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The trials and tribulations of international expansion

Latin American fintech companies are thinking big.

In the hunt for larger markets, several financial technology companies are applying proceeds from investment rounds to ramp up expansions across regional markets.

They have a massive advantage over traditional financial companies: a lack of a robust, cost-heavy physical infrastructure that thwarts cross-border expansion. 

Economies that are very cash-dependent deliver opportunities for fintech providers that have successfully established themselves domestically.

With high banking concentration in many of these markets, fintechs set foot in other countries to compete with traditionally expensive providers.

Pablo Blanco

“From a financial point of view, borders are more and more blurry,” Pablo Blanco, a Chief Financial Officer with Alprestamo financial marketplace firm, said. “Every kind of financial product, whether credit or non-credit, will tend to internationalize,” he said.

He argued that the decision to build a regional franchise is also more attractive to investors.

But there are also disadvantages: a large set of regulations, together with cultures and financial habits that might diverge. On top of that, bureaucracy and local regulation can be a challenge. 

“In addition to having different cultural norms and languages, fintech companies must deal with different regulations, preferred payment methods, currencies, and infrastructure,” Angela Strange, partner at Andreessen Horowitz, wrote in a post.

But despite the obstacles, mature fintech companies have begun their regional hunt. The prize is significant: an addressable market of more than 650 million in a region where financial markets penetration is still shallow. 

Two giant markets

“Latam’s two giant markets are Mexico and Brazil,” Chloé Novène, an investment associate at ALLVP, said. At $1.5 and $1.1 trillion in GDP, respectively, their economies are substantial. “Expanding into those markets makes a lot of sense for many startups in Argentina, Colombia, and all the countries in the region.”

Chloé Novène

But escalating to Brazil, in particular, is viewed as no easy task. Beyond the intricacy of navigating its bureaucracy, it could also require large amounts of capital and setting up different outposts given its vast size. It is also difficult for idiomatic reasons.

For Novène, Mexico is an increasingly convenient market for Spanish-speaking Latin American companies looking to expand regionally. And it is also highly regarded by private equity funds. “To set foot in the Mexican market is quite attractive in the eyes of international investors.”

The case for regional companies heading to Mexico is abundant. One of the latest examples is Argentine unicorn company Ualá, which began operations in Mexico in 2020 and recently bought a local bank to sell banking products. The firm announced it would invest some $150 million in the country in the following 18 months to scale up its operation.

“It is a reality that in recent years, Mexico has been the preferred destination for many Latin American and global fintech companies to open and expand their operations,” Ricardo Olmos, general manager with Ualá Mexico, said.

“This is due to certain characteristics such as the size of its market, its high percentage of unbanked, its proximity to the largest global economy, and the clear rules imposed by the Fintech law, which have made it a perfect market for the flourishing of the industry.”

Afluenta operating since 2016

Ualá is not alone. Peer-to-peer lending company Afluenta has been operating in Mexico since 2016. More recently, Colombian fintech Tyba recently announced it would expand to Chile. And the same can apply the other way round.

Tribal, a U.S. fintech operating in Mexico, is now looking to market its products further south in Colombia, Peru, and Chile. 

Finally, the digital bank Nubank is an example on its own. Having attained significant size in Brazil, the company initiated an expansion phase in Mexico as of 2019.

It announced in 2021 that it would invest $135 million more to scale up its operations. It has also begun operations in Colombia, the home country of its co-founder and CEO David Velez. 

According to Novène, the case for Brazilian fintechs moving outside of their original market used to be rare before.  

Replicating success in Brazil is no easy thing to do in Mexico. “They are very different markets, with regulatory challenges and different consumer habits,” Novène said.

But the Nubank case, she argued, gave hope to many. 

“It shows that it can be done successfully. In less than two years, it has acquired more than 750,000 clients in Mexico,” she said.