LatAm Lending refers to the lending market in Latin America. The market is undergoing change with emerging fintech firms such as Neon and C6. These firms are offering digital banking services, often with no associated fees, to those that were previously excluded from the formal financial system; the firms are also providing investors with data captured through their digital platforms. The most promising markets for fintech in the LatAm region are Mexico, Brazil and Chile.
Rafael Schiozer, a professor at the Fundação Getúlio Vargas, commented that while traditional banks have succeeded in adapting their investment products to the evolving finance industry, they are inferior to fintechs in regards to lending services, claiming that the new credit operations are more user friendly and cheaper.
Leveraged and non-leveraged loan issuance for Latin America and the Caribbean (LAC) dropped 88%, from US$34.1 billion in H1 2019 to US$4 billion, in H1 2020. Banks have focused on relationships with established clients and have been willing to provide financing to existing credits in the absence of M&A revenue.
In order to preserve a stream of fee income and interest payments, banks have been providing other services. Brazil’s payroll loan industry, for instance, is based on the provision of loans to public sector employees who are repaid directly from payrolls. These payroll loans have become a strong revenue source for Brazilian banks—according to Statista, the top six banks in the Brazilian payroll market have combined payroll portfolios worth US$68.5 billion.
The average return on equity (ROE) was at 17.2% in 2019, according to S&P Global Market Intelligence. This compares to 10.6% in the US, 8.8% in Asia-Pacific, and 5.8% in Europe. Nubank had the largest market share, with 35 million customers in Brazil out of a population of 213 million. In the aftermath of a $400m fundraising campaign, it had a valuation of approximately $25 billion.
The alternative lending market segment relates to digital financial services for business customers as well as private borrowers. The market includes bank-independent loan allocation for SMEs (crowdlending) and for personal loans (marketplace lending or peer-to-peer lending) through private or institutional investors via online platforms (e.g. OnDeck, LendingClub, Prosper).
The alternative market lending growth projections include the following:
- The total transaction value in the alternative lending segment is projected to reach US$461.1m in 2021.
- Total transaction value is expected to show an annual growth rate (CAGR 2021-2025) of 5.31%, resulting in a projected total amount of US$567.3m by 2025.
- The market's largest segment is crowdlending (business) with a projected total transaction value of US$334.9m in 2021.
According to a report published by The Economist Intelligence Unit, fintech and renewable energy have been the fastest growing sectors of the LatAm economy in 2018. This is backed by investment activity across Latin America. One example of this is the $400 million financing round by Nu Pagamentos SA, a Brazilian online bank. Two other fintech startups in Brazil, Quinto Andar and Ebanx, have garnered valuations above $1 billion, achieving "unicorn" status.
As of 2021, more than 120 million people across the LatAm region utilize the services of fintechs, neobanks, and digital wallets. Most of these are in Brazil, where fintechs such as Nubank, PicPay, PagBank, MercadoPago, and others compete. Major retail companies such as Ame Digital from the B2W group and Magazine Luiza’s MagaluPay also occupy a share of the market. Most of these companies offer some form of a digital account attached to a prepaid or debit card, as well as payment functionality, such as P2P, bill pay, top-ups, and in certain cases gift cards and digital goods.
In November 2020, the Central Bank launched Pix, its real-time payment platform, which enables interoperability between participating institutions and free money transfers for users. With the number of players increasing and basic banking services undergoing commoditization, the efforts of digital banking competitors to establish loyal customer bases may be undermined.
According to Americas Market Intelligence, as Pix continues to grow throughout 2021, both traditional and digital banks will have to strive to retain their customers and their success will depend on the emotional connection banks can generate with their customers based on branding and messaging, UX, and customer service, and not the quality of the products.
Goldman Sachs has opined that the sector of payments, loans, personal finance, and insurance have the greatest potential. Along with Morgan Stanley, Goldman Sachs has invested into Brazilian fintech startups. Fintech lenders have leveraged the widespread smartphone-dependency in Brazil to offer differentiated banking and credit services. In six years, LatAm fintech funding has grown from less than $50M to top $2.1B across 139 deals.
In Mexico and Brazil, new regulations aim to lower barriers to entry for new tech entrants to apply for and receive regulatory approval for lending licenses and bank charters, among other Central bank regulators have also been capitalizing on the proliferation of mobile devices to shift from the use of physical cash to new digital payment schemes.
The loan securitization market expanded in Latin America in the early 2000s, with Brazil and Mexico accounting for three quarters of the domestic securitized issues launched in 2006. However, the small average size of issues and the lack of secondary market liquidity suggested that the market for securitized assets remained in its infancy during this period. This is despite the suggestion that securitization and structured finance can have a positive influence on the larger financial systems of the region. A securitization market is capable of transforming illiquid or risky assets into more liquid or less risky ones. And it offers an alternative source of long-term funding in both domestic and cross-border markets, while it is also capable of fostering the development of a domestic bond market. These markets had already, by 2006, contributed to the liquidity of the domestic residential mortgages and consumer loans markets.
By the end of 2017, Latin America was one of the faster growing markets for financial technology (fintech), especially in the case of lending technology fintechs (lending tech), which worked to offer services to fill in the gaps left by traditional banks in loan offerings to consumers and small- to medium-sized enterprises, and contribute to the overall depth and efficiency of the regions financial markets.
However, with the growth in online lending, the lending tech companies need funding for their loans, which primarily comes from hedge funds and private investment banks. Limited performance history, low liquidity, and lack of credit ratings in some loans prevent some investors from investing into online lenders. The growing securitization market is capable of solving these problems. Especially as securitization can help lending techs access the debt capital markets by creating asset-backed securities attractive to a wider investor base. Further, it can separate the credit risk of the asset pool from the credit risk of the originator and allow for distribution between institution investors to fit varying risk appetites.
In this schema, multilaterals can play an active role in establishing securitization programs for fintech lenders as a new investable class in Latin America. Multilateral banks can help bridge some gaps and develop the asset class and provide warehousing lines to reach critical mass and then participate in the asset-backed securities by guaranteeing or purchasing part of the issuance. For example, in Brazil, lending tech companies have made use of securitization via Fundo de Investimento en Direitos Creditorios (FIDC). IDB Invest subscribed senior notes issued by the FIDC of Mercado Livre, which allowed Mercado Livre to establish a securitization funding program to grow their lending portfolios and support financial inclusion across Latin America and Caribbean.
The market for collateralized loan obligation is relatively small, as a smaller part of the securitization market in a region that has been slow to emerge. The key regions for CLO markets include Brazil, Argentina, and Colombia, as they are for the larger securitization market. And in late 2020, there was an increased interest in CLO issues in CLO structures for Latin America. While IIG Trade Finance completed a securitization of non-bank Latin America-based trade finance loans, dubbed Trade Finance Funding I, a US $220 million CLO structured, arranged, and placed by Deutsche Bank and managed by the International Investment Group. The CLO focuses on Latin American agriculture and soft commodity industries with an interest in creating a new source of trade finance funds for the traditionally underserved SME market.
In the first part of 2020, as the COVID-19 outbreak caused the region's economies and markets to stumble, loan markets fell in decline as well. Leveraged and non-leveraged loan issuance for Latin America dropped 88 percent from USD$34.1 billion in 2019 to USD$4 billion in 2020. Despite COVID-19, and regardless of the outbreaks in the region, there remain other debt risks and concerns in Latin American states based on an examination of trends of their development. There is a high level of public debt and low rates of economic growth as a factor of investor distrust in the region's debt obligations, which negatively affects the cost of raising borrowed capital.
Further, factors of economic and political instability in Latin American countries are generalized, including the prerequisites for the formation of a new debt crisis due to the annual increase in volume of borrowed funds. Many of these borrowed funds are used to cover the chronically growing budget deficits of Latin American countries, which, against the background of large-scale systemic shocks, makes their economies increasingly vulnerable. Further, political uncertainty across regions and corruption probes into high-level executives and government officials in regions such as Argentina highlight some of the uncertainties in the overall region. In regions such as Mexico, Brazil, and Colombia there has been some relative stability and growth in the securitization market and some political instability and concern over rapid inflation per regions that have hiccupped growth. Otherwise, these regions have seen some stability in growth.
Brazil payments firm Conductor, supported by Visa and Riverwood Capital, raised $150 million at the end of 2020 with the intent to introduce an IPO. Conductor also started expanding internationally—to Mexico, Peru, Columbia, Argentina, and Ecuador. In November 2020, Visa completed the acquisition of YellowPepper to expand its presence in South America.
Caixa is the largest lender in Brazil by customer numbers. Caixa created 35 million new accounts in 2020 to pay government benefits to people who did not previously hold bank accounts and plans to launch micro-credit services for 10 to 30 million people via mobile.
In 2019, Caixa Econômica Federal (CEF) led the ranking of leading banks in Latin America, based on the value of loan portfolio. As of September of that year, Caixa registered a credit portfolio of nearly US$162 billion. It was followed in the ranking by Banco do Brasil, with a loan portfolio of over 137 billion dollars.
Xepelin offers a variation of the lending tool known as factoring, which enables small businesses to take out loans based on anticipated income. According to founder Sebastian Kreis, in Latin America, where small businesses have limited avenues to traditional loans, factoring represents a novel solution.
Citi was recognized as the Best Investment Bank in five countries in Latin America, by Global Finance magazine, at the World's Best Investment Banks 2021 awards. Citi received the recognition in the Dominican Republic, Ecuador, El Salvador, Mexico, and Peru.
Jorge Amato, the Head of Latin America Investment Strategy at Citi Private Bank, voiced the company's belief that due to the absence of significant structural reforms, Latin America’s growth will remain inhibited in the foreseeable future, limiting long-term investment opportunities.
The firm's view on emerging Latin America equities is neutral, based on the rationale that slow growth and high fiscal deficits are structural negative risks for the region, with financial conditions representing the next largest risks. However, Citi explains that since negative expectations are a fixed feature of economic forecasts, even marginally positive data can have significant unforeseen upsides, inclining the company's assessment towards a neutral stance.
Citi's net Income in the 4th quarter of 2020 declined year-on-year by -19.9 %, despite income growth by most of its competitors.
- Citigroup revenue for the quarter ending March 31, 2021 was $21.695B, a 17.75% decline year-over-year.
- Citigroup revenue for the twelve months ending March 31, 2021 was $84.156B, a 19.03% decline year-over-year.
- Citigroup annual revenue for 2020 was $88.839B, a 14.12% decline from 2019.
- Citigroup annual revenue for 2019 was $103.449B, a 6.52% increase from 2018.
- Citigroup annual revenue for 2018 was $97.12B, a 9.17% increase from 2017.
Citi Treasury and Trade Solutions (TTS) Latin America added five new countries to its Digital Onboarding platform, while seeing significant uptake in digital adoption in the first quarter of 2020 as the business supports clients’ contingency situations during the pandemic. The platform has seen a 300% increase in the number of banking accounts opened digitally and a 45% increase in digital banking platform activations.
Marco Financial, a Miami-based startup, plans to enter the $350 billion trade finance market for Latin American exporters with its factoring services business. Since it may be difficult for SMEs in Latin America to obtain the financing they need to launch export operations to the US, Marco aims to provide new risk modeling and management tools capable of assessing loan candidates.
The European Investment Bank has been authorized to lend in Latin America since 1993, when the first mandate for Asia and Latin America (ALA) was approved by the Council of the European Union. On July 1, 2014, the EU’s new External Lending Mandate, covering the period of 2014-2020, entered into force, providing for a ceiling of almost EUR 2.3bn for operations in Latin America.
Nubank is a digital finance company that launched a no-fees credit card in Brazil and became the first investment in South America for Sequoia, DST Global, Founders Fund, and QED. In September 2020, Nubank purchased Easynvest, an investment app operated in Brazil using the Robinhood model, granting mass customers access to fee-free investments.
Merama, a Mexican e-commerce startup, has closed a US$60 million series A round—an atypical large sum compared to average rounds of this stage in Latin America—but the company has also borrowed US$100 million in debt. Merama seeks to unite e-commerce companies in Latin America.
Warren, a Brazilian investment fintech, has closed a US$56 million series C round, with participation of Quartz, Kaszek, QED, and others, seeking to double the volume of assets under management and increase the number of clients by 50%.
Banco Supervielle is an Argentine bank that has developed a digital tool to support the rental of any type of property, simplifying real estate procedures and allowing virtual access to financial support.
Revolut is a UK-headquartered bank that has launched an app for the Peruvian market in an effort to test demand in the market before committing further resources.
Mercado Libre’s payments arm, Mercado Pago, has received authorization from Colombian regulators to operate as a financing company. As a result, Mercado Pago will be able to offer its digital financial solutions to the Colombian market.