Strong momentum for venture capital investments in Latin America extends well into 2022, with Mexican digital firm Techreo raising $5 million on its first-ever capital round as well as an additional $1.5 million in secured financing from Jeeves Fintech.
The financial technology firm launched in December 2021 to bring customers from the small and medium-sized enterprise space to the financial system. The AMB segment is one that typically benefits the least from bank funding.
Looking to address the gap and attract SMEs, Techreo is a platform that offers a range of products digitally, such as loans, investments, and other digital wallet services. The firm has struck a partnership with CAME Sofipo, a financial institution that already serves micro-entrepreneurs in Mexico.
The appearance of Techreo is one of the latest examples of financial technology firms looking to acquire clients at the base of the pyramid.
By definition, SMEs are less likely to obtain bank loans than larger firms. In Mexico, however, that is true even to a greater extent, in a country where almost two-thirds of the adult population is underbanked and have a clear preference for cash.
“Sixty-three percent of Mexicans are not banked while 90% of Mexicans have a smartphone,” Iliana De Silva, founder and innovation director with the firm, said.
Target smartphone users
According to her, there is an opportunity to serve that segment that owns a smartphone but does not consume financial services in the traditional banking sector.
“Many fintechs have come to Mexico to offer various services to the population. However, most are offering services to those already banked and are therefore competing with traditional banks,” she said.
“Our target is mainly the microfinance market, small entrepreneurs who not only need loans but also the full range of financial services that a regulated institution can offer.”
With the help of technology, some believe that the benefits of digitalization will finally reach a more significant number of small and medium-sized enterprises, as financial services can be provided more efficiently. “The underserved market in Latin America is enormous,” she said.
According to a SMEs report by Banco de Mexico in 2021, less than 10% of all loans to the private sector were granted to small and medium-sized companies.
“In Mexico, most of the companies are MSMEs, and despite this, most of the financing is given to large companies by the banking and/or stock market sector,” said Ernesto Calero, general manager with Mexican Fintech Chamber. “Fintechs provide alternative funding channels for MSMEs.”
Informal economy a barrier
One of the main hurdles in advancing credit through the SMEs sector is the significant size of the Mexican informal economy.
According to the Mexican statistical agency, as of 2021, some 29.5 million Mexicans were employed in the informal sector, an informality rate of 55.8%.
Such a large portion of the workforce employed in the informal sector means that many firms are active in the market but possess little financial history for a traditional bank to serve.
Calero argues that small and medium-sized enterprises are the “backbone” of the economy.
“Supporting these markets is of great importance for the development of the country, and today they are experiencing moments of transition in which technology will become their best ally.”