Cheaper valuations could lead to strategic LatAm fintech M&A in 2023 

Analysts say that low fintech multiples could lead to strategic M&A activity, as companies with enough runway take the opportunity to scoop deals.

This leaves room for further consolidation in the industry as bigger-sized fintechs resort to acquisitions to strengthen their client ecosystem.

Last week, PicPay, one of the largest digital wallets in Brazil, announced the purchase of BX Blue, a payroll lending fintech. In the context of inflation, PicPay will incorporate low-risk payroll loans into its credit card and personal loan portfolio.

The companies did not disclose the amount involved. Yet PicPay is part of Banco Original, a traditional Brazilian lender, and is likely to have enough backing to justify the strategic investment.

The deal was just one of many M&A deals in the fintech space at a global level. A capital stain following the rise in interest rates has left many fintechs open to negotiations.

A challenging year for fintech

In Latin America, fintech M&A fell last year as companies sought to preserve cash and assimilate the new scenario. The effort to bring burn rates to a minimum was driven by risk aversion. Also, by looming risks of a global recession.

However, the deal drop was not massive. The number of acquisitions in the regional fintech industry fell in 2022 to 61 from 64 the year before. According to a joint report by Itau BBA and Sling Hub, the number is still way higher than in previous years. There were 33 deals in 2020 and 15 in 2019.

Brazil accounts for roughly 80% of those transactions.

Downsizing almost done

The sector was one of the busiest in the past few years. With unlimited access to low-cost capital, fintechs increased their headcounts abruptly to fuel ambitious growth plans.

As a result, they were also one of those that suffered the most from revising projections. Most fintechs worldwide faced a painful repricing process as the cost of capital suddenly increased.

Now, as most companies have downsized sharply, some look in pole position to acquire smaller companies that might be undergoing financial stress. 

“Unprofitable companies without a sufficient runway or extremely compelling growth story will soon find themselves evaluating options,” analysts from Andreessen Horowitz wrote in a recent post. “We expect M&A will surely be top of mind for them.”

PicPay logo on smartphone
Brazil’s PicPay announced one of the first Latam fintech M&A deals in 2023.

Latam fintech M&A: BNPL, BaaS

Large fintechs have put ambitious expansion plans on ice but still need to work their path to profitability. Investor pressure builds for them to start turning profits. Expanding the product suite is often one of the ways to do so. 

To that end, companies in Brazil and the rest of the region have resorted to strategic acquisitions. These allow them to offer more products to clients and benefit from the crossover.

Late last year, Argentine fintech unicorn Ualá bought buy now, pay later company Ceibo Creditos. The decision was driven by Uala’s efforts to expand its offerings as it seeks to grow both in its home country, Colombia and Mexico.

The BNPL market is looking increasingly crowded in Latin America, with many companies competing for market share in countries like Mexico.  

“In this market, fintech consolidation is both natural and expected,” Jihane Halabi, a fintech adviser in Brazil, told Fintech Nexus. “And it’s not just the bigger ones absorbing smaller ones in trouble,” she said. “Also, consolidation among big fintechs that want to join forces and expand their offering through partnerships.” 

Most companies have faced material valuation cuts, for which interest from strategic and private equity buyers is likely to prevail in 2023. Some leading candidates for M&A activity include Buy-Now-Pay-Later firms and Banking-as-a-Service fintechs, both growing trends in the space. 

Brazil becoming attractive

In Brazil, the digital market is becoming attractive against a backdrop of profound changes in the financial system. The adoption of the instant payment system Pix has been massive, while the implementation of open finance is gradually making its way into the industry. 

“The increasing relevance of BaaS can trigger some interest from companies in acquiring those fintechs that have already made some progress on this segment,” Halabi said. 

However, she argued that deals would be executed cautiously in this context of lower capital availability as preserving capital is critical at this stage.

“Probably any deal will be evaluated with much more care and redefined criteria,” she said. “But it is at these low prices that the best investments can be made.” 

  • David Feliba

    David is a Latin American journalist. He reports regularly on the region for global news organizations such as The Washington Post, The New York Times, The Financial Times, and Americas Quarterly.

    He has worked for S&P Global Market Intelligence as a LatAm financial reporter and has built expertise on fintech and market trends in the region.

    He lives in Buenos Aires.

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