By Sara Hayden Van Velkinburgh *
Unless you avidly follow the Mexican fintech sector, you likely missed Mexican fintech Covalto’s announcement last month of a US $10 million unsecured debt facility with the U.S. Development Finance Corporation (DFC). What can be described as the private sector arm of the U.S. government, the DFC is the result of a merger between the Overseas Private Investment Corporation (OPIC) and USAID’s Development Credit Authority carried out under the Trump Administration in 2018.
The agency is congressionally funded and has an investment capital of US $60 billion, more than double that of OPIC’s. Its objective is simple: to support investments in developing countries to drive economic growth, create stability, and improve livelihoods while generating returns for American taxpayers. Its investments also have the added benefits of advancing U.S. commercial competitiveness around the globe and providing a foothold for U.S. businesses in many of the world’s fastest-growing markets.
According to the DFC’s website, the agency has over US $37 billion in active investments, with the greatest share in the Western Hemisphere and over US $514 million in active investments in Mexico alone. A significant portion of this investment has been in financial technology (fintech) and SOFOMs, a Mexico-specific non-banking financial institution (IFNB in Spanish) that offers credit and lending services.
Since 2019, the agency has invested in Covalto, a fintech-turned-bank offering banking and credit services to the country’s small and medium-sized enterprises (SMEs); Tangelo a fintech that offers tailor-made credit solutions to consumers and SMEs; and the now defunct SOFOM Crédito Real, to support women-owned SMEs, in addition to other SOFOMs.
You might ask, what does the DFC see in these fintechs? The answer is simple, the DFC has correctly recognized that SMEs are the backbone of Mexico’s economy and that investing in fintech companies that service this sector is one of the most efficient ways to support them. 52% of the country’s GDP is driven by 4.2 million small and medium businesses which collectively employ 72% of the country’s entire labor force. If there is support to the SMEs, then you are supporting the majority of Mexicans and the majority of Mexico’s economy.
According to fintech Konfío, one of the main obstacles to Mexican SMEs’ continued growth is a lack of access to financing, with 3 out of 10 SMEs facing this problem. Fintech risen to the challenge, with the majority of Mexican fintechs now operating in the lending space offering several innovative solutions including credit secured by a company’s accounts receivables – in Mexico, some SMEs have to wait up until 120 days to be paid for goods and services they already delivered – and buy-now-pay-later options for consumers to increase sales.
Not only could an increase access to financing could unlock the potential of millions of companies throughout Mexico, but, as was made painfully clear during the Covid-19 pandemic, it also can mean the difference between keeping the lights on or shutting down forever during an economic downturn. According to the Association of Entrepreneurs, during the pandemic, nearly 35% of Mexico’s SMEs closed their doors due to a lack of liquidity.
In this context, the U.S. government’s decision to back lending fintechs in Mexico is not only a smart investment decision, given that lending is considered one of the more lucrative lines of fintech, but is also a decision that directly contributes to the strength of one of the United States’ most important allies. By funding fintechs that are increasing access to financing among SMEs, the U.S. is supporting the main driver of Mexico’s economy and the country’s main employer.
The argument is so convincing that the United States is making the same investment in its own market. On October 4th, Vice President Harris announced that the Small Business Association would propose a rule change to lift a 40-year moratorium to allow non-banks, including fintechs, to apply to serve as lenders on its behalf to increase small business lending.
This, perhaps, makes it even more surprising that the Mexican government has failed to invest in fintech, or even offer government assistance to SMEs during the Covid-19 pandemic. Time will tell if they eventually catch on.
* Sara Hayden Van Velkinburgh is a senior consultant with FTI Consulting’s strategic communications division based in Mexico City where she focuses on developing and implementing stakeholder management and communications plans for companies at critical junctures. She is a member of COMEXI’s Young Professional Program (PJ-COMEXI). The US-Mexico Foundation is a binational non-profit organization dedicated to fostering bilateral cooperation and improving the understanding between the United States and Mexico by activating key people in the relationship that once were dormant. Twitter: @usmexicofound