Brazil offers road map for SEA fintech to escape credit crunch

If I said there was a country with a rapidly growing population, one of the highest mobile internet usages worldwide, where fintech funding in 2023 topped US$600 million, and where there are ambitious founders, which country would come to mind?

If you thought of Indonesia, you wouldn’t be far off. Its growth story as Southeast Asia’s largest economy resonates in the heads, hearts, and pitch decks of the region’s investors.

However, there’s another country that shares these traits – one that could provide a glimpse of the future for Indonesia and, by extension, Southeast Asia.

Ola, welcome to Brazil!

Image credit: Timmy Loen

Latin connection

Credit Saison, a financial institution focused on credit, has built deep roots in India and Southeast Asia over the past decade. Its subsidiary, Saison Capital, runs a fund-of-fund mandate for early-stage venture capital funds, alongside making direct startup investments.

In recent months, the group has expanded to Latin America, focusing on making bets in Brazil and Mexico. As a partner at Saison Capital, I met with more than 50 Brazil-based venture capitalists to understand the market and scout for fund-of-fund investment opportunities.

Unsurprisingly, fintech is the focus for many of the VCs I spoke to, making up 40% to 50% of their portfolios. Many Southeast Asian investors have a similar tally.

Across Latin America and Southeast Asia, many fintech startups – which also include embedded finance players – are hungry for credit.

As an early-stage fintech investor in Southeast Asia, we see the hunger – and the unserved gap – for credit among originators, a term for entities (often startups) that solicit demand for a loan, assess and underwrite creditworthiness, and are involved in collections.

These originators often struggle to raise debt funding in their early days. Call it a “chicken and egg” challenge – capital providers first want to see a track record of loan disbursement, underwriting, and collection capabilities. Without debt capital, these originators themselves scramble to build a meaningful track record.

The status quo is to use equity funding from early-stage venture capital firms to fund loan books. Not only is this unscalable (originators have to overdilute too early), but it is also predicated on the availability of capital.

With today’s higher interest rates and tougher macroeconomic environment, equity as a source of funds has dried up.

In the past, Brazil faced a similar challenge. It had even higher interest rates than Indonesia, often hitting double-digit percentage points. However, in the mid-2010s, an alternative model started to gain traction and that led to Brazil’s emergence as a leader in private credit markets.

Regulators lead the way

Latin America, the next frontier