Greater availability of capital in the Latin American financial technology sector is pushing change in the relationship between banks and regional fintechs.
While in the past new fintechs would grow to the point that a bank acquired them, it is becoming more and more the case that fintechs are the ones doing the shopping.
Well-funded startups looking to expand their offering are now becoming buyers of banks rather than assets being put for sale.
Digital payments and virtual wallet company Ualá is the latest example of good-sized fintechs taking on as buyers.
In November, the Argentine unicorn signed an agreement to acquire Mexican bank ABC Capital.
ABC Capital is a small-sized institution that had seen sustained weakening in its financial profile, to the point that it raised alarms at the regulator.
It ultimately settled with the Argentine fintech company, which in turn gained access to the bank’s coveted license.
Latin American startups are now following other players’ footsteps in the United States and Europe. In early 2020, Lending Club reported a $185 million purchase of U.S.-regulated Radius Bank in early 2020.
For Ualá, which aims at regional expansion, the purchase means it is now legally enabled to offer banking products in the North American country.
Growth in Mexico
According to founder and CEO Pierpaolo Barbieri, the deal will allow Ualá “to offer a much wider variety of financial services within the ecosystem, as well as greatly accelerate our growth in the Mexican market.”
Owning a banking license could be an essential competitive advantage in the industry. It lets them grow into attractive products such as loans and credit cards.
Many fintech companies in Latin America operate within tailor-made local regulations, which can sometimes limit the range of their product suite. When seasoned companies want to expand into banking, they can face restrictions.
For that reason, they are left with a few options.
“They can either create their own bank, join forces with one or simply buy a small, usually half-dying bank in order to make use of the license,” Ignacio Carballo, fintech ecosystem director at Catholic University in Argentina, said.
“The goal is always the same: to offer clients a complete financial package and open doors to profitability,” says Carballo.
But to do so, it is clear that Ualá has significant sponsorship.
It raised $350 million in private capital earlier this year in a round led by Chinese Tencent and Japanese Softbank Group, reaching a valuation of around $2.45 billion.
With the purchase of ABC, Ualá joins the trend of growing fintechs buying small regulated banks in Mexico to accelerate the launch of new business verticals.
“Our objective is to continue developing a financial ecosystem that favors financial inclusion and allows us to reach more and more users,” Ricardo Olmos, general manager at Ualá Mexico, said.
“Expanding our products and services is key to promoting sustained and inclusive growth. With technology, we can increase access and lower costs, including more people.”
But Ualá was certainly not a first in Latin America.
Digital loans provider Credijusto broke new ground in 2021 with the acquisition of Banco Finterra in Mexico. The deal was reported at $50 million and is expected to allow Mexican fintech to broaden its product suite.
Founded in 2015, Credijusto is a financial technology company that focuses on lending to the underbanked in Mexico. Finterra’s portfolio, specialized in small business and agriculture, could permit Credijusto to cater services for a different clientele.
“The expansion reflects a global trend of fintech firms acquiring regulated banks to enable more diversified product offerings,” the company said in a PR statement.
“The acquisition doubles the size of its business and quickly accelerates Credijusto’s growth.”