From Fintechs to Incumbents? The Neobanks Buying Banks in LatAm

Mexico’s Credijusto, Argentina’s Ualá and Brazilian Creditas acquired banking licenses as a way to raise funds

Fintechs acquiring banking licenses in LatAm.
July 21, 2022 | 02:43 PM

The trend in the Latin American financial industry was that traditional banks used to acquire fintechs. But now, the other way is becoming a thing too as neobanks have been buying banks in the region.

Fintechs, startups that use technology for the financial sector, are not banks in the traditional way, although the name of the most famous firm in LatAm, Nubank (NU), might lead one to believe that they are. In fact, Nubank does not have a banking license. In Brazil, Nubank works as a payment institution. This means that it cannot raise funds through deposits, only through the issuance of bonds.

But there are fintechs that are looking to become, in fact, banks, to add different types of funding.

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Betting on buying traditional banks helps LatAm’s startups speed up their customer acquisition and access licenses that allow them to operate other services in addition to those they have as fintechs.

It all started with Mexican fintech Credijusto last year, when it acquired the Finterra bank for nearly $50 million.

“Buying a regulated bank in Mexico was a very important achievement for us since it gives us many tools to support our clients, to offer a banking service, while also offering credit services,” David Poritz, co-CEO and founder at Credijusto, told Bloomberg Línea.

A year ago, Mexico’s National Banking and Securities Commission (CNBV) authorized the acquisition, and last May Credijusto rebranded to Covalto. As a bank, the startup is now offering credit services, banking services and products (data and SaaS) that help companies manage their own businesses to also provide other financial services to larger companies and not only to SMEs, as was the case when the startup opened shop.

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From the South, Argentine unicorn Ualá followed suit. Argentina’s answer to Nubank already has two transactions in tow: Wilobank in Argentina (already approved by the Central Bank of Argentina) and ABC Capital in Mexico (pending approval by the CNBV).

A couple of weeks ago, Brazilian unicorn Creditas also reported that it bought the banking license of Andbank in Brazil.

Fintech companies are beginning to gain strength by buying traditional institutions, not just banks, but also brokerage houses. Mexican Flink acquired Vifaru Casa de Bolsa in May for $25 million to double its number of investors.

Why do fintechs buy banks?

“In the United States and Europe more than five years ago there were fintechs that were applying for banking licenses and also buying banks,” says Poritz. And this trend is already reaching Latin America as the fintech ecosystem grows stronger.

In the case of Covalto, the main reason for buying Finterra, says Poritz, was the need to offer credit to more people.

Allan Apoj Pascal and David Poritz, co-founders at Credijustodfd

“If we want to scale, having a much lower cost of funding and having a much more diversified funding base is totally key,” adds Poritz.

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He affirms that this transaction was necessary “especially at this time when there is very little liquidity in the market in Mexico, because banks are no longer lending to fintechs and it is literally for those moments that we have a deposit base.”

Andrés Rodríguez Ledermann, Wealth Manager at Ualá, says the neobank needed a deposit and brokerage license to develop payment, credit assistance and investments. “At the end of the day, when you have to do loans with with your own capital, the cost of funding is more expensive and you end up transferring it to the end user in some way,” he told Bloomberg Línea.

Without a banking license, Rodríguez says neobanks can’t properly compete with institutions who can collect funds and intermediate those funds like a bank.

“We were getting bigger and bigger, we had more transactions, but we had the possibility of being more efficient, particularly in the most important business verticals, that is, payment methods and loans.”

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After more than a year pending a banking license in Argentina, Ualá got the approval for the change of control of Wilobank. And now the company is waiting to obtain the approval of the Mexican antitrust watchdog for the ABC Capital transaction.

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The beginning of a trend in LatAm?

Alfredo Castellanos, managing partner at Glisco Partners, considers that fintechs will probably continue buying banks.

“They are accelerating the process to be able to attract funds. Those who have the capital, those who have the cash, will be able to continue buying banks,” he says.

Rodríguez, from Ualá, considers that there are few fintechs that have the size to be able to carry out this type of transactions for which they need investment rounds “that can in some way give regulators the confidence that there will not be capital issues and that they will be able to have a normal banking activity.”

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Poritz says there are several benefits to owning a bank, but it also means to establish a close relationship with regulators. For him, having a bank and funding diversification gives the company tools not only to survive, but also to grow in times of economic uncertainty.

Regarding Covalto’s first anniversary, Poritz says that the startup implementing new technologies and new systems. “We are growing the bank very fast. We are already attracting deposits and I think we have a very robust plan”.

The plan is to grow at a rate of 100% a year “to become a major player in the banking sector.”

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Rodríguez, from Ualá, considers that “banking licenses are important so that the product is better, deeper and offers better costs and, therefore, better pricing for the user.”

A couple of weeks ago, the Brazilian fintech unicorn Creditas acquired Andbank’s license in Brazil for R$500 million (some $91.3 million). Sergio Furio, CEO of Creditas told Bloomberg Línea that this transaction did not mean they became a bank, but rather a new way to add funding sources. “We will own a bank and this bank will complement our sources of financing and deposits to be more efficient in financing, increase margins and reduce the cost for the client,” he said at the time.

Creditas, valued at $4.8 billion, already has a SCD (Direct Credit Society) license in Brazil, but is now adding a banking license to expand into deposit-taking for collateralized loans.

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Even with Creditas as owner, Andbank will continue as private banking and asset management as an independent entity.

The banking side

In an interview with Bloomberg Línea, Carlos Foz, CEO of Andbank in Brazil, said that the only thing that changed with Creditas’ acquisition is that now they own a license that Andbank in Brazil didn’t use.

“Our focus, private banking wealth management, which is our business in the world, continues to be our business in Brazil. Brazil continues to be strategic for Andbank. Investments continue to be made, for example, we are receiving an important contribution of capital”, he said.

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“Today, as a financial institution, we have two licenses. And in a private banking business I don’t need a banking license. I am not a credit bank. I am not a commercial bank. It’s not our business. Our business is private banking.”

Foz says that Furio has a close relationship with Carlos Aso, global CEO of Andbank, who had a banking license that he did not use, so he decided to sell it to Creditas. Now, Andbank has shareholding in Creditas, and will use Creditas for credit products. Sergio Furio has an option to become a partner in Andbank, but he has not done so yet.

Brokerage firms

Flink acquired Vifaru Casa de Bolsa in May for $25 million, its CEO and co-founder, Sergio Jiménez Amozurrutia, told Bloomberg Línea.

The acquisition is still in the process of being authorized by the Mexican regulator.

Flink is the first startup to acquire a brokerage house in Mexico. In Brazil, Nubank owns Easynvest.

The integration of Vifaru to Flink’s platform allow the company to offer investments, getting closer to the business of a traditional bank.

Jiménez says users now can invest in the New York Stock Exchange through the fintech’s app.

--With assistance from Isabela Fleischmann