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LatAm digitization gaps render strong case for long-term fintech investment

Structural digitization gaps in Latin America’s business sector will likely lead to long-term value for fintechs providing the necessary infrastructure, according to U.S. growth equity firm Riverwood Capital. 

Despite the recent drop in valuations, when many financial technology companies in the region saw multiples halve, analysts and private capital investors believe that the technology case for digitization remains strong in Latin America.

Also, that flight to quality will likely favor further growth of already established companies, however, at the expense of new startups that might find a more challenging time securing much-needed capital. 

“We are more excited today than we were five years ago,” Riverwood Co-Founder and Managing Partner Francisco Alvarez-Demalde told Fintech Nexus. “Even though we are going through corrections, the business opportunity is still there. Growth is constant and very strong (among these companies). In some cases, it’s even accelerating. The long-term trend is solid.”

Francisco Alvarez-Demalde headshot
Francisco Alvarez-Demalde

Riverwood Capital is a California-based private equity firm that provides growth capital to tech startups. Its investment rounds typically range from $25 million to $125 million.

Recently, they invested $35 million in Argentine banking as a service company Geopagos to finance its growth across Latin America. The firm creates end-to-end products for fintechs and banks looking to offer acquiring services in Latin America.

“These companies are allowing clients to offer a digital account, a wallet, card payment… all of the infrastructure needed for the fintech revolution.” Alvarez-Demalde said.

The pandemic has accelerated digitization trends globally, allowing many digital banking companies to thrive in underserved markets by signing up millions of customers per month. Yet a new phase of digitization will likely have a different, parallel approach. That brings businesses on board and allows them to offer digital banking services through a BaaS provider.

“Digitization of the consumer is still growing, and it’s pretty clear,” Alvarez-Demalde said. “But behind what’s probably more apparent is the entire digitization of companies’ operations. It is more of a B2B opportunity, and we are in a very interesting moment of consolidation.”

Flight to quality 

To be sure, the industry is not out of the woods, and venture capitalists expect the correction phase to continue further on its downward trend. The rise in interest rates globally has led to a sharp contraction in equity markets, which has already seeped into valuations of privately owned startups in the region.

According to data from the Latin America Private Capital Association, venture capital investments into Latin American startups halved in the year’s second quarter, amounting to 2.5 billion compared to 5 billion in the year-ago quarter. A majority of those funds are invested in financial technology startups.

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“Fintechs with an established product and possibilities of turning a profit are better positioned to weather this (scenario), while the new ones are facing a more complicated situation,” Ignacio Carballo, a fintech adviser, said. “This shouldn’t go on like this forever. Big fintech companies are actually buying other firms, while open banking startups in Latin America are growing.” 

Lower financing has led many fintechs to moderate their growth strategies and pay greater attention to increasing profitability. However, Riverwood’s Demalde is confident about the outlook of larger companies.

“At the end of the day, these companies are creating value,” he said. “Companies delivering growth and sustainability or a proven business will still have access to attractive capital.”

Regionalization should continue

Over the past months, several fintech companies in the region that had announced ambitious expansions have put those plans on ice. Nubank, the region’s largest digital bank, said it would not launch in new markets for the time being while focusing on improving efficiencies and consolidating its footprint in Mexico and Colombia, where the company has recently launched operations. 

Other fintechs have done the same, regrouping and adjusting business plans to a less convenient scenario in terms of capital. However, Riverwood’s Demalde argues that the long-term trend remains intact. 

“Strong companies will continue to pursue a multi-country approach,” he said. “Of course, very thoughtfully, understanding the priorities and not doing everything at the same time. But the opportunity to build Latin American regional and global companies will not stop.” 

  • David Feliba

    David Feliba is a Latin American financial and business journalist. He reports fintech, banking, and economic news for global news organizations. His work includes interviews with senior executives, cabinet members, and policymakers across the region. Over the past years, David has reported from several locations in the Americas. His features have been published in leading global media such as The Washington Post, The Financial Times, Americas Quarterly and S&P Global news. He lives in Buenos Aires.