Several neobanks have grown in size in the past few years, catering to underbanked Latin Americans.
Boosted by digitization amid the pandemic, many have succeeded in building a solid customer base, providing essential financial tools for millions of adults in the region.
But beyond individuals, financial inclusion has yet to reach another segment that has remained virtually cut off from traditional banking markets. That is small and medium-sized businesses.
Often, SMEs in the region remain financially excluded because they have little historical records, operate within significant levels of informality, and have little internationalization. These all make them poor targets of credit when it comes to banks, who have remained mostly reluctant to provide capital at scale in a region with high economic risk.
To this end, some fintech companies are stepping in to fill the gap, betting on big data and new technology to figure out loan pricing in the face of a lack of financial records.
Kapital wants to become a neobank for SMEs
Kapital, a Mexican fintech firm, wants to become a top pick for SMEs in the country. Recently, the company announced an expansion into Colombia, fueled by a $100 million credit line from Sivo, a debt-as-a-service U.S. company.
Earlier in the year, the company had taken an $8.6 million seed round from a group of venture capital investors. With the new capital, the company is looking to boost lending to SMEs, the latest illustration of how digital credit to companies could become a trend in Latin America.
“We achieved this (funding) in the most difficult times for raising capital,” René Saul, CEO, and Co-Founder at Kapital, told Fintech Nexus. “Our goal is to become Latam’s neobank for SMEs, allowing us to reach more customers and expand to other countries faster.”
Total funding rose to $130 million
Through Kapital, smaller-sized companies can access loans, and credit cards, pay bills in advance, and manage cash flows and expenditures on a digital platform. With over 7,000 clients, the company is in Mexico and Colombia. It is also planning to launch in Peru, the executive told Fintech Nexus. “We are still deciding on our next destination after that,” he said.
Following Sivo’s financing, Kapital’s total funding rose to $130 million, according to Crunchbase. The company will launch its so-called Kapital Flex product in Colombia, through which companies can defer payments to suppliers for up to 6 months, which, according to Saul, allows businesses to grow and have liquidity for their daily operations.
Opportunities in the SMEs segment
The Latin American and Caribbean region has about 27.5 million MSMEs, yet very few have access to financing. The Inter-American Development Bank estimates the overall funding gap at $1.2 trillion. According to the OECD, they receive only 12% of total credit—less than half the 25% share received by MSMEs in OECD countries.
“Small businesses consistently cite a lack of access to finance as one of the main barriers to growth, one that prevents them from making the investments required to increase their productivity and competitiveness, enter new markets and expand their workforce,” according to a report by the IDB.
Indeed, one factor restraining access to bank financing is the lack of information. Often, these firms do not have the necessary records that financial institutions demand to grant credit. This makes it difficult for banks to weed out unprofitable business operations without a case-by-base analysis, resulting in less financing than if they had a birds-eye view of companies.
It is in this aspect that some expect fintechs to make progress.
Fintechs are a good fit
“Fintechs have greater technological resources and more agile and efficient processes for a global review of SMEs,” Ernesto Calero, general manager at Mexico’s fintech association, said. “Traditional banking is making efforts to enter this market. However, their speed does not match the needs of an SME that can get better response times and credit granting digitally.”
To be sure, lending to smaller enterprises is still riskier than doing so for a large corporation. Logically, these companies often do not have sufficient backing to weather through crisis, making them vulnerable to the frequent economic turmoil in Latin America.
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Fear of recession
With fears of a recession at a global level and inflation rising, there are concerns among financial institutions and fintechs alike about default rates going up. However, economic instability is not new to companies, for which Kapital’s CEO is confident about local expertise in dealing with adverse scenarios.
“The risks of crisis are always present in Latin America; we have experience in that as a local company and are better prepared for any global economic risk that could hurt the region,” Saul said. “Undoubtedly, we do not need a recession in the U.S. or Europe because it can hit us, but I think that Mexico’s position, as well as Latam’s, is still solid in the face of this scenario.”