Q&A with Founder of Top Mexican Fintech, Kueski
MoneyLion & OppLoans SPAC, Updates on Chime/Varo Overdraft
Hello all, Jason here.
Happy Valentine’s Day! Hallmark holiday or no, hopefully you have a loved one to celebrate with today.
This week, I’m pleased to bring you an interview with Adalberto Flores, founder & CEO of one of Mexico’s top consumer fintech companies, Kueski. While most readers of this newsletter operate in the US and Western Europe, Mexico is a dynamic, growing market with significant business and consumer financial connections to the US in the forms of investment, trade, travel, and remittances, among others.
In many ways, “developing economies” that may have lower penetration of financial services have the space and opportunity to innovate more quickly - offering lessons for startups in more developed financial services ecosystems.
I’ll admit - I’m a bit biased, as my better half is from Mexico and having traveled there 10+ times 🇲🇽
New here? Don’t forget to:
Winning the 2021 Tax Season
Sponsored content: TrueAccord is back this month with another free webinar, focused on helping creditors navigate an unusual tax season. Research shows that consumers, facing more than one obligation, will choose to resolve their debts when they trust the collector and when they can resolve on their own terms.
In this webinar, leaders from TrueAccord will showcase digital innovations that transform the consumer experience – winning consumers’ attention, trust, and engagement during the 2021 tax season — this Feb 23, 1pm ET / 10am PT.
Buy Now/Pay Later, Earned Wage Access, and Consumer Lending in Mexico with Founder/CEO Adal Flores
Adalberto Flores is founder and CEO of Kueski, a Mexico-based consumer lending fintech focused on providing financial services to users who are ineligible for traditional bank loans. While Mexico's economy is deeply intertwined with the US as its neighbor and one of its largest trading partners, the consumer financial ecosystem has some important differences, presenting both opportunities and challenges for incumbent banks and startups alike. What follows is my written Q&A with Adal.
First, can you set the stage -- what is Kueski? What types of products does it offer and to what consumers?
Kueski is a company based in Mexico, with the mission to facilitate the financial lives of people living in Mexico. We are one of the fastest-growing fintech platforms in Latin America. Our Machine Learning capabilities allow us to evaluate thousands of unconventional variables to determine the financial profile and needs of our customers and provide them the best experience possible. Kueski provides the following products:
Kueski Pay: The largest Buy Now Pay Later service in Mexico. This product allows people to finalize a purchase online without the need of a card. Kueski Pay grew more than 60% last month and has grown almost 11x in the last 8 months.
Kueski Cash: This is the largest online consumer loan company in Mexico.
Kueski Up: This is our earned wage advance (EWA) product that allows employees to advance their payroll at no cost.
Most of my readers operate in the US and Western Europe. What are some key differences in the Mexican consumer financial services system vs. these markets? Particularly when it comes to consumer lending?
In Latin America, 48% of the adult population is excluded from having access to financial services, and according to the Financial Inclusion Survey made by the CNBV (Mexico’s equivalent of the SEC), only 21.6% of the population in Mexico has a credit card while in the US it represents 91.1% of the total population.
The lack of financial inclusion could be associated with the high informal economy in Mexico. Currently, more than 57% of the working population in Mexico is under informal employment, which represents 22.7% of the GDP as stated by INEGI. Informality causes consumers to avoid financial services because they want to fly under the tax radar.
At Kueski, we promote digital financial access in Mexico by bringing trustworthy and simple financial services to people underserved by financial institutions.
According to recent stats, only about 50% of Mexicans have access to a bank account (and only ~31% to credit). As one of the most advanced economies in Latam, what accounts for this relatively low penetration of financial services vs. other Latam countries?
The existing banking industry in Mexico is very new and has been around for only 25 years, after the privatization and subsequent bailout of the Mexican banking sector from the mid-1990s. Even though the first credit bureau was established in the U.S. more than 120 years ago, in Mexico our main credit bureau was founded in 1996.
In the USA, having a healthy credit history is very much ingrained into the culture, which is not the case in Mexico. This is why financial authorities are so focused on promoting financial education in Mexico. A combination of: (1) high job informality rates that incentivizes (2) a cash economy which in turn incentivizes (3) a low financial education in Mexico creates a vicious cycle that hinders banking penetration.
The solution is complex and Internet mobile connectivity will definitely help, but you also need to promote a stronger rule of law, a more competitive banking industry, and educate the population about the benefits of formal employment. Fortunately, the new fintech ecosystem in Mexico is contributing significantly to this movement.
What challenges does this lower level of banking penetration pose for Kueski's business model? Opportunities?
This is actually more of an opportunity to us, since our goal is to enable our customers to integrate into the financial system. More than 20% of our customers have started to build a credit history with Kueski and many more believe they’ve improved their credit history when using Kueski. Dozens of thousands of customers have opened a bank account for the first time in their lives in order to use at least one of our products. We are excited to be part of the solution.
Two key aspects of credit underwriting in any market are assessing willingness and ability to repay. In the US, this is done by looking at payment history (credit bureau) and availability + reliability of cashflow (verifying employment/income).
Given the large share of workers employed in the informal economy, who may not have documentation of their income or records at a central credit bureau, what information does Kueski use to underwrite potential borrowers?
At Kueski we use contextual data such as real-time behavioral analytics, device data, and sociodemographic data to better predict an applicant’s repayment ability, without necessarily classifying people based on their credit history. The more loans we give to customers, the more data we have. The more data we have the better the underwriting we can do, and that means better personalization. This is a phenomenal virtuous cycle.
COVID-19 and the ensuing economic damage have roiled economies around the world -- but the damage to US lenders, so far, has been much less than initially anticipated. How are you seeing the impact play out in Mexico, broadly, and with your customer base in particular?
We experienced something very similar in Mexico, but for different reasons. The USA was very proactive in launching The Paycheck Protection Program. Although Mexico provided very limited governmental support to the economy, the workforce still proved to be economically resilient. But this came with a cost; Mexico’s death toll became the world’s third-highest, surpassing India’s. And the job informality rate grew in this pandemic, making financial inclusion a bigger issue.
At Kueski we were able to help our clients affected by COVID with thousands of loan restructuring agreements, and we enabled businesses to accept payments from people that don’t have a credit or debit card, offering them Kueski Pay, our Buy Now Pay Later solution.
The concepts of companies building products that foster "financial health" has been gaining popularity in US and European markets as of late; are you seeing a similar trend in Mexico? Is this ideology something you incorporate into Kueski's products?
We take financial health very seriously and we work very closely with our regulators to promote financial education and adopt their principles. Our main regulator, CONDUSEF (the equivalent of USA’s CFPB), has been scoring regulated institutions like Kueski in a series of metrics that include their products, service, complaints, etc.
For the last few years, we’ve consistently gotten the top grades in our segment. And this is also reflected in our Net Promoter Score at Kueski, consistently getting more than 80 points for the last 4 years (while the banking industry in Mexico typically gets 20-30 points).
The Mexican government has been active in encouraging fintech as a means of promoting financial inclusion. In your experience, how successful has this been? From a policy perspective, what more could be done to encourage innovation and financial inclusion?
In 2018, Mexico became the first country in Latin American to implement a law specific to the fintech sector. The Fintech Law was created to promote financial inclusion and has contributed to the creation of many fintech startups in Mexico. The government is also very focused on protecting users, leveling the playing field among players, enabling interoperability, etc. There are still many things to be done, but we are heading in the correct direction.
What is a lesson banking/fintech leaders in other countries can learn from the financial services market in Mexico?
Every financial system is different and it is a common theme to see well-funded international players fail to enter Mexico. The financial industry requires a deep understanding of topics like credit, fraud, regulation, macroeconomy, and currency risk. Therefore, I believe the local players have a significant advantage, and partnering with the leading local players is the best way to enter the market. Ant Financial has been doing it this way in the South East Asia region, very successfully.
Kueski is based in Guadalajara, Mexico; are there any big differences between founding and running a tech startup in Guadalajara vs. the Bay Area or New York? Access to capital? Talent?
Guadalajara is known to be Mexico’s Silicon Valley and there is no better place to recruit the best engineering talent in Mexico than in Guadalajara. Nevertheless, it is more challenging to build an executive team here. Part of the reason is that Mexico’s tech industry is relatively new. So we decided to build a distributed management team. Nowadays, almost half of our management team lives outside of Guadalajara. Our talent pool includes people from the USA, France, Switzerland, Brazil, Paraguay, Cuba, India, Indonesia, etc. We are planning to open an office in Shanghai, China, and we have investors from Asia helping us with this task.
Starting a company and raising capital is more difficult than in the Bay Area or New York. As Alex Lazarow says; startups in emerging markets need to be more like “Camels”. You might remember that Camels can adapt to multiple climates, survive without food or water for months and when the time is right, sprint rapidly for sustained periods of time.
Finally, something I haven't asked that I should have?
Watch out for Kueski Pay, our Buy Now Pay Later product, which is rapidly becoming the ecommerce payment darling in Mexico. Thanks for having me here!
A SPACtacular Week
Sorry, I couldn’t resist. A big week in fintech financing, with FT Partners reporting $1.1 billion in financing volume. Last. Week. This volume was partially driven by two well-known US fintechs SPAC’ing.
OppLoans (OppFi?)
On Wednesday, 2/10, OppLoans announced its intention to combine with SPAC vehicle FG New America Acquisition Corp. The deal implies an equity valuation of $800 million for the combined company.
OppLoans is a Chicago-based fintech focused on loans to consumers who may have difficulty accessing credit from traditional lenders and is the rarest of things for a fintech: profitable.
See more details in the investor deck and webcast recording.
MoneyLion
MoneyLion also announced a SPAC deal with Fusion Acquisition Corp on Friday, 2/12, which estimated the post-transaction enterprise value of the combined company at $2.4 billion.
MoneyLion is primarily focused on low/moderate income and credit constrained consumers, offering a checking-like account coupled with cash advance, credit builder, and investing products. I broke down its investor deck in this tweet thread:
Update: Chime & Varo Overdraft Practices
Last week, I broke a story on how Chime and Varo’s marketing and disclosure practices may mislead consumers about their overdraft and advance products, respectively.
Since the story broke, Chime has edited its landing pages to improve its disclosures for SpotMe, more clearly spelling out that users are only eligible for a maximum of $20 initially and linking to the full terms and conditions, which it didn’t previously.
Since publication, Varo has ceased running Facebook or Instagram ads promoting its advance product, which it previously marketed with language such as “get instant cash.”
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