Open banking may be a global trend, but implementation is fragmented. Fintech startups gearing up to do just that in smaller markets could become M&A targets for incumbents like Visa.
One of them is Fintoc, a Y Combinator alumnus. Fintoc is his B2B fintech startup that he raised $7 million in a Series A round to strengthen its presence in his native Chile and Mexico, where he expanded a year ago.
Fintoc's product is an API that allows online businesses to accept instant payments directly from their customers' bank accounts. This method, known as account-to-account (A2A), provides an alternative to credit card transactions with fewer middlemen.
For end users, A2A is as smooth as online credit card payments. Instead of entering your card details, you can now just select your bank and enter your bank credentials securely. But its main selling point is for businesses that pay lower fees than typical credit card transaction fees.
Currently, many countries are promoting A2A, which is a boost for open banking companies such as Plaid, Visa's Tink, TrueLayer, and Volt. More generalist fintech companies such as Adyen and Stripe have also entered into partnerships to offer their A2A payments to their customers.
However, Latin America is not a particularly accessible or attractive region for global players. According to the World Development Indicators, fewer than half of Mexican adults have a bank account.
CEO Cristóbal Grifero told TechCrunch that Mexico's low banking penetration is a problem, but also an opportunity for Fintoc. He expects neobanks to address this issue, but that will take time. “If we were there right before this boom, we would be able to grow with the market.”
In some ways, Fintoc's domestic market wasn't that difficult. This has allowed Fintoc to gain tremendous attention. “In 2023, 1,807,000 people used his Fintoc to pay for products, services and bills, which is about 13% of the Chilean population,” said content manager Pedro Casale. I wrote by email. According to Fintoc, more than 1.2 million people use it every month in Chile.
These numbers are even more impressive considering that Fintoc faces competition from other players such as ETpay and Khipu. But its large customer base means it is tied to frequent use cases such as recharging public transport cards, e-commerce purchases, bill covering, and credit installments.
But Fintoc's growth potential is limited by Chile's population size, Grifero said. “Once you get some revenue, it will be very difficult for ARR to reach $100 million because the population is limited to 20 million people, so it's becoming very complicated. , I have to go outside.”
The need to expand applies to all fintechs in Chile. However, Fintoc's roadmap also reflects how the market has changed significantly compared to 2021.
Toned down development
When Griffero and co-founder Lukas Zorich joined Y Combinator's winter 2021 batch, their pitch was very simple. “They are building a Plaid for Latin America. ” That is no longer the case. Plaid's model was too advanced for the region, and the idea of rolling it out region-wide was too ambitious.
Griffero said VCs have come to the same conclusion that Fintoc learned during its fundraising process.
“I believe the funds are still here, it’s just that their claims have changed a bit. Now they have to better explain why. [you’d go into] each country. Saying “I'm X from Latin America” is no longer appealing to investors, especially San Francisco investors. Because Latin America is so fragmented that it suddenly doesn't make sense to be in every country. So instead of Brazil or Colombia, it might be Mexico, Chile, and one more country. It's not like, “Let's do all of Latin America because it's close.''
This more cautious approach does not guarantee a large round. “In 2021, this round would probably have been five times as large,” Griffero said. But maybe it's for the best. TechCrunch has tracked several unicorn companies scaling back their pan-Latin America expansion and having to lay off employees as a result.
Fintoc has high hopes for expansion in Mexico. “Mexico will be our number one focus market over the next two years, and we expect it to represent the majority of Fintoc's revenue over the next two years,” Grifoll said. But the startup is working in stages. Of his team of 48 employees, only five are based in Mexico. Zorich moved there last year, but Grifoll may not move in until next year.
With a more cumbersome plan, Fintoc's Series A round might never have happened at all. Fintech funding slowed to its lowest level since 2017 in the first quarter of this year, according to a report from CB Insights. In Latin America, the decline is most stark when compared to the second quarter of 2021. At the time, fintech startups in the region raised a total of $6 billion across 94 deals, compared to just $400 million in the previous quarter.
Fintech funding in Latin America is not as fashionable as it was three years ago. But for venture capitalists waiting in the wings, the rise of open banking across the region could ultimately lead to some interesting M&A. Brazil isn't the only country where Visa spent $1 billion on Pismo. Pismo is a payment infrastructure that enables access to Pix, an instant payment system that is widespread throughout Japan. Also in Mexico: In 2021, Mastercard acquired fintech startup Arcus, whose co-founder Iñigo Lemayor participated in Fintock’s Series A round.
Fintoc's lead investors also have connections to the target market. Monasees, a Brazilian fund that previously participated in Fintock's seed round and is currently making an additional investment, has an office here. As the Series A leader, he was able to facilitate an introduction to a bank in Mexico, which was an important step in the startup's expansion, although Propel is based in the United States.
“The closer we get to the payment rails, the better the payment experience we can provide,” Griffero said in a statement.
On the customer side, Fintoc targets businesses in Mexico that accept offline payment methods such as cash payments and deferred payments that require customers to visit a physical location to complete a transaction. This makes A2A a very clear upgrade. But eventually, Griffero hopes it will replace debit cards and, in the future, become a solid alternative to credit cards.
Mastercard and Visa will clearly face more competition as instant payments become more common with systems such as Brazil's Pix, as well as UPI and India and FedNow in the US. A recent report from Bain & Company estimates that 90% of today's payments revenue “could shift to software.” vendors, large technology companies, and other competitors. ” This explains some of their past acquisitions, and I wouldn't be surprised if other companies follow suit.