrencies, of course, and generally open to see new verticals. We think that ultimately as commerce have gone digital, we think financial services will go digital and then will start probably from the consumer interaction side but will evolve ultimately penetrate all financial services and capital markets and the like.
We are sector agnostic right now but I would say the majority of our portfolio as of today is both in payments and lending and then various other areas that are more one-offs.
Kai Schmitz, IFC: In everything that we do, we always try to meet two objectives. One is, of course, that the companies are commercially successful. Our mandate is to develop the private sector and that only works if the companies go and make money and ultimately become attractive and can grow for us. On the other end, of course, we have various other mandates from our shareholders which include financial inclusion. They also include, for example, the development of financial infrastructure. They include the development of capital markets with a broad set of investment objectives that we follow.
Fintech lending, we see as a critical facilitator for financial inclusion. Indeed, you would know that in Latin America there is a large part of the population that is not on credit bureaus, for example. For them, it’s very hard to borrow from the formal financial sector. Fintech companies, by using machine learning and big data and other types of analytics and data sources, have been able to create alternative scores for many small businesses and consumers. Thereby creating new credit history and ultimately these will probably get reported to the existing bureaus, or some of these companies actually become marketplaces where traditional lenders can extend credit and thereby use a credit history that these fintech lenders have built.
We have investment in Brazil, for example, in a company called GuiaBolso. It has 3 million users who give financial information to GuiaBolso to understand better what financial services they need, to understand better how they can manage their finances. And Guia then allows traditional banks to lend to these users, quite a few of which have not had credit history before. We thereby hope to expand the formal financial market. The same, by the way, also applies to payments. We really see electronic payments – whether mobile or cards or we are agnostic to the form factor – we see electronic payments really very much as the gateway to all other forms of fintech because only once you have an electronic record of payments, you can use this data in an efficient manner to then manage finances, to offer other financial products, to really understand the consumer, to target the consumer effectively.
In many ways, what we have in developed markets in the form of credit bureaus and much more sophisticated marketing tools, we think that electronic payments would ultimately provide in emerging markets. Together with social networks and messaging apps and others, all of these together create the digital data that we will need going forward to really enable fintech and ultimately reach the financial inclusion goals that most countries have adopted and that is also very important in LAtin America
Kai Schmitz, IFC: Yes, that’s true. We see, of course, that once people start to make payments electronically, for example, if they pay their bills electronically, if they make repayments of loans that they have electronically, if they start to pay their rent electronically, you’re beginning to see a financial profile of that consumer. The same applies to a business where business files, for example, electronic tax returns where they’re using a corporate credit card to make the most of their expenditure. You’re beginning to see a digital profile of these companies and these consumers and even if they are all included in a credit bureau and if they haven’t had any interactions with a formal financial institutions, you can then mine that data to build an alternative credit profile of these potential borrowers and users of financial services.
Then both find the right to sell them to these clients but at the same time also make marketing more efficient and provide the whole service in a much more efficient way. Because in many cases particularly in small business lending, what is prohibited for many of the traditional financial institutions is the cost of providing loans to this sector because it’s a very manual process. There is a lot of review of documents in many cases small businesses are quite informal. They wouldn’t have the documents that a bank would typically want to see for the credit and the writing process for example. Fintech companies and big data can fill that void and ultimately mine electronic data to provide a profile that is very similar to what a bank would get from a more traditional underlying process and thereby enable those fintech lenders and tradition lenders to provide credit.
Kai Schmitz, IFC: Much of this is achieved very much at the beginning. Since the financial crisis, capital markets has changed a lot. The role of banks has changed a lot. The role of market makers has changed a lot. We see the first electronic market places, for example, for various things, for stocks and bonds and others more in developed markets. That will ultimately also happen in emerging markets. Where we have the most interaction with capital markets right now is actually again in fintech lending where the large fintech lenders in the US like lending clubs and others fund themselves partially from P2P lending but to the largest degree from also capital markets.
In Europe and in the US, you have a very sophisticated and specialized capital market that serves to these lenders. That is not the case in most emerging markets, in Latin America in particular. We have recently created a joint facility with a specialized lender in this area that has provided financing for other larger fintech lending platforms in the US and in Europe. We partnered with them to create a capital market facility where fintech lenders in emerging markets can borrow capital with the objective to A, provide the financing but also ultimately to encourage other investors to invest in the sector and emerging market base, as I said, but now are relatively large specialized industries.
Even mainstream banks now invest in this sector. By breaking a path together with Victory Park who is our partner in this, we should be able to bring more of this lenders to emerging markets, create the right structures to make this investment, and ultimately be able to help fintech lenders in emerging markets like in Latin America to scale much faster.
Kai Schmitz, IFC: The clear leader is Brazil and that has many reasons. One, of course, is market size and a very developed and well established financial sector that Brazil already has. I generally believe and that’s also what we are seeing is that fintech evolved from the higher income countries that have a more established banking sector already to the poorer countries and as business models evolved, they would then expand. I would expect that these are the models that you see today in Brazil. Some of which have been imported from the US but quite a few are actually unique to Brazil.
I do believe in … also be adopted or exported into other countries in Latin America but Brazil is the largest financial services market in Latin America and has, at the same time, a high degree of concentration. The largest banks at the very high shelf are pretty much anything of assets, of consumer accounts, of small business accounts. The concentration is very strong despite of the very large market. As everywhere where you have large concentration, you find that prices are high and not always services are necessarily as good as they can and also the incentive to adopt technology is not as hard as if a market is not so competitive.
In Brazil, a lot of fintech companies have targeted different sectors in financial services where services exist but they are partly very basic or they’re very expensive and in many cases, they are only available to a very small part of the population. The fintech companies have then started to use everything that we have discussed: big data and automation, social media and so on, to build business models that take these financial services to a broader audience and then also reduce crisis quite drastically. We have invested quite a few fintech lenders in Brazil that are all working to reduce prices in particular in the consumer lending sector.
Brazil has actually one of the highest interest spreads in the world, by far the highest of a large economy. They have many reasons. Part to do with the lack of competition but also to do with the economics of Brazil. Anyway that, of course, creates an opportunity for fintech companies that can do some of the things more efficiently, can target a part of the market that hasn’t been targeted, quite the traditional financial institutions. Thereby, really find a very attractive business model and very attractive market. Brazil has by far the largest number of fintechs as I already mentioned. We have seen many different business models. Anything from electronic payments, … lending to investment products, and we are beginning to see more and more in terms of financial infrastructure.
There is some very well known fintech companies. There have also been some billion dollar exits in this past few years on fintech companies, which, of course, also then creates more of a market, create more venture capital investment. For all these reasons, I would say Brazil is ahead of most of the other markets or all the other markets in Latin America. Then, of course, you have others. You have Mexico. In certain areas, you also see a lot of innovation, a lot of new fintech companies and payments. For example, lots of fintech lending. There is a large number of fintech lenders in Mexico. We see quite a bit in Colombia. We have a good eye on Colombia and quite a few new fintech companies have been created there in the past five years or so.
Many of them are still too early for us to engage since I see it’s a very large organization. We cannot operate as a venture capital fund. We try to invest early but there are limitations to how early we can do this. Brazil is a market were the stage of fintech is actually working perfect for us while some of the other markets are going to take a few years until the companies have grown to the size where I’ve seen what we’re able to deploy capital effective. We will ensure this will come. We’ve made an investment in Mexico in a small business lender called [unintelligible 00:17:15]. It’s actually doing very well. It’s growing very first. It has a lot of clients so I think this is a fantastic business model for Mexico. We are looking at other companies in the same category. We looked at a lot of payment companies. There is quite a few innovation as I said.
Colombia and Peru are probably at a similar level. We have quite a few new companies. Most of them are still very early. Most of them are pre-break-even. Many of them have only raised relatively small amounts. We are monitoring these markets very actively both from Washington and also from the offices that we have in the region. We have offices as you know in most countries in Latin America. We think that the timing so far was very good for us here in Brazil but we expect that the same will happen in other markets. I’m sure that beyond the markets that I mentioned, opportunities will arise.
We’ve also invested in Chile for example. We’ve invested in Uruguay already. We have quite a few investments in Argentina. Argentina, of course, is an interesting market right now, large political change, and a lot of people are very optimistic about business in Argentina. There is a lot of innovation in Argentina. There is a lot of good entrepreneurs. We see quite a few strong early stage companies. We have seen some …. stage companies and we’ve made a few investments there. The same will happen in other markets but this will probably take a little bit longer.
Kai Schmitz, IFC: I haven’t done the math. That actually surprises me. Brazil should probably give them a run for their money especially in the last few years where we had quite a few very large exits. As I said, Argentinian companies are typically very aggressive. They also tend to expand more rapidly than Brazilian companies because the Brazilian market is very large while Argentinian companies are typically interested in going to other markets. The companies that we have invested in Argentina and also in Uruguay are already in other markets. They are in Mexico. They are in Colombia. Some of them are also in Brazil. That’s probably the main difference between Argentinian entrepreneurs and Brazilians. it’s that they go to other markets quite quickly.
Kai Schmitz, IFC: Everybody is actually learning from China at the moment. Of course, every market is very different and the infrastructure that you have and the environment and the economic circumstances are all very different. Either way, fintech has evolved in China and how fast fintech has worked in China is really mind-blowing. Therefore, a lot of entrepreneurs are already looking at China. I’m sure they’re not waiting for me to tell them. I also quite frankly think that investors are often asked what companies should do, but in many cases the companies find their own ways and probably better than investors can tell them. We may have the advantage that we have a global perspective and hence, we have a lot of visibility in China and to Southeast Asia.
We may see some new business models. We have seen different applications of technology, as you mentioned. If I may turn the question a little bit and if you ask me what holds fintech back a little bit in Latin America, I would say is for one, it’s a lack of capital. Outside of Brazil and maybe Argentina and to some degree Mexico, there isn’t really a very active venture capital markets. In Colombia, there is relatively few venture capital companies active. The same applies for Peru and in the other markets anyway. That’s one of the things that’s missing. You also have a shortage of good developers, of good technical people in the region. We see this actively in our portfolio in Brazil, for example, right now.
With all the growth of fintech companies, there is an acute shortage of developers, of data analysts, and various others. The region needs to address this other than outsourcing it to other markets and that’s only beginning now but that’s at least a short-term fix. In the long run, you need to create the ecosystem. I don’t mean just ecosystem of financing, I mean the whole ecosystem of creating new companies. You need entrepreneurs that already have exits, that have made money from the exit, and that are reinvesting their money into new companies. That provides a great example for other young people to get involved in these areas. We now see actually a lot of very well educated people from Latin America.
Many even went to the US and have come back to Brazil and Mexico and other markets with really remarkable resumes, decide to go back and engage or create fintech companies in their countries. They typically have access to capital outside. They worked on Wall Street, they worked on Silicon Valley. They have contacts with existing venture capital firms in the US and in other markets. For them, it’s easier to do this. This first generation of entrepreneurs will grow into an ecosystem that will be much broader and they will, of course, hire other young people who will become managers and who will become executives in these companies, who will then go start new companies who will … money. They may raise money from the first generation of entrepreneurs that have already exited their businesses.
We do see this already in Brazil. There are several repeat entrepreneurs that have started either seed funds or integrators or other things and are now building other markets and in the process training a new generation of entrepreneurs. I do think we will need to see the same happening in other markets.
Kai Schmitz, IFC: No.
Kai Schmitz, IFC: Enrollment of new customers and that will, to a large, be solved by the large platforms rather by social networks, by messaging apps like WhatsApp and Facebook, and the like. They will play a major role in enrolling more and more people in digital payments. I still don’t think to your previous question that this will all happen in 10 years.
Kai Schmitz, IFC: I would take a very close look at, as I said, the social networks and the messaging apps. A lot of innovation, a lot of drive will come from these, either from the ones that are already active in Latin America or from ones that are coming from the outside.
Kai Schmitz, IFC: I don’t think so. The market is too diverse.
Kai Schmitz, IFC: An effective mobile payment platform requires you to have a very large user group. It’s best done by someone who already reaches a very large part of the population. If you find several large banks that can do this together, this will probably have a good chance of success. As I see it today, there are nonfinancial services company which I already mentioned that have a much faster access to a larger share of the population. I, therefore, think they have a better chance.