Nubank might be one of the most well-known private companies in Brazil. Valued at over $25 billion dollars, the company has been making waves in Latin America and beyond. With a US stock exchange listing in the works, Nubank as a case study has made it clear that the LATAM fintech market is garnering increased attention from the US investor community. Furthermore, this market represents the new frontier for some of the most interesting payments innovations in the world today. Although these fintech upstarts may share some similarities in business models to US/EU counterparts, it’s clear that a complex web of consumer behavior, regulatory, and legacy incumbent dynamics make LATAM a challenging environment for global brand names to simply step into and succeed.
The rise of fintech on a global scale has been inevitable, and lines are increasingly blurring between what constitutes a software versus a fintech business. Many organizations, whether they’re upstart neobanks, small-to-medium sized business (SMB) lenders, or vertical SaaS marketplaces, have something in common: they’re a central node for money coming into, and flowing out of, the business.
"The rise of fintech on a global scale has been inevitable, and lines are increasingly blurring between what constitutes a software versus a fintech business."
— Mark Fiorentino, Index Ventures
Think of a company like Etsy or Patreon. The words “payments company” aren’t the first that come to mind, but in many ways, that’s exactly what these are. It’s a space for artisans and creators respectively to sell their tangible or intangible creations to third-party consumers. For many of these artisans or creators, the money they generate on these platforms represents their sole or main source of income. So the ability to obtain (bank account), spend (debit/credit card), and manage (hold savings in an e-wallet via dollars or crypto) those funds directly on the platform makes sense for a variety of reasons. Especially in emerging markets where a sizable percentage of consumers don’t already have a bank.
But payments products aren’t necessarily the core competency for Etsy, Patreon, and countless other examples. Where do you find the infrastructure to spin up your own debit or credit cards, offer flexible working capital loans, and run fraud checks on users? In the US, companies like Marqeta have found the solution for this problem by serving enterprise-level companies with this exact need, like Doordash or Instacart. On the other end of the spectrum, upstarts like Privacy have proven that there’s also a case for a dev-first, self-serve version of this solution for the massive and growing mid to long tail.
But do any solutions like this exist in the Latin American market? Frankly, there are very few and most are either outdated offerings from legacy financial institutions or subpar iterations of US incumbents. That’s why we’re excited to announce that we’re co-leading Pomelo’s $9M Seed round. Gaston Irigoyen and team are combining local expertise and decades of payments know-how from Naranja X, Mercado Pago, and Mastercard to build the next generation of LATAM embedded financial services starting with the credit/debit issuing process and virtual accounts. But before we dive into why Pomelo is so special, let’s lay the groundwork for what’s transpiring in the LATAM fintech ecosystem.
The growing opportunity for fintech in LATAM
The need for embedded financial products is becoming an increasingly ubiquitous need in the Latin American market—but it’s important to note that LATAM is far from a carbon copy of the US market. In fact, there are different dynamics here that make the arrival of this new wave of fintechs even more vital.
Here’s a statistic that might surprise you: 80% of transactions in Latin America are still cash-based. But things are changing quickly. Adoption of card payments was already on the rise and the need for cashless, more hygenic ways to pay has only been accelerated by COVID. In fact, card transaction volume grew by 22% year over year in 2019, and that growth has increased since.
"The need for embedded financial products is becoming an increasingly ubiquitous need in the Latin American market—but it’s important to note that LATAM is far from a carbon copy of the US market. In fact, there are different dynamics here that make the arrival of this new wave of fintechs even more vital."
— Mark Fiorentino, Index Ventures
Here’s the problem, though: in the current state, it takes over 12 months for a business to spin up a plastic or digital card for itself. And because most legacy processors are owned by banks or large financial institutions that have been around for decades, pricing is inflexible and expensive. And if that wasn’t enough of a headache, stable reliability has been a huge pain point with these issuer processors.
Couple this with the fact that approximately 50% of the Latin American population is either unbanked or underbanked, the need for embedded fintech products extends far beyond simply giving the consumer a card to transact with. There is a massive opportunity to provide the picks and shovels to create virtual accounts, e-wallets, embedded lending, and digital investing platforms that will play a key part in this burgeoning ecosystem. So in comes Pomelo...
Where Pomelo fits in
At Index, we’re big on founder market fit, and believe me when I say you couldn’t find a better team to build this company. Pomelo’s founding team has the DNA of the most well-known payments companies within LATAM—think Naranja X, Mercado Pago, and even Mastercard. Co-founders Gaston, Hernan, and Juan combine the power of a multi-time founder, the former head of digital accounts/cards charge at one of the largest fintechs in LATAM, along with the institutional knowhow from one of the two largest global card networks respectively. They’ve lived through the pain points and keyed in on this opportunity through firsthand experience. This shows in both their refined approach to the market and unique product savvy. Combine these stellar resumes with the Pomelo team’s love of skiing and South American wine, and we’re certain they're going to fit in quite well with the Index team.
"Pomelo’s founding team has the DNA of the most well-known payments companies within LATAM. Co-founders Gaston, Hernan, and Juan combine the power of a multi-time founder, the former head of digital accounts/cards charge at one of the largest fintechs in LATAM, along with the institutional knowhow from one of the two largest global card networks respectively."
— Mark Fiorentino, Index Ventures
Today, Pomelo is building a dev-first, self-serve API for any customer to launch a virtual account and issue and process prepaid, debit, or credit cards. But take that foundation coupled with the teams’ expertise, and the opportunity to embed a broader array of financial services into any LATAM software business or marketplace isn’t far off.
We’re excited to co-lead this seed funding alongside our friends at monashees with participation from Fontes (QED), SciFi, Latitud, Addition and FJ Labs among other funds, and some of the most prominent angels and entrepreneurs in the region including Max Levchin, Biz Stone, Angela Strange, Harry Stebbings, Martin Varsavski and the founders of Marqeta, Rappi, Auth0, Kavak, Loft and RecargaPay. Above all else, we couldn’t be more excited to help Pomelo redefine the landscape for embedded financial services within LATAM and beyond.