Lending fintechs in Latin America is rising to a new challenge. The wave of digitization and online sales in countries such as Mexico is leading to new, untapped opportunities in the SME segment.
Several of the most prominent fintech players in the country announced million-dollar investments in the past few months as they aim to step up loans to small and medium-sized businesses in the country.
Softbank-backed fintech unicorn Konfio recently upsized its borrowing capacity with Goldman Sachs and Gramercy to a combined $227 million to lend to SMEs in Mexico. Neobank Kapital drew a $100 million credit line last year to become Latin America’s “neobank for SMEs.” Earlier this year, Argentine fintech company Uala said it would launch SME loans in Mexico. At the same time, local corporate credit card provider Clara raised $60 million as it seeks to expand in Latin America.
SMEs, an underserved market
While loans to individuals have been gradually growing in the past few years, the SME sector has remained largely underserved. Most of the workforce operates in the informal economy, leaving few reliable records for financial companies to assess creditworthiness. As a result, SMEs in Mexico and the region often make poor targets of credit.
“Access to working capital for small and medium-sized companies is historically non-existent in Mexico,” Manolo Atala, CEO at Fairplay, which provides financing to SMEs looking to sell online, told Fintech Nexus. “For decades, banks have focused on just the 2,000 largest companies, but most of the remaining 4.8 million SMEs do not enjoy these benefits.”
But as e-commerce catches up, some believe there could be a turning point.
“The opportunity to lend to SMEs in Latin America is huge,” Atala added. “Only in Mexico, we are talking about a market size worth at least $28 billion, which is the volume of online sales in e-commerce last year.”
Fintechs better positioned for SME lending in Mexico
Most SMEs selling in this market are likely generating information that fintechs can base on when gauging credit risk.
For Ernesto Calero, a general manager at Mexico’s fintech association, fintechs are the best banks in this respect as they have better technological resources to analyze data and review an SME loan request promptly.
A recent joint study by the University of Cambridge and the Inter-American Development Bank found that SMEs resort to fintechs for funding mainly because they have a better chance of securing it faster.
They often turned to fintech after unsuccessful attempts at banks, families, or friends.
For Calero, banks’ agility, even as they want to get into the market, “does not match the needs of an SME” that can get better response times when providing credit on a digital channel.
According to the report, Latin American startups are indeed turning to fintechs to bridge the funding gap.
“The findings illustrate the potential of fintechs in narrowing the funding gap and driving SME growth across the region,” said Bryan Zhang, Executive Director at the Cambridge Center for Alternative Finance. “Especially for micro-enterprises, fintech credit delivers much-needed support to sustain, grow and expand.”
