Predictions: The fintech outlook for LatAm in 2023

QED Investors' Mike Packer, Ana Cristina Gadala-Maria and Camila Vieira share their thoughts on what to expect in the new year.

Market turmoil separates the wheat from the chaff

Many startups that raised during 2021 will return to the fundraising market in 2023 - most likely in Q3/Q4. We expect the impact of the recent turmoil is yet to be fully seen by the market. We remain invested in the region and confident that the talent in LatAm only continues to strengthen. Great talent in a downmarket can build sustainable and durable fintech companies, so 2023 will separate the good from the great.

The founder-friendly environment of the past few years created less-than-ideal behaviors in diligence and governance. 2023 will push companies and investors to lean heavily on audits, reporting, board composition, and voting rights. Founders that accept this new reality will find an easier path while fundraising.
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Regulatory changes, real-time payments and open finance

The democratization of data access enabled by Open Finance across Latam should drive financial inclusion for consumers and small businesses. Lending and insurance businesses also benefit from higher customer data visibility. Early momentum has already started, but this will be a long game.

Legacy banks are adapting their experience and features as mobile adoption and credit data continue to evolve. However, banks will require more than marginal features to win. For example, in order to bank GenZ and near-prime underserved groups, incumbents will need to reach these audiences where they are while leveraging and understanding alternative data.

The Brazilian Central Bank continues to show a balance between what is best for customers, banks, and fintechs. Some recent regulatory changes they have made such as interchange fee caps and the revised receivables registration process show their intent to continue to shift power back to consumers and businesses. Companies that lean into regulation will thrive. This dynamic has been and will continue to be excellent for the sector.

Colombia, Mexico and Brazil's startups will benefit from higher visibility regarding the regulatory landscape, especially in Colombia and Brazil after the recent elections.
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B2B solutions ripe for disruption

Operating SMEs in LatAm typically involve manual and inefficient processes alongside high overhead costs. In some cases, cash management gets out of hand, and it is too late; in others, delivering a competitive experience becomes impossible without a scalable back office and operations. Previously available solutions were often too generic or complex, costly, or marginal improvements.

Businesses previously dependent on interchange are starting to feel pressure to diversify their business. As a result, in 2022, fintech companies increased investments across other B2B modules beyond payments & expense management. We are excited to see how legacy models will adapt and the new businesses that will continue to emerge.

We already see many of our portfolio companies innovating in the space between revenue-based financing (Fairplay), SME-focused banking (Cora), payments and credit solutions (Konfio, Tribal, Colvato), embedded & infrastructure solutions (Pomelo, Kalto), HR (Worky, Hunty), treasury and accounts payable (Cobre), and outsourcing or all-in-one options (BHub, Kamino).

For many industries (e.g. retail, agriculture, healthcare, food), vertical-specific solutions are the only answer. We continue to brainstorm with founders new verticalized solutions focused on: procurement, treasury, accounts payable & accounts receivable, B2B marketplaces, and other solutions that will help companies improve finance, logistics, and operations.

Optimizing and automating basic financial workflows is very hard for finance teams that don't have a development background. Low-code solutions will give teams the power to build, scale and adapt their day-to-day processes while providing visibility to other stakeholders with minimum involvement & commitment from non-finance leaders.

When focusing on B2B, we have seen companies with great products but unable to consolidate their market efficiently, engage their base, and create a sense of loyalty. When applying our learnings from B2C to B2B, we are not only looking for the digitalization and automation of workflows but finding companies that will provide differentiated experiences.
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The trends for e-commerce and retail

Global digital merchants are adapting to accept local and alternative payment methods to reflect consumers' and suppliers' preferences. Fintechs that help merchants sell more will win by driving higher conversion, higher average spend, improved cash management, and fewer chargebacks for merchants. We will continue to see this trend for a while, as we are in the early innings of localized globalization and using payments to generate more revenue.

Customers prefer the convenient, comfortable, and contactless experience of online shopping, but every LatAm country still has a long way to go to become fully digitalized. We expect to see more companies seeking ways to create omnichannel experiences to adjust to the new norms. Zubale is a great example of the trend, handling fulfillment for major brands across Latam through gigworker marketplace. We are excited about companies working on inventory management (Melonn), logistics, marketing digitalization, and customizable checkouts in this space.

Consumers are buying more through social media platforms, and most intend to do it again. This trend only intensifies as younger generations ramp up their disposable income. Building a compelling presence, marketing appropriately via ads, influencer partnerships, or brand deals, and driving engagement are top of mind for companies.
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The best lending companies will be unaffected by the turmoil

All durable lending businesses must be able to navigate the up-and-down cycles of the economy and interest rates, which we have repeatedly seen in Latin America. 2023 is likely to give companies a real test. Companies that have been able to differentiate themselves with a unique distribution model, lower cost of capital, dynamic underwriting model, and efficient collection processes will likely make it through the potential market turmoil.

We continue to see new creative and sound collateral management methods in LatAm driving higher returns. A few examples include cellphone-backed loans, solar panel financing with IoT devices (Solfácil), home equity loans (Loft, Creditas), cargo collateral for trade finance (Vixtra), cars (Kavak, Creditas), and other equipment-backed loans.

With the expansion of embedded solutions & Open Finance, micro-lending tends to become more cost-efficient. We expect companies will design ways to make lending safer, more efficient, and effective for lending institutions while helping customers unlock new and recurring pools of capital.
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Fraud and alternative payments

Alternative payments such as PIX, QR codes, payments with face and voice, and crypto/digital currencies will continue to make payments contactless, instantaneous, and frictionless. But we must be careful - while alternative payments bring convenience to accessing financial services, it also creates more avenues for fraud. Given the high volume of fraud in the region, Fintechs in LatAm are born thinking about fraud and are well-positioned to lead innovation globally.

Different segments and products have different needs for anti-fraud tools. We don't envision this market as a winner-take-all case. We expect a combination of large-scale but more generalized anti-fraud providers and smaller but more specialized providers to tackle the spectrum of needs.

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The outlook for insurance companies

With Open Finance, we expect insurance companies and brokers to become more strategic and less transactional - able to create niche insurance products with adequate structure and price for the needs of consumers while balancing the cost of insurance and the delivery time.

In Brazil, companies are starting to scale after two years of startups joining SUSEP's regulatory sandbox. We are following companies that are innovating around:

• Coverage based on: pay-per-use, parametric, intermittent, geolocation, telemetry data, AI models, and creative inspections.
• Coverage for: climate & agriculture, micro-insurance, damage, health, life, wealth & assets, truck & auto, proptech & construction, travel and others.

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What can we expect in proptech?

When rates go up, consumers tend to buy fewer new homes and delay decisions to build. With volumes down, real estate agents, developers, and property managers want to ensure they optimize every cost. B2B proptech companies focusing on cash flow, supply, labor, operations & maintenance, design, building, and other ways to speed up construction & provide overall project visibility should benefit from this environment.

One trend we have seen in past recessions is the consolidation of construction and other proptech companies. With the fast growth in the industry pre-2022, startups that couldn't scale from a GTM standpoint will look to consolidate with other point solutions.

We have seen Quinto Andar and Loft thrive with residential, already-built housing. We expect other solutions will continue to emerge that provide alternative ways to gain ownership and more focus on commercial/B2B and not-yet-built properties.

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Embedded finance continues to play a vital role

We continue to believe in the power of platform solutions in LatAm, where companies fill multiple needs for a consumer across a particular value chain. Companies in our portfolio like Kavak, Nuvocargo, Loft, QuintoAndar, Zubale, Melonn, Capim, and Morado are successfully integrating financial services into their offerings. Embedded finance plays a vital role as companies gain access to proprietary user data and earn their "permission" to offer financial services within their product.

On the flip side, we also have providers of embedded solutions themselves - or infrastructure, as we see it. Embedded lenders, payment orchestrators, card issuers, data aggregators, collections agents etc. will play an increasingly important role in the ecosystem. We already have some investments in this thesis, as shown by portfolio companies Pomelo, Syntage, Plug, Kalto, and Caliza. As a relatively new category, we are still in the early days here and are excited to see this new infrastructure adopted at a larger scale.

While the first phase of embedded solutions was mostly focused on retail and marketplaces, we expect to also see new use cases in 2023 as SMEs and corporates continue to identify ways to engage, monetize and optimize their client base.

A cross-country transfer use case for crypto

Driven by FX fluctuations, delays, high costs and lack of transparency with legacy systems, we expect more LatAm companies and consumers will leverage distributed ledger technology, smart contracts, and tokenization to enable instant settlement and transfers.

2022 was a challenging year for crypto headlines, but we continue to search for teams and protocols that are trying to solve real Web 2.0 problems by building Web 3.0. In 2023, more bad actors will continue to pop up, and we should also see increased regulatory pressure. Companies building with transparency and controls while aligned with the regulatory world will continue to thrive, gain trust and expand market share.

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