The crises of the past few months have exacerbated inequality in Latin America and done harm to people’s financial health. But entrepreneurs are stepping up with tech-driven solutions. This is the first in a series that will explore what’s coming next in financial health innovation in the region.
A few years ago in Brazil, as the country suffered its worst economic crisis in history, banks raised annual credit card rates on unpaid bills to more than 500 percent. That spoke to a reality: access to credit is a major challenge for many people in Latin America, and a major cause of financial distress.
More than seven out of ten people in Latin America still lack a bank account, and eight out of ten don’t have a credit card. The prevailing cash economy might work for basic daily transactions, but it creates challenges for anyone who needs a loan urgently: for instance, to pay an emergency health expense or make home repairs after an earthquake.
The credit access problem starts with an unfortunate catch-22: you need credit history to get a credit card, but you also need a credit card to build your credit history. Without this credit history, people end up relying on informal “gota a gota” loans, which often end up doing more harm than good. Unfortunately, reliance on these loans has spiked during the pandemic. And would-be entrepreneurs are locked out of access to finance for their business, which further harms economic growth and job creation.
As we’ll share in our upcoming report, Tech and Financial Health in Latin America, there is a growing wave of fintech startups in Latin America that are democratizing access to financial services: taking financial products and services once reserved for the elite and making them more accessible and affordable for everyday people. Below we’ll preview the first section of the report, on Alternative Lending and Credit: tech-driven tools that help Latin Americans access safe and affordable loans and build a credit history.
Gustavo Rojo Blasquez worked for years as the Head of Credit Products at Citibanamex, the second largest bank in Mexico. He saw how millions of people in the country were shunned by traditional financial institutions, which made it almost impossible for them to build a credit history.
In 2016, Blasquez saw an opportunity. He knew that most consumers who got a chance to build a line of credit ended up making good on their payments. They just needed a shot. What if anyone could open up an account with a line of credit of $1,000 Mexican pesos?
Blasquez left Citibanamex to start a company, Vexi, which seeks to be a “first credit card” for people who don’t have a strong line of credit. Unlike traditional banks, Vexi allows individuals without credit history to make an account with a credit line of $1,000 Mexican pesos with minimal paperwork – a Facebook account, official ID, and proof of income over $2,000 Mexican pesos. They can approve cards within 72 hours. In order to train individuals unaccustomed to credit with how to use it, Vexi starts small with their users. “We start from really minimal lines of credit,” explains Gustavo. “It helps us see if people are using the credit card in the ways that we want them to.”
Vexi’s story is one of dozens of quickly growing startups offering creative ways to help people access safe and affordable loans and build a credit history. Each one has a unique and creative approach to offering services that traditional banks cannot. Ualá in Argentina, for example, offers a prepaid international MasterCard card that helps users complete free transfers and easily track their financial movements.
Nubank, a Brazilian neobank valued at $10B, recently expanded to Mexico where it already has a waiting list of 30,000 customers. The demand for its credit cards, savings accounts and loans targeted toward underbanked customers has it rapidly continuing that growth, recently announcing their move into Colombia, a third major market. Or Rebel, in Brazil, which uses machine learning and artificial intelligence to instantaneously analyze credit risk. CFO André Botelho Bastos says their technology “price[s] every loan request precisely in just a few minutes, which guarantees us a default rate that is substantially lower than that of the market.”
Financial health-oriented startups are generating significant interest from the investment community. Venture capital funding in Latin America more than doubled to a record $4.6 billion in 2019 with signs of continued strong growth in 2020. Fintech startups received over 30% of venture investment, the largest portion of any industry. Ualá raised $150 million in its last round and has issued two million prepaid cards since 2017. Afluenta, a lending marketplace that offers loans to SMEs, has raised more than $25 million. Klar, which operates a debit card that reimburses customers from one to four percent of their expenses everytime they shop with it, has raised $57 million.
Banking as we know it, is going through a revolution – and startups like these have the potential to shake up traditional banking in Latin America – rapidly gaining validation from mainstream banks and financial institutions, like Vexi’s recent license with American Express, and creating new opportunities for people to get past the catch-22 of banking and build a better financial future.