Fintech–novel technology attempting to advance and automate the application of financial services–is rapidly expanding in Latin America in terms of origination volumes, geographical presence, and capital raised. In S&P Global Ratings’ view, fintech will play a key role in local securitization markets within the region in the future. The major factors that explain this boom are shown in chart 2.
Amid fintech’s expansion scenario, financing becomes a relevant factor to allow the acceleration of processes. To explain the different alternatives, we have divided the financing stages into three categories based on what we typically observe in the market: the initial phase, the consolidation phase, and the growth phase.
A sequential funding path towards securitization
During a fintech company’s initial phase, funding sources are typically limited. Financial support mainly comes from individuals, such as family and friends and shareholders. In some locations, crowdfunding platforms are becoming a more frequent financing alternative. As an example, the fintech Klar, a Mexican start-up focused on the payment sector, raised $7.5 million U.S. Dollars (USD) from seed capital in 2019.
In the next stage, as the project begins to consolidate and the company needs another round of funding to scale even further, we often see private or angel investors enter the scene. They can contribute not only from an economic point of view, but from their experience and knowledge. One such example is Ebanx in Brazil, which raised roughly $30 million in October 2019 from a private equity round.
In the third stage, when these entities need a stronger capital injection to continue expanding, consolidating, and developing new products or gaining market share, funding sources usually take the form of debt or equity. Fintechs that issue debt prioritize maintaining ownership rights, while those that opt for equity financing are usually looking to obtain a higher amount of cash.
As a result, financial support generally comes from private equity, venture capital, bank credit lines, or the capital markets. According to its public announcements, the Brazilian digital bank Nubank raised over $1 billion from different U.S. venture capital firms over the past three years. Credijusto, a Mexican lending platform, announced that it raised USD100 million in debt financing from Goldman Sachs and another USD100 million from Credit Suisse in the past two years. In 2019, the Colombian lending platform Sempli obtained USD6.5 million in a series A investor round. Also, during the same year in Argentina, the payment platform Ualá has raised USD150 million in a series C offering, led by Tencent and SoftBank’s Innovation Fund.
Brazil is taking the lead in terms of fintech capital market financing. We can highlight the case of Gerú, a Brazilian lending platform that issued up to $3 million of convertible notes in 2018 and another 238 million Brazilian reais (BRL) through several private securitizations that same year. After its merger with Rebel (creating OpenCo, the largest personal financing platform in Brazil) this year, it raised another BRL150 million through a series C equity issuance.
Securitization is ramping up as a financing tool for fintechs
Fintechs are increasingly considering securitization as the entrance door to financing through the capital markets. An example is Brazilian fintech Nubank, which already obtained BRL500 million throughout the issuance of an FIDC (Credit receivables-backed fund) backed by credit card vouchers. In the same line, the lending platform Creditas issued five deals up to BRL900 million, backed by auto loans, personal loans, and mortgage loans over the past 12 months.
Other examples in the region include Mercado Libre in Argentina, which accumulated funding equivalent to $175 million through notes issuance backed by consumer loans. Also, the lending platform Moni obtained…