The Fintech Passport: Cross-Border Transactions & Money Movement 

In our increasingly interconnected world, the ability to move money across borders quickly, securely, and cost-effectively has become crucial for individuals and businesses alike. Cross-border payments and money movement encompass a wide range of financial transactions that traverse national boundaries. Latin America has emerged as a hotbed of innovation, particularly in the realm of cross-border payments and money movement. We see immense potential in this market, driven by a unique confluence of factors that make LATAM ripe for fintech disruption. 

We seek to invest in startups that leverage cutting-edge technology to address specific pain points in cross-border transactions, whether for individuals or businesses. Key focus areas include remittance solutions that significantly reduce costs and increase speed, B2B cross-border payment platforms that simplify international trade for SMEs, and innovative currency exchange solutions. We also see potential in blockchain and cryptocurrency-based solutions that can overcome traditional banking limitations.

As these trends converge, they're creating unprecedented opportunities for innovation in cross-border payments and money movement, particularly in emerging markets like Latin America. This blog post explores the specific opportunities, challenges, and investment thesis for the cross-border payments sector in the LATAM region.

The Market Opportunity: A Perfect Storm

Untapped Potential of the Unbanked

While approximately 50% of Latin America's adult population remains unbanked or underbanked, this figure varies significantly across countries:

• Mexico: 63% unbanked
• Colombia: 54% unbanked
• Brazil: 30% unbanked
• Argentina: 48% unbanked

This variation presents opportunities for tailored solutions in different markets. For instance, in Mexico, there's a greater need for basic financial services, while in Brazil, the focus might be on more sophisticated offerings for the underbanked population.

The total addressable market (TAM) for financial services to the unbanked in LATAM is estimated at $34 billion annually, with cross-border payments representing a significant portion of this.

Digital Adoption on the Rise

The digital landscape in LATAM is evolving rapidly:

• Smartphone penetration is expected to reach 80% by 2025, up from 68% in 2021.
• Mobile internet users in LATAM are projected to reach 424 million by 2025.

This digital transformation is not uniform across the region. Countries like Brazil and Chile are leading in digital adoption, while others like Bolivia and Paraguay are catching up. This creates opportunities for fintech companies to tailor their go-to-market strategies based on the digital maturity of each country.

Remittance Flows: A Lifeline for Millions

The remittance market in LATAM is substantial and growing:

• Mexico alone received $51.6 billion in remittances in 2021, a 27% increase from 2020.
• Guatemala, El Salvador, and Honduras collectively received over $28 billion in 2021.
• The average cost of sending remittances to LATAM is around 6%, leaving significant room for cost reduction through technology.

The remittance corridors with the highest volumes are:

1. USA to Mexico
2. USA to Guatemala
3. USA to El Salvador
4. USA to Colombia
5. Spain to Colombia

Each of these corridors presents unique opportunities and challenges for fintech solutions.

Booming Cross-Border Trade

Intra-LATAM trade and cross-border e-commerce are growing rapidly:

• Intra-LATAM trade reached $150 billion in 2021, a 25% increase from 2020.
• The Pacific Alliance (Chile, Colombia, Mexico, and Peru) is driving increased economic integration, creating new opportunities for cross-border payment solutions.

Key Growth Drivers: Catalysts for Change

Financial Inclusion: A Social and Economic Imperative

Financial inclusion in LATAM has significant economic implications:

• The Inter-American Development Bank estimates that increasing financial inclusion to the levels of developed countries could boost GDP in LATAM by up to 30%.
• Fintech solutions have the potential to bring 30-50 million unbanked adults in LATAM into the formal financial system by 2025.
• Government initiatives, such as Brazil's Pix instant payment system, are accelerating financial inclusion and creating opportunities for fintech innovation.

Digital Adoption: The Great Enabler

The rapid digital transformation in LATAM is creating new opportunities:

• Mobile banking users in LATAM are expected to exceed 200 million by 2025.
• The number of digital banking users in Brazil alone is projected to reach 88 million by 2024.
• Super apps, like Rappi in Colombia, are becoming increasingly popular, offering opportunities for integrated financial services.

Regulatory Tailwinds

Progressive regulations are fostering fintech innovation:

• Mexico's Fintech Law, enacted in 2018, provides a clear regulatory framework for fintech companies, including those in the payments space.
• Brazil's open banking regulations, fully implemented in 2022, are creating new opportunities for data-driven financial services.
• Colombia's regulatory sandbox for fintech companies, launched in 2020, is encouraging innovation in areas like cross-border payments.

E-commerce Boom

E-commerce growth is driving demand for cross-border payment solutions:

• LATAM e-commerce sales are projected to reach $160 billion by 2025, up from $85 billion in 2021.
• Cross-border e-commerce is growing faster than domestic e-commerce in many LATAM countries.
• Major global e-commerce platforms, like Amazon and Alibaba, are expanding their presence in LATAM, creating new opportunities for payment providers.

The Nearshoring Phenomenon

Nearshoring is reshaping cross-border business activity:

• Foreign Direct Investment (FDI) in Mexico reached $29.8 billion in 2022, largely driven by nearshoring.
• Companies like Tesla, BMW, and General Motors have announced significant investments in Mexico, driving demand for cross-border financial services.
• The USMCA (United States-Mexico-Canada Agreement) is facilitating increased trade and investment flows, creating opportunities for innovative payment solutions.

Where we're placing our bets

B2B Cross-Border Payments

The B2B cross-border payments market in LATAM is ripe for disruption:

• The B2B cross-border payments market in LATAM is estimated to be worth over $50 billion annually.
• Traditional bank transfers can take up to 5 days and cost up to 5% of the transaction value.
• Opportunities exist for solutions that offer:some text
  • Real-time payments
  • Lower fees (targeting <1% per transaction)
  • Enhanced transparency and traceability
  • Integration with ERP systems and accounting software

Example: EBANX (Brazil) specializes in cross-border payment solutions, enabling global businesses to accept local payment methods from Latin American consumers, facilitating international e-commerce transactions across the region.

Remittance Solutions

The remittance market offers significant opportunities for innovation:

• The total remittance market in LATAM exceeded $100 billion in 2021.
• Traditional remittance providers charge fees of 5-10%, leaving room for more cost-effective solutions.
• Key areas for innovation include:some text
  • Mobile-first solutions
  • Blockchain-based transfers
  • Integration with local payment methods (e.g., Pix in Brazil)
  • Value-added services (e.g., bill payment, micro-investments)

Example: Felix Pago (Miami-based) offers a chat-based platform for Latino workers in the US to send remittances to Latin American countries.

FX and Treasury Platforms

Currency exchange is a critical component of cross-border transactions:

• The forex market in LATAM is estimated to be worth over $20 billion annually.
• Opportunities exist for platforms that offer:some text
  • Real-time exchange rates
  • Multi-currency accounts for businesses and individuals
  • Hedging solutions for SMEs
  • Integration with e-commerce platforms

Example: Currency Cloud (UK) offers a global payment technology platform that enables businesses to make and receive international payments quickly and securely. It provides a suite of APIs and services that allow companies to manage multi-currency transactions, automate payment workflows, and access competitive exchange rates across a wide range of currencies. 

Open Banking Solutions

Open banking is creating new opportunities for cross-border financial services:

• Brazil's open banking regulations, fully implemented in 2022, are setting a precedent for the region.
• Mexico and Colombia are also developing open banking frameworks.
• Opportunities include:some text
  • Account aggregation across multiple countries
  • Cross-border credit scoring
  • Automated financial management for businesses operating in multiple LATAM countries

Example: Belvo (Mexico City) provides open banking APIs that enable fintechs to access and interpret user financial data from banks and fiscal institutions.

Identity Verification and KYC

Efficient identity verification is crucial for cross-border financial services:

• The market for digital identity verification in LATAM is projected to reach $1.5 billion by 2025.
• Opportunities exist for solutions that offer:some text
  • AI-powered document verification
  • Biometric authentication
  • Cross-border identity validation
  • Compliance with varying KYC regulations across LATAM countries

Example: Truora (Colombia) offers an automated identity verification solution for businesses in Latin America.

Blockchain & Cryptocurrency

While still emerging, blockchain and crypto solutions show promise:

• Cryptocurrency adoption in LATAM is growing, with countries like El Salvador adopting Bitcoin as a legal tender.
• Opportunities include:some text
  • Stablecoin-based cross-border payment solutions
  • Blockchain-based remittance platforms
  • Crypto-fiat gateways for businesses

Example: Bitso (Mexico) is a cryptocurrency platform that facilitates cross-border payments using blockchain technology.

Technology of Interest: The Engines of Innovation

AI and Machine Learning

AI and ML are transforming various aspects of cross-border payments:

• Fraud Detection: AI can analyze transaction patterns in real-time, potentially reducing fraud rates by up to 60%.
• Credit Scoring: ML models can incorporate alternative data sources, enabling credit assessment for thin-file or no-file customers.
• Customer Service: AI-powered chatbots can handle up to 80% of customer queries, reducing operational costs.
• Foreign Exchange Optimization: ML algorithms can predict currency fluctuations, helping businesses optimize their FX strategies.

Example: Feedzai (Portugal/US) provides AI-powered risk management solutions for cross-border payments.

Blockchain and Distributed Ledger Technology

Blockchain technology offers several advantages for cross-border payments:

• Settlement Time: Blockchain can reduce settlement times from days to minutes.
• Cost Reduction: By eliminating intermediaries, blockchain can potentially reduce transaction costs by up to 40%.
• Transparency: Immutable transaction records enhance auditability and compliance.
• Interoperability: Projects like Ripple's Interledger Protocol aim to connect different payment networks.

Example: Circle (Boston) offers digital payment solutions and stablecoin infrastructure, most notably issuing the USDC stablecoin pegged to the US dollar.

Open Banking APIs

Open banking is creating new possibilities for cross-border financial services:

• Data Aggregation: APIs enable the consolidation of financial data from multiple sources across countries.
• Payment Initiation: Open banking can facilitate direct account-to-account payments across borders.
• Credit Decisioning: Access to transactional data can improve credit assessment for cross-border lending.
• Product Innovation: APIs enable the creation of new financial products that combine services from multiple providers.

Example: Prometeo (Uruguay) provides open banking APIs that connect to various financial institutions across LATAM.

Data Analytics and Predictive Modeling

Advanced analytics are crucial for optimizing cross-border financial services:

• Risk Assessment: Predictive models can improve the accuracy of credit decisions by up to 25%.
• Market Expansion: Data analytics can identify promising new markets and customer segments.
• Pricing Optimization: Dynamic pricing models can maximize profitability while remaining competitive.
• Regulatory Compliance: Analytics can help identify suspicious transactions and ensure compliance with AML regulations.

Example: Kushki (Ecuador) uses advanced analytics to optimize payment routing and reduce transaction costs.

Investment Criteria: What We Look For

When evaluating potential investments in the LATAM cross-border payments space, we focus on the following criteria:

Strong Founding Team

We look for teams with:

• Deep domain expertise in finance, technology, or relevant regulatory environments
• Track record of successful exits or significant growth in related fields
• Strong understanding of LATAM's diverse markets and cultural nuances
• Ability to navigate complex regulatory landscapes
• Demonstrated capacity to attract top talent in a competitive market

Innovative Technology

We prioritize solutions that:

• Leverage cutting-edge technology (AI, blockchain, etc.) to solve clear pain points
• Demonstrate significant improvement in speed, cost, or user experience compared to existing solutions
• Have potential for IP protection or other defensible technological advantages
• Show scalability and ability to handle increasing transaction volumes
• Adapt to the unique technological challenges of the LATAM market (e.g., varying levels of digital infrastructure)

Scalable Business Model

We look for business models that:

• Have potential for regional expansion across multiple LATAM markets
• Demonstrate improving unit economics as they scale
• Have multiple revenue streams or potential for expansion into adjacent services
• Exhibit network effects or other characteristics that improve with scale

Regulatory Compliance and Partnerships

We prioritize companies that:

• Have robust compliance frameworks adaptable to different LATAM jurisdictions
• Demonstrate proactive engagement with financial regulators in target markets
• Have secured necessary licenses or are on a clear path to obtaining them
• Have established strategic partnerships with banks, payment networks, or other key players in the financial ecosystem
• Show ability to navigate the complex and varying regulatory landscapes across LATAM

Network Effects

We favor business models that:

• Become more valuable as they gain more users (e.g., payment networks, marketplaces)
• Have potential to create ecosystems that encourage user retention and growth
• Can leverage data network effects to improve services over time
• Have potential to become default choices in their respective niches due to network advantages

Our Approach

Our investment strategy is tailored to the unique opportunities and challenges of the LATAM market:

• Geography:some text
  • Primary focus: Mexico, Brazil, Colombia, Argentina
  • Secondary focus: Chile, Peru, Uruguay
  • We're particularly interested in companies with potential for pan-LATAM expansion
• Investment Stage:some text
  • Seed to Series A
  • We occasionally participate in pre-seed rounds for exceptional teams or ideas
• Initial investment ticket:some text
  • Seed: $1M - $1.5M
  • Series A: $1.5M - $2M
  • We reserve capital for follow-on investments in subsequent rounds

Risks and Challenges: Eyes Wide Open

While the opportunity in LATAM cross-border payments is significant, we must be cognizant of the following risks:

Regulatory Uncertainty

• Varying regulations across LATAM countries can create complex compliance requirements
• Sudden regulatory changes can significantly impact business models
• Some countries may introduce protectionist measures favoring local players

Mitigation: We favor companies with adaptable compliance frameworks and those actively engaging with regulators.

Currency Volatility

• Many LATAM currencies have historically been volatile, affecting profitability and increasing financial risk
• Currency controls in countries like Argentina can complicate cross-border transactions

Mitigation: We look for companies with robust hedging strategies and those leveraging stablecoins or other innovative solutions to manage currency risk.

Competition from Global Players

• Well-funded global fintech companies (e.g., Wise, Revolut) are increasingly entering the LATAM market
• Local banks and traditional financial institutions are also investing heavily in digital transformation

Mitigation: We prioritize companies with deep local market knowledge and those targeting underserved niches.

Cybersecurity Threats

• Fintech companies are prime targets for cybercriminals due to the sensitive financial data they handle
• The cost of a data breach in LATAM averaged $2.23 million in 2021

Mitigation: We ensure our portfolio companies prioritize cybersecurity and have robust data protection measures in place.

Economic Instability

• Some LATAM countries face ongoing economic challenges, including high inflation and political instability
• Economic downturns can significantly impact consumer spending and cross-border transaction volumes

Mitigation: We favor companies with diversified market exposure and those offering countercyclical or recession-resistant services.

Market Saturation

• Certain segments of the fintech market in LATAM are becoming crowded, particularly in more mature markets like Brazil
• Intense competition can lead to unsustainable customer acquisition costs and price wars

Mitigation: We look for companies with unique value propositions and those targeting underserved market segments.

A Call to Innovative Founders in LATAM Cross-Border Transactions

The cross-border payments and money movement sector in Latin America stands at a critical inflection point. The convergence of technological innovation, regulatory support, and shifting consumer behaviors has created a fertile ground for disruption and growth. We're looking for founding teams with deep domain expertise, innovative technologies solving clear pain points, and scalable business models with the potential for regional expansion. We understand the challenges of building in this space - from regulatory complexities to currency volatility - and we're committed to partnering with founders to navigate these hurdles.

To the bold entrepreneurs tackling the challenges of cross-border payments and money movement in Latin America: we want to hear from you. If you're building an early-stage company in this space and your vision aligns with the themes we've discussed, we encourage you to reach out.

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If you’re a founder building in any of these areas I’d love to hear from you! Please reach out to Nia at nia@montageventures.com