Let's get context right first, what happened to Mexico during COVID-19?
Mexico’s economy is still under recovery and it has not yet reached 2019 levels.
This poses a threat for economic and social development.
Mexico’s Economy is strongly supported during the pandemic by trading surplus and an increase in incoming remittances. This trend seems to have helped Mexico's economy surpass the initial COVID-19 effects.
During COVID Mexican citizens mobility decreased to -50% in average. This reduction in mobility impacted consumption habits and thus, severely hit the average mexican independent worker. Their income is dependant on people going out to the streets and buying their products.
Despite this situation, the Mexican government decided to provide little fiscal and liquidity measures to aid the economy. Mexico ranked as the 76th (out of 82) country in terms of capital injections.
Under a volatile and uncertain economic landscape, most banks opted for reducing their exposure, close credits and limit the amounts of new loans. This resulted in traditional banks reducing their credit portfolio size and market shares.
Consumer Credit in Mexico is expected to be $66.7B USD by the end of this quarter, according to Trading Economics global macro models and analysts expectations. In the long-term, the Mexico Consumer Credit is projected to trend around $68.5B USD in 2022 and $70.1B USD in 2023, according to econometric models. However, forecasts emphasize the market’s de-acceleration.
Consumer Spending in Mexico is expected to be $610.8B USD by the end of this quarter, according to Trading Economics global macro models and analysts expectations. In the long-term, the Mexico Consumer Spending is projected to trend around $625B in 2022 and $640B USD in 2023, according to our econometric models.
This forecast shows a steady stagnation trend for consumer spending.
How does economics shape startup development?
As bank shrunk their credit portfolio, central banks were also doing their part by reducing interest rates to control inflation. This combination results in the decrease in returns on traditional assets, and thus, the mexican Venture Capital and Private equity industry has drawn attention and interest as an alternative to traditional assets.
This has led to larger funding rounds and the rise of funded companies. Which also attracts the investments of international funds.
In just a couple years, Venture Capital became in 2020 the main investment activity as reported by AMEXCAP. Despite this being good news, it also leads to startups having more capital available (which is then invested into the market).
This turned out to be specially true as this money went directly into customer acquisition. This was particularly true for Fintech:
With less traditional options, alternative lenders found a lucrative and growing market. Market growth started driving new player’s attention, increasing rivalry and competitivity between startups.
During 2021, brands 10x’d their advertising spending to consolidate their position within the market against fierce competition.
Despite the strong growth of Fintech in Mexico, most traditional financial institutions have been playing catch-up game: leveraging their unit economics and strong customer channels to ramp-up their digital games. This has led to benefiting the consumers, as their digital banking experience has become much better.
An interesting analysis on customer ratings and downloads on app stores shows the fierce competition and catch-up game being played in the financial industry:
If we take a look into this by sector, we can find that most banks have catched up to challenger banking experiences, as their size helps them improve UX quickly and retain users. There is an obvious outlier to this (NuBank) that managed to grow and keep great ratings on their application despite exponential user acquisition.
This is not true when comparing banks with investment and mobile lending providers, where fintechs seem to have an edge, as the following figure shows, Fintech apps related to lending, insurance and investments are highly rated.
- Mexico has yet to recover from the economic impact of the COVID19 pandemic.
- Behavioural patterns were affected during the pandemic, this had an impact on consumption and thus lending activity.
- Mexican government decided not to incentivize the economy through fiscal nor liquidity policies.
- The market (people and businesses) require liquidity and start looking at debt as a viable option to glide the economic crisis.
- Under volatile conditions, banks become more risk averse. Most close their doors to new and riskier customers.
- Forecasts on consumer credit and spending are stagnant.
- Limited access to liquidity and private bank-funded debt leads consumers and businesses to search for alternative financing options.
- Fintechs had been growing steadily in the market, however, competition is fierce. There is an increase in available VC/PE funds whilst investment in Ads for Finance App’s has grown to over 1200% YoY.
- Banks have already catched up regarding most digital banking experiences, however there is a good opportunity for alternative lending and investments ventures before Fintechs or banks dominate the market.
So is it too late to launch a Fintech product?
We believe that launching a Fintech can be quite expensive now: Talent, customer acquisition and Lifetime Value are costly.
There is a strong opportunity to launch embedded finance case uses within your current offering. The most efficient way to do so is by using Insuretech as a Service, Funding as a Service or Lending as a Service products. This has been a strong use-case for our KonPaaS product where we've helped dozens of companies leverage their communities and launch financial services.
Blockchain was not strongly mentioned in this blog post, we will talk about blockchain and crypto further along the line as it requires it's own analysis, however, blockchain does pose a huge opportunity to deliver Fintech products. That's one of the main reasons why we've launched KNFT, our embeddable API-based blockchain service.