Latin America’s Trillion-Dollar OpportunityBy Cristian Huertas | Mon, 07/18/2022 - 13:00
Analyzing the macro data from several Latin American countries, you will find that the three largest categories of a population’s expenses are food, entertainment and housing.
Whether people have a diverse diet or not, they do not always shop in the same place and are always looking for the best price or the coolest place (depending on income level). Some companies like Justo, Merkeo and Jokr are trying to grab as much as possible with a convenience offer at a competitive price. Exit barriers are low, thus users are tempted by flashy offers to switch between stores (or apps).
The same goes for restaurants: some apps are willing to grab as much as possible with a convenience offer (and a premium price). Exit barriers are usually (but lightly) generated with exclusivity from certain brands. You will use Rappi/Uber/Didi if your favorite restaurant is there. However, most people don’t always eat at the same place, every day for several years. It is difficult to grab most of the share of wallet from this expense.
Entertainment is also tricky. No matter how involved a person is in a hobby, the search for a new experience or to do something different is desirable. One weekend it can be a movie, the other a small road trip. Some companies have successfully earned a place in the share of wallet of entertainment with a robust offering of content but this remains low compared to other categories of entertainment.
Housing on the other hand is long term; no matter how nomadic you are, eventually you will grow some roots. Even if you rent, changing houses more than once a year is uncommon. Most people are tempted to buy a house but remain constrained by income. The CAGR of housing prices has skyrocketed, way beyond inflation, limiting the possibility for many to buy their dream house. Boomer or millennial, this happens eventually (at least that’s what data suggest) but for millennials this comes later, especially because they are in need of joining income with their partners to afford a mortgage. Consequently, housing is king in the share of wallet. There is no single payment as large as this among the middle class. Mortgages are literally the most important financial decision for the middle class around the world, taking up to 30 percent of their gross income.
The mortgage industry in Mexico has had a two-digit growth rate year on year (YoY) in the last 20 years and 2021 was the epitome. Banks grew 24.3 percent YoY on loan allocation, and an outstanding 34.3 percent YoY growth in financing. This story has repeated in several other Latin American countries that have benefited from historically low interest rates.
Despite the mortgage boom, if you are one of the lucky ones with an ongoing mortgage you may clearly remember how painful and complicated the process was. Today, it is as hard as it was to obtain a credit card from an incumbent 10 years ago: lots of intermediaries, several visits to the branch, small letters all over the place and physical signatures. The product is so freaking complicated that there are specialized and certified people to help you navigate the offering of 10 banks. No matter the Latin American country you look for, there are four banks with more than 80 percent of the mortgage offering. In fact,, there are certified people to help you navigate the products of four freaking banks!
When going deeper into the rabbit hole of mortgages you realize that most incumbents know there are several things that need to be changed but moving their “tech” stack is too painful. Most banks don’t know how to attract mortgage customers and heavily rely on other incumbents, the mortgage brokers, who in some cases bring up to 70 percent of the customers. Back office is also outsourced and some so-called tech providers help them with the flow of documents with valuators and notaries. Their tech is marginally better than banks but it is old, rigid and with few updates during the year. It seems that the banks' role in mortgage allocation is to provide a set of rules to deny mortgages, while capturing funding very cheaply. Most things are actually outsourced.
The current mortgage industry is a mixture of legacy players that have bureaucratized the process so much that banks need to charge two-digit interest rates to make decent money. The industry is full of dinosaurs being paid to reduce risk and avoid any failure, no matter how. Those intrapreneurs looking for change end up frustrated.
This comes with a heavy cost. An average mortgage takes more than 60 days to be approved and builders and real estate sellers suffer the consequences in their capital costs because their inventory turnover is heavily affected by these times. Also, regulation makes the process bureaucratic and painful for all parties involved. In several countries, like Mexico, the Public Registry Office is a state authority so there are more than 30 public registry offices. Corruption plays a role: there are several stories in which there are three valid property registrations (awarded and sealed by notaries) of the same property! Thus, banks have opted to avoid providing mortgages in these states.
All these factors affect the final user, who ends up paying more because of bank inefficiencies and government inefficiencies that have already been explained. Despite that, most people desire to own a house and they endure and suffer the process to accomplish the dream.
And their dream is so big that Brazil’s outstanding loan book is US$250 billion, Mexico’s is US$150 billion and when you add up all of Latin America, the number is very close to a TRILLION DOLLARS. That’s the size of the opportunity and that is why we decided to team up, take it all over and change it for good. You’ll hear from us soon!
In collaboration with Ana Lucía Pereyra.