What Latin American Fintech Startups Can Teach Silicon Valley

If you have traveled to Latin America recently, you may have noticed a prevalent trend. Servers instantly offer credit card readers everywhere from breezy beach tents in Tulum to high-rise restaurants in Sao Paulo. Pix, an instant payment platform created by the Bank of Brazil, is ubiquitous. Since launching in 2020, it has already been adopted by almost three quarters of Brazil’s population. Fintech is everywhere in Latin America.

Stripe and PayPal
PYPL
are often held as pinnacles of success in the fintech ecosystem. However, Brazilians are adopting digital payment systems faster than anywhere else. The success of Nubank has opened the floodgates to a wave of entrants seeking to capitalize on the fertile opportunity that the Latin American ecosystem presents. At face value, it can be easy to observe this phenomenon with detachment. However, there are lessons that even storied Silicon Valley startups can learn from the thriving fintech ecosystem of their southern neighbors.

Latin American fintechs have successfully capitalized on “blue ocean” opportunities

In entrepreneurship, the term “blue ocean” refers to the highly coveted segment of a market that is relatively unexplored, with little competition and high barriers to entry. The most successful Latin American fintechs have been able to find, or more accurately create, these highly coveted opportunities. This has manifested in the creation of a new type of consumer.

Incumbent banks in the region enjoy the highest profitability margins and ROIs in the world, while managing to serve a small subset of the population. Companies like Nubank emerged and created an entire new consumer category. How were they able to accomplish this? By having a strong digital focus, these new entrants were able to pass cost savings to consumers, streamline product offerings, and minimize overhead costs, culminating in a superior customer experience. Nubank, for example, has no physical branches.

The lesson here is that the importance of “quick wins” cannot be overlooked when building to scale. Latin American banking incumbents had little reason to innovate, leading to a subpar digital experience for many customers. Fintechs only had to raise the UX bar slightly higher to be perceived as light years ahead. While deep tech trends such as AI and hydrogen powered planes capture headlines, often it is the smaller incremental victories that lead to sustained success.

Fintechs in emerging markets are used to operating in volatile markets

US consumers and corporations alike have been wringing their hangs over the challenging high-interest rate environment. Latin American economies, however, are no strangers to hyperinflation. In theory, this could manifest in in more durable companies. In practice, stormy seas inevitably act as a deterrent. Will this mean fewer people taking risks, and doubling down in investments that provide security and jobs that provide security?

Debora Senra, an investor with Brazilian-based early stage fund Alexia Ventures, believes this political and economic instability has prevented the region from developing at a faster pace. Fortunately, she believes, “Latin American entrepreneurs are resilient and creative to adjust to new conditions and are not easily intimidated by rapid and extreme scenario changes.”

Entrepreneurs can build great companies even when resources are not abundant by focusing on capital efficiency and on the path to profitability. The best-in-class entrepreneurs in Latin America are capable of doing more with less, focusing on what they can control during tough times, and presenting a great deal of grit to keep growing despite adverse conditions that arise from time to time throughout business cycles. This is a lesson in resiliency that Silicon Valley can turn to, as a cohort of companies are suddenly faced with the unfamiliar environment of high interest rates.

Exit dynamics for startups remain complicated, but promising

The dearth of IPO activity in the US is well documented. This same trend is observed on an even greater scale in Latin America’s public exchanges. Uncertainty shrouds the future of the companies that were beneficiaries of the frenzied investment activity of the last few years. Most will likely underwhelm: an estimated 90% of startups fail. However, for those that survive, the spotlight will be turned towards exit outcomes.

According to PitchBook-NVCA Monitor, acquisitions of venture-backed startups saw their lowest quarterly level in a decade. This decline in M&A activity, a meaningful exit channel for a large portion of early stage firms, coincides with the broader economic downturn. Will these companies eventually become acquired? Will some IPO? No one can predict the future. But the legacy that has been created is unequivocal and irreversible. A new consumer has been created, and more competition means the collective society benefits. This is the most important thing.