Open banking may be a global trend, but implementation is fragmented. The fintech startups doing the legwork to make it a reality in smaller markets could become M&A targets for incumbents like Visa.
One of these is Y Combinator alumnus Fintoc, a B2B fintech startup that has raised a $7 million Series A funding round to solidify its presence in its home country of Chile and in Mexico, where it is currently launching expanded for a year.
Fintoc’s product is an API that allows online businesses to accept instant payments directly from the customer’s bank account. This method, known as accounts-to-accounts or A2A, offers an alternative to credit card transactions with fewer middlemen.
For end users, A2A can be as seamless as an online credit card payment. Instead of entering card details, they can simply select their bank and provide their banking details securely. However, the main selling point is with companies that pay a lower commission than standard credit card transaction fees.
Many countries now enable A2A, which has provided a tailwind for open banking companies such as Visa-owned Plaid, Tink, TrueLayer and Volt. More general fintech providers such as Adyen and Stripe have also partnered to offer A2A payments to their customers.
However, Latin America is not particularly easy to develop for global players and is not very attractive either. It is highly fragmented and many countries still lag behind in financial inclusion: less than half of Mexican adults have a bank account, according to World Development Indicators.
Mexico’s low banking penetration is a problem but also an opportunity for Fintoc, CEO Cristóbal Griffero told TechCrunch. He expects neobanks to address the problem, but it will take time. “If we get there just before this boom, we can grow with the market.”
Fintoc’s home market was in some ways less challenging. This helped it gain significant traction: “In 2023, 1,807,000 people paid for products, services and bills with Fintoc. That’s about 13% of the Chilean population,” content manager Pedro Casale wrote in an email. According to Fintoc, it is used by more than 1.2 million people in Chile every month.
These numbers are even more impressive considering that Fintoc faces competition from other players such as ETpay and Khipu. However, due to its large customers, it is tied to common use cases such as topping up public transport cards, e-commerce purchases, paying bills and making loan installments.
However, Chile’s population limits Fintoc’s potential growth, Griffero said. “We have a limit of 20 million residents, so after a certain level of sales, it is very difficult to reach an ARR of $100 million. It gets very 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.
Weakened expansion
When Griffero and co-founder Lukas Zorich joined the Y Combinator team in winter 2021, their pitch was pretty simple: they were building “Plaid for LatAm.” That is no longer the case; The Plaid model was too progressive for the region and the idea of rolling it out across the region was too ambitious.
VCs have also come to the same conclusion, as Fintoc learned during its fundraising process, Griffero said.
“I believe the resources are still there, just that their thesis has changed a little. Now you have to explain very well why [you’d go into] Every country. Saying “I’m So maybe it’s Mexico, Chile and some other country, not Brazil or not Colombia; not “we’re going to travel all over Latin America because we’re close.”
This more measured approach does not justify mega rounds. “In 2021, this round probably would have been five times larger,” Griffero said. But maybe that’s for the best; TechCrunch followed more than one unicorn having to scale back its pan-Latin American expansion and lay off employees as a result.
Fintoc expects a lot from its expansion in Mexico. “Mexico is the market we are most concerned about over the next two years and we expect it to account for the majority of Fintoc’s revenue over the next two years,” Griffol said. But the startup is taking things step by step: of its 48-person team, only five are based in Mexico. Zorich moved there last year, but Griffol may not do so until next year.
With more onerous plans, Fintoc’s Series A round might not have happened at all. CB Insights reported that fintech funding slowed to its lowest level since 2017 in the first quarter of the year. In Latin America, the decline is most noticeable compared to the second quarter of 2021: Fintech startups from the region raised a total of $6 billion in 94 deals, compared to just $0.4 billion in the last quarter.
Financing Latin American fintech companies is less in vogue than it was three years ago. But for VCs willing to wait, the rise of open banking across the region could ultimately lead to interesting mergers and acquisitions. Not just in Brazil, where Visa has spent $1 billion on Pismo, a payments infrastructure that will give it access to Pix, the country’s ubiquitous instant payment system. Also in Mexico: In 2021, Mastercard acquired the fintech startup Arcus, whose co-founder Iñigo Rumayor participated in Fintoc’s Series A round.
Fintoc’s main investors also have connections to the target market. The Brazilian fund Monashees has an office there, which previously participated in Fintoc’s seed round and has now made a follow-on investment. And Propel, the Series A leader, is based in the US but was able to facilitate its launch with Mexican banks, an important step in the startup’s expansion.
“The closer we get to 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 and post-payment methods that require customers to visit a physical location to complete their transaction. This makes A2A a pretty clear upgrade; But at some point, Griffero hopes it will also replace debit cards and later provide a solid alternative to credit cards.
Mastercard and Visa will clearly face increased competition as instant payments become commonplace with systems such as Pix in Brazil, but also UPI and India, and FedNow in the US. A recent report from Bain & Company estimates that 90% of today’s payments revenue “could move to software.” Vendors, big tech companies, and other competitors.” This explains some of their previous acquisitions, and we wouldn’t be surprised if others followed suit.