How real-time payments boosted fintech investment in Latin America

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With fintech investors looking for bright spots during a venture capital slump, Latin America is on the rise, partly due to Brazil's quickly maturing real-time payments network. 

The PIX network has, in less than three years, covered much of the country, creating demand for technology firms to provide services adjacent to payments and drawing attention to other markets where real-time processing has room to grow. 

"The adoption of PIX in Brazil, which has been phenomenal, has opened eyes to other central banks," said Daniel Lloreda, co-founder and managing partner of H20 Capital, a Miami-based firm that has invested in several fintechs that have influence from PIX. "It's a better way to track things like tax payments and obtain transaction data. To put myself in the shoes of a central bank, companies and consumers are going to want their funds in real time." 

Brazil's central bank launched PIX in November 2020, and it has been adopted by about 130 million consumers (out of a total population of 214 million) and 800 financial institutions, or nearly the entire market. Adoption has been driven by high cash usage in Brazil and a government policy that encourages digital payments via real-time rails and other projects such as the country's central bank digital currency.

Brazil's real-time payment market is much larger than the U.S. market. The Clearing House's RTP network in the U.S. has about 300 banks and FedNow, which launched in July, has about 200 banks in its network — though RTP covers more than 70% of U.S. bank accounts, and it's expected FedNow's adoption will grow in the coming years.  

"There has been a hockey-stick growth curve in real-time payments in Brazil," said Bridgit Hall, leader of real-time payments for the Americas at financial software company ACI Worldwide. "And advancing the use of digital payments has also created opportunities for fintechs in the area." 

Lloreda is betting that PIX will spur the growth of real-time payment networks in other Latin American countries, such as CoDi in Mexico and Transfers 3.0 in Argentina, as well as a real-time rail that's being developed in Colombia. Many of H20 Capital's portfolio companies have clients in most of these countries, as well as in the U.S., creating upside, he said.  

"The efficiency and ability to make decisions based on real-time data is priceless," Lloreda said. 

PIX's money train

H20 recently invested in several fintechs that provide technology in Brazil and other parts of Latin America. The Columbia-based OnTop, for example, enables payroll and HR services, potentially benefiting from instant payments to clients' employees. H20 also invests in the Columbian payment fintech Druo. 

H20's portfolio, which focused on early stage investments, also includes two dozen other fintechs. Lloreda also mentioned two non-portfolio payment companies — Dock, which sells a digital banking and payments platform, and payments fintech Benvo — as examples of technology startups in Brazil that are benefiting from PIX's growth. Mature payment companies also contend that PIX has been beneficial.

"Instead of taking three days to get funds in your account, now it comes in three seconds," said Carlos Netto, CEO of Matera, a Brazilian firm that develops software that powers instant payments for a third of the banks in Brazil, including two of the country's top three banks. It is also expanding into the U.S., with clients including Bank of America. 

As an example of PIX-influenced local investment, Netto mentioned Visa's June deal to acquire Pismo for $1 billion. Pismo is a Brazilian financial technology firm that sells cloud-hosted payment and banking technologies. The deal, which is scheduled to close by the end of this year, will enable Visa to offer digital payment processing for debit, prepaid, credit and commercial cards. As the number of PIX-connected bank accounts increases, the demand to provide technology to support those accounts will also go up, according to Netto.  

"PIX has made bank accounts more relevant," said Netto. "And there's going to be a lot of investment based on PIX. Acquirers and issuers are trying to figure out how to play in this market." 

Fast growth in a slowdown

Fintech investors have spent much of the past year chasing emerging opportunities that will drive growth in the future, such as payments orchestration or embedded finance. 

In the current fintech market, Latin America was the only region to see investment expand in the quarter ending June 30, according to CB Insights, which reported $500 million in Latin American fintech investments, up from about $200 million in the first quarter. Deal count remained the same at 69, and 81% of the deals were for early-stage fintechs. 

The success of real-time payments in Brazil plays a role in this boom by creating work for technology companies. 

"While the consumer and business benefits of PIX are immense, new networks always come with additional challenges, and hence opportunities, for new companies," said Andreessen Horowitz in a research note called "Brazil's surprising fintech tailwind." 

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"For example, instant payments are irreversible, which increases the importance of Know Your Customer (KYC)/Know Your Business (KYB) and fraud controls; this is an opportunity for a startup with an intelligent risk and fraud model and compliance expertise," Andreesen Horowitz wrote in its note. 

Research from the Wharton School at the University of Pennsylvania suggests PIX has increased competition among banks by lowering the cost of payments and deposits. 

"Small banks enter the market and gain market power," said Sergey Sarkisyan, a Ph.D. candidate in the finance department at the Wharton School. "Hence, their clients finally have access to fast payment systems."

That, in turn, has boosted financial inclusion, according to the university's study, which notes that people need a bank account to use PIX. 

Real-time payments have been shown to influence other payment innovations and expand participation in financial services in markets where there's a large real-time network, according to Gareth Lodge, a senior analyst for payments at Celent. 

"This is absolutely the case in many countries around the world," Lodge said, noting that in Chile, the explicit goal for the real-time payment network is to make sure fintechs target unbanked and underbanked consumers. And in Malaysia, the national identity network can be used by any fintech wallet, broadening the available market for fintech companies. 

"And of course, there's India," Lodge said, noting that the UPI rail was designed to work across phones and levels of financial literacy while serving as the backbone of financial services, rather than just payments. 

"I think the key element is that these schemes were designed to fit the needs of the users, rather than just create a 'faster ACH,'" Lodge said.