Financing Business Is Becoming Big Business

Dramatic changes are unfolding in Mexican and Latin American financial services regarding business-to-business (B2B) markets. Companies reaching scale today as well as nascent companies being created as we speak will dually transform the landscape of how businesses pay, borrow, lend, and transact in the coming decades, and outcomes in this space have implications far beyond financial services themselves. Technology is the primary driver of these changes, and entrepreneurs, investors and companies that choose to seize these opportunities will thrive in the coming decade. 

Fintech prior to 2020 had been defined by the consumer. Both in the US and elsewhere, large companies spawned in the years following the financial crisis in 2009 have grown rapidly and eventually eclipsed traditional financial institutions in terms of product development but also growth and revenue. Kavak in Mexico, NuBank in Brazil, and Chime in the US are all good examples. But as consumer fintech has matured, B2B fintech has increased in sophistication and opportunity in the background. Indeed, the best entrepreneurs in Mexico are now launching fintech businesses that serve other companies, and huge amounts of private equity capital is flowing into the segment, driven by confidence that developments will come quickly and returns will be high. 

Now is the time of enterprise fintech innovation. It’s happening globally and is particularly pronounced in Latin America and at similar paces in both Spanish-speaking countries and Brazil. This wave of change is primarily solving three main problems. First, fintech is blasting away complexity in B2B transactions. Enterprises small and large in Mexico and elsewhere have to manage incredible complexity with respect to relationships between vendors, suppliers, customers, lenders and borrowers – AR and AP management in particular is very cumbersome and expensive for companies to maintain. Early and later-stage fintech companies in Latin America, such as Xepelin and Mundi, are tackling this complexity through more nimble technological platforms that simplify systems that are labor-intensive, redundant and error-prone – often alongside attractively priced financing solutions. The result is more efficient operations for companies, along with new markets for capital markets participants of various types (including family offices and institutional investors). Indeed, entire investment funds are emerging to facilitate such platforms via debt financing, many of which are themselves harnessing unique business models (such as crypto-deposit-driven lending, such as Goldfinch). 

Poor access to capital and credit is another zone of significant innovation. The overwhelming majority of businesses in Latin America are underbanked or unbanked – often referred to as the “long-tail” of SMBs. This problem isn’t new by any means – limited access to credit in Mexico and Latin America has been widely known for decades, and various approaches have improved things to greater and lesser degrees. Banks are very poorly suited to serving these customers due to high variable costs, lower customer LTV, and poor information availability. But fintechs solve many of these shortcomings and are increasingly making a serious dent in weak access to such financial services. Solutions from firms such as Konfio to Creditjusto address small-to-medium sized business (SMB) credit in a number of ways, but almost universally they harness tech-enabled distribution advantages, frequently alongside machine-learning-driven underwriting using larger datasets. These approaches go far in ameliorating challenges regarding limited counterparty trust, poor institutional access, weak borrower sophistication and non-existent underwriting data. Digital technologies bridge this gap and allow targeted credit that ultimately facilitates faster and more efficient commerce and productivity (in applications ranging from agriculture to import/export and construction and transportation/logistics). The lack of easily-available credit for most companies has long produced a drag on Mexico’s economy, so these fast-growing companies represent a meaningfully positive force for faster economic growth nationwide.

Third, marketplaces are proliferating to a degree as to transform how goods and services are bought and sold throughout the enterprise segment. Latin America almost universally features a large informal vendor sector for many, many verticals – segments that include restaurants, retail, construction, manufacturing – and others usually feature a massive number of suppliers combined with a more finite universe of buyers. This causes lots of hassle for the buyers and generally poor terms for the suppliers. Inefficiency, waste and opacity abound due to this.  Emerging B2B marketplaces, which usually also offer smart methods of quality control, payment and credit, solve many of these problems, while leaving both buyers and sellers (especially the well-managed and efficient ones) better off. Strong vendors can grow their businesses through wider distribution, better terms, and easier access to short-term financing, while buyers can avoid large investments in procurement personnel and systems. Some of these models extend credit, some facilitate payments, and some coordinate logistics/delivery. But all are hallmarked by a stark shift away from inefficient informal and often paper-based processes toward reliable digital systems that lead to better results for market participants.

Rivaling and often exceeding developments elsewhere in the globe, a growing ecosystem of these new solutions is quickly emerging in CDMX, Guadalajara, and other regions throughout Mexico. Experienced fintech teams – both homegrown and foreign – are entering the market, powered by meaningful investment from large capital providers. Indeed, there are also indications that these opportunities are luring back Mexican talent from coveted foreign employers, such as investment banks in New York City and technology companies in San Francisco, helping to re-wind several decades of stultifying brain drain for the Mexican economy.

Regardless of the other outcomes from this sea change, it is obvious that consumers will ultimately benefit from better, cheaper and more ubiquitous consumer goods and services due to dramatic improvements from underlying supply chains and distribution networks operating under the economic surface. This effect is likely to pervade all aspects of the Mexican economy too, from the foods we eat, to the clothes we wear, to the houses we live in. Changes admittedly aren’t always good, but it is pretty safe to say that these will be – and that smart people building companies that ride this wave will likely make a lot of money in the process.