In Payments

Lindsay Lehr

Managing Director

PCMI

It’s now been two weeks since the collapse of Silicon Valley Bank, and nearly everyone in the Latin American venture space has tracked the fallout. The bank’s failure was the second largest in the United States since 2001, representing US$175 billion in deposits, including those of 400 Latin American startups, such as Roddo, Truora and Miferia.

Why was SVB so important to the Latin American start up community? It found a lucrative, yet high-risk niche: it was one of the few US-based FIs that would provide baking services for emerging market startups, whose VC firms often required them to have a bank account in the US.

This demand from VCs is both logical and ironic; it stems from the belief that the banking system in Latin America is not trustworthy, nodding to banking crises in Argentina and Mexico. Yet the very bank that served this niche also went belly up, due to a poor investment strategy and unfavorable market conditions. The difference is that regulators in the US have been able to provide the guarantee that investors ultimately look for: all deposits from SVB customers will be protected and returned.

In the meantime, the crisis illuminates an urgent market need and opportunity, that of cross-border banking for small businesses in Latin America. In the past two weeks, SVB customers have been without a bank. This is a critical problem for Latin American businesses, precisely because opening a business bank account is difficult and time-consuming in the region—part of the reason for services like SVB in the first place. An even sharper pain point is the lack of cross-border services.

Venture-backed start-ups have global investors and sources of credit, as well as suppliers, and they require the ability to move money in and out of the US, primarily—but also to other jurisdictions. Without a well-connected bank with relationships across both continents, suddenly money movement becomes difficult, expensive and risky.


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Start-Ups Seeking Solutions

In the wake of SVB’s collapse, Latin American start-ups have scrambled to find a solution to this problem, and money has flowed in a couple of directions: one is toward highly secure and reputable groups like JP Morgan; the other is toward other fintechs that are in various stages of maturity. Examples include Brazil’s Trace Finance, a fledgling, seed-stage fintech, with $4 million in total funding, according to Crunchbase. Yet, as PitchBook reports, upon SVB’s closing, the company suddenly found itself with a waiting list representing $1.5 billion in new customer deposits from former SVB clients.[1] Trace Finance is intentionally filling this niche, advertising its Global Banking, “the perfect solution for your US and offshore Cayman (LLC and C Corp) structure,” the characteristics of most US venture-backed startups.

Trade  Finance website, as of March 22, 2023
Source: Trade Finance. March 22, 2023

Latin American startups focusing on international banking is not a new phenomenon, but prior to this development, they were mostly focused on FX services for international businesses either selling—or disbursing funds into—Latin America. These companies were in the right place at the right time; their capabilities for holding deposits, having an FX banking license (especially in Brazil), and their ability to make fast, easy international transfers have positioned them perfectly to capture business from start-ups suddenly without an international banking partner.

Another Latin American fintech benefitting from the SVB fallout is Bexs, a Brazilian FX banking fintech acquired by UK-based Ebury, specializing in cross-border transactions for small and mid-sized businesses, in 2022. While Brazil has dozens of FX brokers licensed to provide the foreign exchange service needed (as per regulators) to send and receive international transfers, few have this and a front-end banking service for small businesses. The few that do are reaping the rewards.

3 Opportunities to serve SMEs in the Wake of the Crisis

This scrambling by startups highlights a large unmet need—international transfers for small businesses—one that global companies like Wise and Revolut have been attuned to for years, and who may also begin to attract new business after these events. These companies both have presence in Mexico and are beginning operations in Brazil, but widely their operations are limited compared to the enormous needs. VC-backed-start-up or not, Latin American SMEs have scant options for international payments. Over 90% of outbound B2B volume is served by traditional financial institutions, which are expensive, slow, and frankly indifferent to the needs to small business. The other option is traditional money remitters, such as Western Union and MoneyGram, which capture the demand of SMEs and independent professionals needing to pay small invoices to providers overseas.

Here lie multiple opportunities for new solutions for cross-border payments for small businesses which can move money cheaply, quickly, with regulatory compliance and with the needed transparency:

Global banking fintechs, which can provide a global bank account and banking services to companies with global operations

Alternative cross-border money sending rails, like Visa Direct and Mastercard Send

Blockchain-based money movement solutions, which can be licensed by banks or fintechs

Key Questions to Consider

In typical Latin American style, a huge market failure—the collapse of SVB—has been painful for some, but represents a silver lining for others, revealing an acute need and opening the door to innovative solutions. There are many issues to work out, mostly around regulation and security, but the trend is clear: the traditional correspondent banking system for cross-border transfers continues to fall short of the demand, and innovative, tech-based solutions are emerging. Questions, whose answers, that can help guide these competitors, include:

  • What are the top industries/use cases for small businesses demanding global banking services?
  • What are the top payment corridors?
  • What payment rails and technologies are used?
  • What pain points exist even for fintech-based solutions?
  • How will regulation impact the trajectory of this emerging niche?

It’s still early days for new solutions such as Trace Finance and Bexs, and in the short-term, large institutions will continue to dominate, even including the defunct SBV, which regulators are helping to get back on its feet. But implosion of the bank has awakened interest in innovative alternatives, which now have new wind in their sails and are sure to continue to forge a path in cross-border business solutions.

Next Steps

Contact us if your company needs help in answering the questions posed above. After conducting hundreds of payments industry studies in Latin America and beyond in the past decade, our team is well-positioned to help your company identify these use cases, rails, and corridors, while also identifying regulatory risks and other challenges.


Sources

[1] Bradbury, Rosie, 2023. “Fintech startups race to serve LatAm founders left behind by SVB. “ Pitchbook.com.


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