Open banking may be a global trend, but implementation is fragmented. Fintech startups that do the legwork to make it a reality in smaller markets could become M&A targets for incumbents like Visa.
One of them is a Y Combinator alum Fintoca B2B fintech startup that raised a $7 million Series A funding round to establish its presence in its home country of Chile and Mexico, where it expanded a year ago.
Fintoc’s product is an API that allows online businesses to accept instant payments that come directly from a customer’s bank account. Known as accounts to accounts or A2A, this method offers an alternative to credit card transactions, with fewer intermediaries.
For end users, A2A can be as frictionless as an online credit card payment. Instead of entering their card details, they can simply select their bank and securely facilitate their credentials. But the main selling point is businesses, which pay a lower fee than typical credit card transaction fees.
Many countries now facilitate A2A, which has created a windfall for open banking companies such as Checkered fabricowned by Visa Tink, TrueLayer and Volt. It appeals to more general fintech players Adyen and Film they have also entered into partnerships to offer A2A payments to their customers.
Latin America, however, is not particularly easy for global players to enter, nor very attractive. It is highly fragmented and many countries still lag behind in financial inclusion: Fewer than half of Mexican adults they have a bank accountaccording to the World Development Indicators.
Mexico’s low banking penetration is a problem but also an opportunity for Fintoc, CEO Cristóbal Griffero told TechCrunch. He expects the new banks to address the issue, but it will take time. “If we’re there right before that boom, we’ll be able to grow with the market.”
Fintoc’s domestic market was less challenging in some ways. This helped it gain quite significant traction: “In 2023, 1,807,000 people paid products, services and bills using Fintoc. That’s about 13% of Chile’s population,” content manager Pedro Casale wrote in an email. Fintoc says it is used by more than 1.2 million people monthly in Chile.
These numbers are even more impressive when you consider that Fintoc faces competition from other players such as ETpay and Kipu. However, its large customers mean it is linked to frequent use cases such as topping up public transport cards, making e-commerce purchases, paying bills and paying credit installments.
Chile’s population size, however, puts a cap on Fintoc’s potential growth, Griffero said. “You have the threshold that we’re 20 million residents, so after a certain amount of revenue, it’s very difficult to get to $100 million in ARR. It’s getting too complicated and you have to get out.”
The need to expand applies to every Chilean fintech. But Fintoc’s roadmap also reflects that the market has changed significantly compared to 2021.
Reduced expansion
When Griffero and co-founder Lukas Zorich joined Y Combinator’s winter 2021 batch, their pitch was pretty simple: they were making “Plaid for LatAm.” This is no longer the case. Plaid’s model was too advanced for the region and the idea of rolling it out across the region was too ambitious.
VCs, too, have come to the same conclusion, as Fintoc learned during the fundraising process, Griffero said.
“I think the funds are still here, it’s just that their thesis has changed a bit. Now you have to explain very well why [you’d go into] each country. Saying “I am X for LatAm” is no longer attractive to investors, especially those in San Francisco, because Latin America is extremely fragmented and suddenly it doesn’t make sense to be in every country. So maybe it’s Mexico, Chile and another country, not Brazil or Colombia. not “we’ll do all of Latin America because we’re close.”
This more measured approach does not warrant long rounds. “In 2021 that round would probably be five times bigger,” Griffero said. But maybe that’s for the best. TechCrunch followed more than one unicorn that had to scale back its pan-LatAm expansion and lay off employees as a result.
Fintoc expects a lot from its Mexican expansion. “Mexico is the market we will be most interested in over the next two years, and we expect it to account for the majority of Fintoc’s revenue over the next two years,” Griffero said. But the startup is taking it one step at a time: Of its team of 48 employees, only five are based in Mexico. Zorich moved there last year, but Griffero might not until next year.
With more onerous plans, Fintoc’s Series A round might not have happened at all. In the first quarter of the year, fintech funding slowed to the lowest level since 2017, CB Insights mentionted. In Latin America, compared to the second quarter of 2021, the decline is more stark: Fintech startups from the region collectively raised $6 billion in 94 deals then, compared to just $0.4 billion in the previous quarter.
LatAm fintech funding is less popular than it was three years ago. But for VCs willing to wait, the rise of open banking across the region could eventually lead to interesting M&A. Not just in Brazil, where Visa paid $1 billion for Pismo, a payments infrastructure that will give it access to Pix, the country’s ubiquitous instant payment system. And in Mexico: In 2021, Mastercard acquired fintech startup Arcuswhose co-founder Iñigo Rumayor participated in Fintoc’s Series A round.
Fintoc’s main investors also have connections to its target market. Brazilian fund Monashees, which previously participated in Fintoc’s seed round and now he has made another investment, he has an office there. And the Series A lead, I’m promotedis based in the US, but was able to facilitate introductions to Mexican banks, an important step in the startup’s expansion.
“The closer we get to the payment rails, the better payment experience we can provide,” Griffero said in a statement.
On the customer side, Fintoc targets Mexican businesses that accept offline payment methods, such as cash payments and post-payment methods, where customers must visit a physical location to complete their transaction. This makes the A2A a pretty clear upgrade. but eventually, Griffero hopes it will also replace debit cards and later offer a solid alternative to credit cards.
Mastercard and Visa will clearly face more competition as instant payments become common with systems like Pix in Brazil, but also UPI and India and FedNow in the US. Bain & Company report estimates that 90% of today’s payments revenue could “migrate to software vendors, big tech companies and other competitors.” This explains some of their previous acquisitions and we wouldn’t be surprised if more followed.
