Embedded Finance in Latam’s Beauty and Wellness Market
STORY INLINE POST
Miriam is a Glitzi coach. She provides at-home hair services on the Glitzi gig-economy platform. She performs between 8 to 15 appointments per week while having a flexible schedule. She earns between US$150-$300 weekly, which, compared to the average income of a hairstylist working full-time in a traditional salon in Mexico, is up to 3.5 times more in weekly earnings for Miriam. She has been with Glitzi since 2019 and is one of the most active and trusted Glitzi coaches. However, in the eyes of traditional finance, she has a high-risk profile because she does not have a full-time job or a credit score. She struggles to get access to credit and when she does, the interest rates are between 10 percent and 20 percent monthly.
It is estimated that 38 percent of the employed population in Latin America is self-employed (Statista, 2019). That means that around 4 out of every 10 people economically active in Latin America struggle to get access to traditional financial services. If we look more closely at the low-skilled self-employed population in the region like Miriam, we are talking about an estimated 145 million people who struggle to access financial services and only have access to predatory and expensive products when they do.
As you probably already know, there is a boom in fintech startups in Latin America. Startups, such as Fondeadora, Oyster, Cuenca, Albo and NuBank, are offering consumers in Latin America fully-digital banking services and credit at much lower costs than traditional banks. This has significantly improved the banking experience of the employed and formally self-employed people in Latin America. However, there is still a huge market in Latin America that lacks access to great customer-centric and cheaper financial services: people in the informal sector (usually self-employed). I am talking about people who do not even have an RFC (Mexican tax identification number) to open a bank account at a neobank or who have never had credit from an institution. Beauty and wellness services professionals like Miriam have this profile. Most low-skilled workers in Latin America who tend to join gig-economy platforms have this profile.
The financial needs of this sector go beyond access to online banking. Self-employed low skilled workers need healthcare, insurance, savings instruments, loans and even financial education. Nevertheless, we have seen that access to cheap capital (low interest rate loans) is a game changer when it is used for their professional development. We have seen Glitzi coaches looking for capital to buy beauty and wellness products, to upgrade their smartphones, to pay for continuous training and to buy their own transportation (a motorcycle or a car). For example, Miriam asked us for capital to buy a new set of hair dryers that would help her provide better Glitzi services, meaning happier customers. We were shocked to hear the interest rates some short-term loan startups were offering her. After hearing similar cases to that of Miriam, we understood that those high interest rates were a reflection of a lack of data. No traditional bank or fintech startup has the information that Glitzi has on Miriam (activity on the platform, earnings history, incident rate, etc.) to assess her risk profile adequately. They have to apply the same underwriting requirements as with any formally employed person and, under that lens, Miriam is definitely a high-risk profile.
Because of several stories like Miriam, and to better serve our Glitzi coaches and empower their professional development, we decided to develop embedded financial services for them, leveraging our data. We have started with lending but our Glitzi coaches are already asking for insurance and savings instruments. Glitzi’s embedded lending services have significantly improved not only our retention of Glitzi coaches but also Glitzi’s margins. Indirectly, customer retention and satisfaction have also improved as the loans granted to Glitzi coaches are focused on improving the Glitzi service (purchase of beauty and wellness products and training).
Launching Glitzi´s embedded lending services without losing focus on our core business was only possible through a partnership with a startup providing embedded lending infrastructure. This company takes charge of the underwriting (using Glitzi’s data), the credit offers, the compliance, the capital lent and servicing and collection. Glitzi keeps a proportion of the interest collected from each loan, opening a new revenue stream for the company. The best part is that the interest rates are less than half those offered to Miriam outside Glitzi.
The hype in the fintech space in Latin America can deceive investors and entrepreneurs, making them pay attention to the solutions that continue to focus on people who have full-time jobs and credit scores. The bigger opportunity are those solutions that provide access to customer-centric and cheap financial services to people like Miriam, who represent the majority of the population in Latin America. The opportunity is bigger but the challenge is too, especially because the traditional methods of assessing and accessing affluent customers do not apply for this sector. To solve the puzzle, two components are needed: the enablers and the platforms. The enablers are companies that provide all the software infrastructure as a service (lending as a service, banking as a service, insurance as a service). The platforms are companies building ecosystems for the financially underserved, such as gig-economy platforms that know this market well and have access to it (unique data and $0 acquisition cost for embedded finance services).
With enablers constantly being created and established platforms looking for new ways to better serve their users, the prediction that every company will become a fintech company (Angela Strange, 2020) is becoming a reality. We are already seeing successful examples of it with Rappi Pay, Rappi Card and now Glitzi Capital.