U.S. investors fund Mexican lenders targeting underserved merchants
Goldman Sachs, Elevar Equity and QED Investors are among institutions financing Mexican lenders that fund SMEs by leveraging business data such as e-invoices filed with the Mexican tax authority and credit bureau reports to make rapid decisions, typically within 48 hours. There are currently four fintechs lending to Mexican SMEs: Aspiria, Credijusto, Konfio and Creze, which was acquired in January by Mexico’s Polygon Fintech, a financial services provider to underbanked consumers and SMEs.
Mexico has a large informal, cash-based economy, and low bancarization levels, with banks focusing on lending to large businesses.
In September, Konfio received a secured credit facility of up to $100 million from Goldman Sachs, and obtained an extension of a credit line agreement with Victory Park Capital Advisors for up to $150 million. The deals will help Konfio lend about $250 million in the next 12 months, David Arana, Konfio’s CEO, told Bloomberg. Konfio’s plan is to expand into using guarantees or collateral, making it possible to provide larger loans than its current average of $20,000.
Goldman Sachs also invested in and provided financing to Credijusto. In March, Credijusto closed a credit facility of up to $100 million with Goldman Sachs, and in August Point72 Ventures and Goldman Sachs Principal Strategic Investments led a $42 million Series B funding round in Credijusto, in which QED participated. Founded in 2015, Credijusto has provided $90 million in asset-backed loans and equipment leases to small businesses in Mexico.
“Credijusto’s Series B is an endorsement of the firm, and investors are recognizing that there is a big opportunity in Mexico’s SME lending market,” said Johanna Posada, managing director of Elevar Equity, which was the main institutional investor in Credijusto’s initial funding round in 2016. “Credijusto has been growing and has maintained good asset quality. This means it has been doing the right type of underwriting and finding the right types of SMEs to fund.”
The reason for the growth in B2B lenders is because Mexico has a small number of national banks, whose main focus is highly profitable consumer lending on credit cards and mortgages, and lending to large companies.
“Their underwriting and risk systems aren’t really set up for lending to SMEs,” said Posada. Typically, Mexican banks require a lot of paperwork and lengthy back-office processes when lending to businesses.
Mexico’s SMEs form the backbone of its economy, comprising 99% of businesses and accounting for 74% of total employment, according to Credijusto. Yet they receive only 15% of total outstanding credit, as banks reject over 80% of all loan applications from SMEs. Also, SMEs can wait up to six months to receive funding from traditional lenders, and pay banks interest rates on average five times higher than those of their U.S. counterparts.
“We invested in Credijusto because we saw the size of the need for lending among underserved SMEs,” said Mike Packer, a partner at QED. “Credijusto fills that gap, and we liked its management team. We were also impressed by Credijusto’s model of secured B2B lending, as it’s not something that has been done well historically in emerging markets. Credijusto has made the secured lending process easier using innovative technology.”
QED, which has a Latin American fintech investment partnership with Canada’s Scotiabank, also invested in Konfio. Credijusto and Konfio aren’t close competitors, although there is some overlap at Konfio’s high end and Credijusto’s lower end.
“While Credijusto provides secured lending based on collateral such as real-estate or equipment, Konfio does unsecured lending,” Packer said. “Konfio also offers smaller-sized loans and targets emerging smaller businesses.”
Fintech lenders leverage Mexican credit bureau data and loan applicants’ e-invoices, which, under Mexican regulations designed to combat the informal economy, must be filed with the country’s tax authority Servicio de Administración Tributaria (tax administration service).
“The fact that e-invoicing data is publicly available created an opportunity for B2B services in Mexico such as factoring for SMEs, and for credit bureaux and lenders to access accurate business information,” said Posada. “They can see applicants’ revenues and the strength of their commercial relationship with buyers and suppliers.”
Mexico’s financial regulations have facilitated the development of the B2B lending market, as fintechs can become non-bank financial institutions known as SOFOMs (Sociedad Financiera de Objeto Múltiple). These institutions are authorized to provide loans, but have less onerous regulations than banks.
In 2018, the government announced a fintech law designed to promote financial inclusion and competition, while imposing stricter governance standards on fintechs.
According to a Moody’s report, “Fintech - Mexico: Bank of the Future,” the Law to Regulate Financial Technology Institutions (Ley para Regular las Instituciones de Tecnología Financiera) will make fintechs attractive to domestic and foreign investors, including large domestic banks and foreign tech firms entering Mexico.
“Fintech growth, and investment, in lending, payments, crowdfunding and digital banking services reflect the large pool of potential clients, eager investors, and a relatively welcoming business environment,” Moody’s said. “Easier loan applications are attracting individuals and small businesses that previously had little to no banking relationship.”
Aspiria, a company that wants to bring more capital into the Mexican SME market, was boosted by major changes to Mexico's financial regulations in 2010.
“Mexico has been left behind in terms of the supply of financial services compared to other countries, so the financial regulators have been introducing more flexibility in their regulatory frameworks," said Guillermo Hernández, Aspiria’s CEO.
Hernández said Aspiria’s goal is to bring the price of loans down.
“In Mexico, the ratio of domestic credit compared to GDP is 37%, but in the U.S. the ratio of credit to GDP is 150%,” he said.
Aspiria has an average NPL rate of 6% to 6.5%.
“We do most of our work at the origination stage using our risk and data models to prevent non-performing loans,” said Hernández. “Since 2015, our lending has been growing at 250% a year.”