Podcast: Future of Finance - LatAm perspectives

In this episode, QED's Managing Partner Nigel Morris and Head of LatAm Mike Packer discuss the findings of the Global Fintech 2023: Reimagining the Future of Finance report that we co-authored with the Boston Consulting Group.

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Show notes

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Nigel Morris is the co-founder and managing partner of QED Investors, a fintech venture capital platform focused on disruptive, high-growth financial services companies. QED has made numerous unicorn investments, including Credit Karma, Nubank, Avant, SoFi, Klarna, GreenSky, and AvidXchange.

Nigel is the Chairman of ClearScore and Mission Lane and serves on the boards of Remitly, Quinto Andar, Bitso, Amount and Current. Additionally, he serves on the board of Ideas42 and Scotia’s Digital AdvisoryCouncil, and he works in an advisory capacity with General Atlantic and Oliver Wyman. Nigel previously worked on the boards of Capital One, The Economist, Brookings, National Geographic, Klarna, Braintree, TransUnion, and London Business School. He frequently keynotes at industry-leading conferences, including Money2020, LendIt, Finance Disrupted and the Bernstein Annual Financials Summit.

Prior to QED, Nigel co-founded Capital One Financial Services in 1994. Under Nigel’s leadership as President and Chief Operating Officer, Capital One pioneered an information-based strategy that transformed the consumer lending industry.

Although Nigel grew up mostly in England, he takes immense pride in the fact that he is at least half Welsh. He has an MBA with distinction from London Business School, where he is also a Fellow. Nigel was recognized as a Top 100 Venture Capitalist by CB Insights in 2019 and Midas List member in 2020 and 2021. He is an avid cyclist, but he is happiest when he is at home in Virginia with his wife, four children, and three grandchildren.

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Mike Packer is a partner at QED, focusing on supporting the portfolio and finding new investment opportunities – with a current focus on Latin America as a region. Mike is passionate about finding the next wave of fintech’s disruptive entrepreneurs and business models – particularly in lending, payments, and anything that helps small businesses thrive.

Prior to QED, Mike spent 10 years with Capital One working across several functions and business lines developing a skill set in strategy and analytics.  He has always been drawn to data-based strategies and has broad experience in credit risk management, product development, decision sciences, data analytics, testing strategies, marketing, and financial management.  In his last role at Capital One, Mike led small-business lending and was charged with growing the portfolio in the face of growing fintech competition. Mike’s prior responsibilities included leadership roles in account management, retail partnerships and subprime credit card.

Mike holds MBA degrees from Columbia Business School and London Business School and graduated from the University of Virginia with degrees in systems engineering and economics.  Mike lives with his wife Maggie and two children in Tampa, Fla.

Full Transcript

Nigel Morris:

You are listening to the Fintech Thought Leaders podcast from QED Investors, your deep dive into the world of venture capital and financial services with today's digital disruptors. Fintech Thought Leaders brings together the most talented entrepreneurs tackling today's biggest problems. If you are looking to learn more about the hottest trends in fintech, you are in the right place.

Hello and welcome to Fintech Thought Leaders. I'm Nigel Morris and I'm the managing partner of QED. I'm joined today by QED's head of Latin America, Mike Packer, to dig deeper into LatAm data and insights found coming out of the research paper that we've recently co-authored with our good friends at the Boston Consulting Group called Global Fintech 2023: Re-Imagining the Future of Finance. And just a by way of background on the co-authored study as we've been talking to our limited partners, a question we often got was, "Where are we in the lifecycle of fintech?" And if I take the polls of that debate, one argument was, look, the innovation has now happened. There's been Stripe and Klarna and Square and Nubank, Remitly. These companies have now occurred and they've got to escape velocity. They've all done well. The low-hanging fruit has now been taken down in fintech and we're really in chapter eight of the book. So we're in the swan song time.

Other arguments would be, look, we're in the early innings of this, we're in chapter two, and there's enormous reasons to believe that we're going to see more and more very substantial fintech breakthroughs that are going to occur. And this debate of chapter two versus chapter eight was at the core of the motivation for the study that was done with BCG. So in light of that, this conversation today is much more around what we're seeing in Latin America. QED has following our investment in Nubank how many years ago? Eight, nine years ago perhaps.

Mike Packer:

Yeah.

Nigel Morris:

Yeah. We were enthralled by the opportunities that exist largely in Brazil and Mexico, but in other geographies too and how much opportunity there was. So how about we kick off with just a thought about what is the state of play in Latin America in terms of fintech and just a word on fintech and LatAm and the study is that the study points to just how small fintech revenues are in Latin America. Of course there's some big names that you can talk about from Konfio and KAVAK and Creditas and Nubank and QuintoAndar and Loft entities that we've invested in. But the relative small level of fintech revenues in LatAm points to potential lots of opportunity. What say you, Mike?

Mike Packer:

Yeah, I mean there's tons of opportunity. I mean, I think to create a little bit of an arc to this, what we've seen in the last seven, eight years, we invested in Nubank in 2015, as you referenced. We really started looking at the region throughout that year and into 2016, '17. But what we kind of saw was the early adoption of digitization of strategies. And there's been a lot of success that's come out of that. Some of that has been on the backs of innovation scene in other parts of the globe. So I think Latin America has certainly benefited from some of that. And we've just seen that continue to compound and accelerate as things get going. And a lot of the companies that are kind of doing well today put in the kind of investment over the years to build the infrastructure needed to bring fintech to where it is.

To your point about where revenues are in fintech as a proportion of financial services, I think it's in the 12% range according to this paper. And I think it's pretty good penetration, but got a long way to go. And in Latin America, the money is at the banks, pun intended. Financial services is a huge part of the economies. So today I think fintech is now starting to look for how do we move from digitization working on things like access and underrepresentation to really how do we embed deeply in the financial services ecosystem? But the numbers on unbanked and underbanked population in Latin America continue to stand out. 35% of the population being unbanked, 42% that is being underbanked. And these are the areas I think that fintech companies continue to have leg up in. And a lot of the innovation that we've seen has come more the banked and underbanked as opposed to unbanked.

I think there's a lot of opportunity in how access gets distributed, especially as some of these economies in Latin America continue to move forward. So I think the growth comes from the broad economic growth that's expected and the growth and strength of financial services. And then I think what we're predicting in this paper is just a little more penetration of fintech, if you will, of the entire financial services industry. One stat that stood out to me in that paper, I'm going to mess it up, of the fintech revenues, I think Nubank was something like 20% of them in terms of how big the opportunities are and how concentrated these markets are. You're talking about a few giant companies that have been created and even if you kind of steadily think that a few more giants are going to work their way in, the growth of this space I think is a huge opportunity.

Nigel Morris:

A lot in what you said there, Mike, thank you for covering that ground so quickly. Yeah. The BCG QED study predicts that fintech revenues in LatAm will go from $10 billion to $125 billion between now and 2030.

Mike Packer:

Nubank, I could have the numbers wrong, but it was roughly $2 billion in 2022. They're still growing quite quickly, but it's a fairly concentrated pool still. I mean, you've got these other big companies, Stone and PagSeguro, who's done really great work innovating in Brazil and merchant acquiring.

Nigel Morris:

The strength of Nubank, $2 billion in revenues if that's the right number. And I think 80 million customers now, is a pretty extraordinary phenomenon to build that kind of scale from a blank sheet of paper from tabula rasa is really pretty incredible. And if you go back to David Velez's architecture of the business model right from the beginning he said, "Look, there's so much friction. It's so hard to pay your bills. It's so hard to borrow money, it's so hard to engage with your bank." And he said, "Look, there's a real opportunity to revolutionize the way credit cards are delivered," and then a whole suite of other products with net promoter scores that are in the eighties and nineties where the incumbents are fractions of that. So let's go back to chapter two versus chapter eight then, Mike. As you look at the landscape, we touched on some of the breakthroughs that have already occurred. Where do you think this extra $115 billion of fintech revenues, where do you think the breakthroughs, which spaces, which verticals and which geographies?

Mike Packer:

So I think what we've seen are a few players that are leaders in their categories, in some cases global benchmark. We should count how many times we use Nubank today. It's well worth the count for sure. But that company is now looked at as a global benchmark and can go well beyond just looking at the market of Latin America. In spite of that, there are a lot of other categories to be built out. I think we talked about the underbanked and unbanked. So I think there will continue to be growth and revenues in the consumer sector, the ability to kind of land and provide payments, although we may continue to see spreads or pricing go down as access gets wider. Things like real-time payments, of course, driving the cost of payments down. So I do think there's still plenty of room left in consumer through access, through finding additional kind of niches and customer segments.

There's going to be a lot of opportunity there. I think the B2B segment is one that we're continue to be very excited about globally. It's also called out in this paper. You look at the employment statistics in Latin America, you look at the proportion of businesses that are small and micro-businesses is a very, very large proportion of the economies. And we'll get into the countries in a second, but that is fairly universal. They are very, very much in that unserved or underserved bucket. And so we're seeing not only banking services but things like tax services, things like the bookkeeping services, finance services. How do you run your business better in every given kind of vertical, I think we're seeing play out. I think Latin America has a outsized opportunity to kind of rebuild platforms. I think the other spaces that haven't really been fully penetrated, I mean, I think insurance is one that we talk about a lot.

We're starting to see a little bit of early stage momentum there. I think the global case for insurance continues to be a market that hasn't been disrupted in Latin America. So how that will happen, we have some hypotheses and we're still trying to figure out, but I think that one can happen. Yeah, I mean just to touch on geographies for a second, I think Brazil continues to be the biggest and probably the best setup to innovate and drive real value. We're going to talk about the regulator here in a bit, I believe. But they've done a really good job of fostering that ecosystem and not just from a regulatory perspective, but you've just seen the capital markets respond to businesses in Brazil. You can point to public companies, you can point to real exits. And that ecosystem development I think is one of the real strengths.

Mexico is next in line. A lot of really good things to like about Mexico, but it is behind in terms of where it is in the ecosystem, where it is in terms of exits. But the economy is huge. The opportunity is huge. You have some great tailwinds with the relationship to the U.S. for example, which is of course from our view in the U.S., a very, very nice positive. And the next countries I think still have large opportunities, whether you're talking about Columbia or Chile, or even Argentina or Peru, which have gone through some macro and political difficulties in recent years, you're going to see some innovation there. At what scale and how much of it is cross border, how much of it is homegrown I think is still to be determined. There really are opportunities everywhere you look, but Mexico and Brazil continue to stand out from a sizing perspective.

Nigel Morris:

One of the things that we've found also, Mike, is just how rich the talent pool is in Latin America. So many really talented individuals, many of them doing their graduate work in the U.S. although often undergrad locally, then working for Bain or BCG or Goldman, and then wanting to go back and build these businesses. So the talent has been really pretty extraordinary and spurred on by seeing these unicorns and these exits, a lot of talent coming into fintech in Latin America.

Mike Packer:

For sure. And I think what we're starting to see is not just kind of what you're describing, but the kind of second, third time founders, the founders that are leaving some of the larger fintech companies as well. So you're seeing some of that real experience, not just as in business or as an executive, but also as a kind of fintech entrepreneur, at least as an entrepreneur. And I think what we're seeing, early stage, formation stage companies are more and more exciting kind of piece of the town. Again, every country is a little different, but this is, I think, if some of these geographies and countries and governments are able to harness some of that pent-up innovation, I think you can really look to a very vibrant ecosystem. Because you're exactly right. You have the benefit of being able to look around the world. You have the benefit of a very young, digital oriented, high impact seeking workforce that's ready to go on the new phase of technology.

Nigel Morris:

Yeah, and what we found also having now made 30-odd current investments in Latin America and been investing now for these eight years is that as many of these companies succeed, often the very early stage employees will tend to spin off and start their own thing. A lot of people coming out of the Nubanks of this world. And in a way, you and I both coming out of Capital One and many of the people at QED followed that route as people seek that innovation. You talk about geographic expansion, Mike. I sometimes quip that any company that starts in Brazil wants to go to Mexico and any company that starts in Mexico wants to go to Brazil cause they're two of the largest economies side by side. Of course, culturally different, different language, different regulatory systems. But talking a little bit about how successful people have been in crossing that Brazil, Mexico blood brain barrier. And then maybe talk a little bit about what developing country models that have evolved in Latin America might mean for Africa or for India or for Indonesia.

Mike Packer:

To talk about Brazil and Mexico specifically, I think you're right in a lot of ways. It's looks like in a natural extension, especially from a case perspective, but it's a lot harder to really get the work done. I think most companies that we've worked with, which has probably been close to a dozen now, have all found it harder than they expected. And not just by 10 or 15%, but I think significantly. And I do think part of that is how different things are, whether it's talent regulation, whether it's kind of differences in terms of business model, all these things have been issues. But in Latin America, I think there is plenty of room for expansion and depending on which market you're in, which product you're in, going from Chile to Peru or Mexico to Columbia or Argentina to other countries. And we've seen that done a lot easier than the Mexico, Brazil, I think because Mexico and Brazil, when you're entering those markets, the competition is there, it's more developed.

So it's something that I think a company has to put a full kind of focus on. And that's where we really have seen some of the differentiation. Getting founders to move to one location or the other, getting founding teams together to really embed the culture has been I think one of the big positives of some of those expansions that we've seen. And in terms of other regions, I would say maybe two things. One, being cautious as you've kind of looked to expand regions. I mean, just as if you're in the U.S. and you're expanding cities or states, depending on how you've built your company and what kind of talent you have within the company, you need to take a special approach to expansion cause it's going to take the CEO's mind, the executive team's mind off of whatever they were thinking about the day before.

So making sure that you really combat that head on for some of those markets is good. And I think also building models or at least thinking about models that will cross borders easily. Understanding where the roadblocks to crossing borders will be, I think that's a big lesson. And fortunately in Latin America, there's been some clustering of countries that we're actually actively working to innovate across borders and to work together through trade agreements and other things like that that do make some things easier. But you got to know what you're getting into in any case.

Nigel Morris:

As you look at to what extent successful models in Latin America can be the X of Y, the KAVAK, or the QuintoAndar, or the Creditas of Nigeria or Indonesia or India, how much of value add is in the learning of cracking a business model in a developing country and taking it to another ascending developing country?

Mike Packer:

So my hypothesis is it's very high, and I think we see that as we work internally at QED to figure out where we're putting resources and how we're helping companies across the globe and combining some of the learnings from these models. We see it in kind of the entrepreneur or founder networks where founders from Africa or Indonesia or Latin America or kind of Southeast Asia, everyone is kind of seeking out someone who's gone through a similar business model or similar challenges. So I think that network, that kind of sharing of ideas is incredibly strong.

Selfishly, I think for us at QED, right, we're going to be able to connect some of those dots globally, which I think will be very good. But in terms of the actual strength of businesses that can be made from some of these learnings, I mean we're seeing it with some of the companies already kind of partnering or thinking about expanding as they do get bigger. But I think you're right, some of these business models, again, no matter which emerging market you're in, that been a good frame to think about will this work in another emerging market? And a lot of times you'll find some very interesting threads there, if not a direct copy.

Nigel Morris:

You can take a business model and plunk it down into a new geo and expect it to work without significant tailoring, augmentation, looking at the payment rails, working with the regulators, understanding what talent you need, it's very nuanced and very hard. And I think you're right, this is very seldom a 10 to 15% harder to cross a border, a much higher number. So I agree, but there are key learnings that can come from that. And you're right in saying that the QED entrepreneurial diaspora is looking aggressively to cross those borders where we see successful entrepreneurs in country A looking to do angel investing in country B. So in a sense, sponsoring and fostering that cadence. Yeah. Got it.

Mike Packer:

Absolutely.

Nigel Morris:

Things have slowed down though for QED in Latin America the last 12 to 18 months in part, Mike, because we've been working really hard to help our portfolio companies deal with a much more austere funding environment as we push in the time to profitability and manage expenses better and go through that process. Do you feel like we are through that or do you feel like we're still going through it? And do you feel like the investment propositions are starting to come back and there's a bit of a bounce back in the marketplace?

Mike Packer:

So I think everyone's been asking this question for the last three or four quarters.

Nigel Morris:

Yeah.

Mike Packer:

I think I might've already gotten the prediction wrong, but we have the benefit of whoever's viewing this wasn't part of my last chat. So I do think we're starting to see some of those green shoots. And I think towards the end of this year, I think we're going to be in a scenario where you're going to start to see companies differentiating themselves in the market. I mean, what's really happened is you had so many companies over capitalized in 2021 and early 2022 that there's just been this waiting game between how do we make the money last as a company, how do we get to profitability? And investor saying, "Well, you don't need the money, or if you did, it would be at the wrong terms." And so I think we talk a lot about that bid ask difference between the entrepreneur and the investor has been widening, but we see it kind of shrinking.

So I think the new investment is going to start to come as companies differentiate themselves. And unfortunately, we are going to start to see some more failures or acquisitions as the rest of the pack gets sorted out. But yeah, make no mistake, it has been slow. Companies have really had to hunker down and we're really proud of our portfolio and the resiliency I think that's in some of those businesses. And for us, it's been a good reminder of what we thought we were underwriting to. In some cases, we had real business models and the ability to have flexibility at scale.

And I think you see that across Latin America where you can find unit economics that work from the beginning. And those companies right now I think are differentiating themselves. So the kind of new mantra of grow and be profitable, those are the companies that I think are going to stand out. And yeah, it's easy to say. It's like increase your revenue and decrease your cost. It's very easy to say, very, very hard to do, but we're seeing companies do it. That makes me think that the market will continue to come back and investment's going to come back eventually as well.

Nigel Morris:

Yeah. With so much friction and so much inclusion yet to occur, so much opportunity in a larger population, more digitally enabled, gaining GDP per capita and a regulatory and policymaker backdrop that is increasingly more supportive, those opportunities have got to be there. And the incumbents by and large are going to struggle to do that, to struggle to engage digitally if they are in an analog distribution mode, attract the talent, deal with their own tech debt phenomenon. That's very well said. So let's go to regulatory policy. The study points quite clearly to the fact that there is a proactive role for policy makers and regulators to play here in fostering inclusion, fostering innovation, and with that, promoting inclusion of large populations that have not been served or have not been served well. And with that creates an economic multiplier effect as those folks get access to credit for example.

And that has a positive impact on the ability to be able to tax, if you like, a black economy, which of course is in the minds of central government. So we've seen India with UPI do a really good job. There's talk in the U.S. now of FedNow. I don't know if you are following that. And then Pix, of course. But how do you see the regulatory climate in general and how supportive or not is it of fostering the ecosystem that's necessary in order for the revenues to go up by 12x in the next seven or eight years?

Mike Packer:

Brazil has set an amazing example, I don't believe just for Latin America, but globally of kind of pushing innovation. Whether it's clarity for how a fintech company can be regulated, how you can get access to certain aspects of the financial markets, lending, payments, wealth management specifically, they've done an amazing job just setting the rules and then actually getting things done. I mean, Pix is quite the phenomena in terms of how high the usage is, not just initial signups and everyone creating their accounts, but the continued increase in transactions. We're seeing it more and more used in different use cases, some that I think can be really, really interesting to build around. So I think a lot of what Brazil has done is leaned into that. And then when you look at, I think the other countries, they're lagging behind. Frankly, they can do a lot more to speed things up on these two or three dimensions that I just referenced.

So one, providing more clarity to fintech companies across different types of companies. I think whether you look at Mexico or Columbia or Chile, they have certain regulation, but it only covers a sliver of the activity we have going on. And then two, kind of really embracing what are the next waves of innovation. I think one of the big things that everyone's talking about right now, and I think saying a lot of the right things is how you go to an open finance world, which of course we believe unlocks so much innovation for all the trends that we see in terms of embedded fintech.

I think there's some great references in the report in terms of IoT opportunities, of course, AI and how those data get used through new kind of AI innovation. So I think these are the things that everyone needs to lean into. And I do think that to your point, outside of Brazil, probably outside of Mexico as well, for the region to hit those numbers, you do need to see regulators kind of leaning into this and continue to lean into this. Again, I think there's a lot of reason to believe that this is going to go the right direction, but we're just getting started on that.

Nigel Morris:

The complexity of the tapestry of regulation around the world is incredible, and we see, sadly, often our regulators being rather focused on regulating away last year's problems. And usually that's just by more compliance rather than having the resources and the energy to take a step back and say, "Look, what's the arc here? Where is this going and how can we provide," the term you use, "Clarity and some steering of the boundaries of what is plausible and what is not so that innovation can get a sense of what's going to work and what's not going to work from a regulatory perspective?"

Huge opportunity for the regulators to be catalytic and accretive to these different economies as a result of it. If you had to point to where do you think, if we were having this conversation in seven or eight years from now in 2030, which is the scope of this study, what will we look back on and say, this is where the two or three biggest breakthroughs are likely to occur? So you have to be a bit clairvoyant here for me. And while you're thinking about that, I just want to make sure that we'd salute your incredible team in Latin America from Anna Chris to Lauren Morton to Fernando to Cammi, a really terrific dedicated team that we have that's really living and breathing things LatAm, and the wonderful entrepreneurs that we've had a chance to invest in and grow with over these years. Now, did I miss anybody there, Mike? Or did I get everybody?

Mike Packer:

That's the majority of the team of Camilla Kay has also spent a fair amount of time with us in a little bit of a split role as well. So we like to say that we will borrow anybody who wants to go to Latin America, and we've had a lot of hands up over the years.

Nigel Morris:

So last question, a big breakthroughs, Mike.

Mike Packer:

I think it's a little maybe cliche, and I think it's certainly called out in the report, but I think the B2B, small business, how do you get those portions of the economy really humming? There's so much efficiencies there. You mentioned informality, there's a big push by all of these governments to push more formality in the form of tax receipts. So compliance is going to continue to be an issue. Mexico, I think, has done a great job over the years with electronic invoicing, for example. And you see the formalization really increasing.

So I think there's going to continue to be pressure to upscale the small businesses and really arm those business owners with the tools to be more efficient. And then with that comes the growth of those businesses and comes the growth of the financial services around it. So whether you look at e-commerce, small services, informal kind of corner stores. Healthcare is another one there. There's so many of these sectors that are informal in the way that they do business, not necessarily informal in the way that they pay taxes. So moving all of that to digital and then moving all their financial services to embedded, I think is going to be a massive, massive trend across every sector. And it's going to unlock a ton of productivity and growth for the region.

Nigel Morris:

And Mike, absolutely, inevitably anything analog, anything paper-based, all the friction, all the clunkiness gets digitalized away. With that, costs fall, efficiency goes up. There are new data sets that emerge, and there are windows to offer services that add on so-called embedded finance, insurance payments, lending, trade finance, the list goes on. Mike Packer, thank you for giving us the time. Really appreciate the incredible insights on what's happening in LatAm, and look forward to having this conversation in 2030.

Mike Packer:

Agreed. Thanks, Nigel.

Nigel Morris:

Thanks mate.

This has been the Fintech Thought Leaders podcast, your deep dive into the world of venture capital and financial services. With today's digital disruptors. QED is proud to provide the best advice you can get. To learn more, or to read the full show notes from today's episode, check out QEDinvestors.com and be sure to follow QED on Twitter and LinkedIn @QEDinvestors. And thank you for listening.

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