The epicentre of entrepreneurship: Mexico City’s booming startup and fintech scene

Thanks to its strategic location, the size of its market and its language, Mexico has been making great strides with entrepreneurship in recent years. As the country’s capital, Mexico City is home to the majority of these startups, and even some unicorns. Fintech has taken off as one of the most promising sectors within these emerging companies, helped by the pervasiveness of smartphones and connectivity.

Mexico City’s Plaza de la Constitución is the beating heart of this vibrant city. Better known as the Zócalo, some of the megalopolis’ most emblematic buildings are concentrated around it. In a similar fashion, the city also brings together the country’s most innovative startups, which are endeavouring to solve some of the challenges that Latin America faces. Its entrepreneurial ecosystem is the second largest in the region and number 50 in the global ranking, according to StartupBlink.

And it‚Äôs not just about Mexico‚Äôs capital. The whole country, located between the United States and Central America, has become an entrepreneurial enclave within Latin America, to such an extent that ‚Äúentrepreneurs in Central and South America often have to prove that their business model is scalable in Mexico in order to receive investment, even at the second round stage‚ÄĚ, says Juana Ram√≠rez, President of the Mexican Entrepreneurs Association. By way of example, she quotes the startups Cornershop and Rappi. Indeed, its proximity to the North American giant and to Silicon Valley are additional factors that help explain the country‚Äôs entrepreneurial growth.

Entrepreneurs in Central and South America often have to prove that their business model is scalable in Mexico in order to receive investment, even at the second round stage

Alberto Jorge Barona, Head of Entrepreneurs at the National Centre for the  Support of Small and Medium Businesses (CENAPYME) of the National Autonomous University of Mexico (UNAM), points out the technological development laboratories at universities and the high number of graduates as some of the aspects that make Mexico City an attractive market.

With a population pyramid made up of young layers, these educational institutions are taking advantage in order to foster the entrepreneurial spirit in the country. This is the case with CENAPYME, which offers training, consulting and incubation services, and with the Monterrey Institute of Technology, which also supports the creation and development of companies.

In this hub of entrepreneurship, startups in the fintech sector stand out as they have detected a key business niche and a social need where they can have a positive impact ‚Äď improving financial inclusion. The country has a population of almost 130 million people, 9 million of whom live in Mexico City, and only 47% of adults have an account with a bank or regulated financial institution, according to the ‚Äė2021 Fintech and Incumbents Radar‚Äô report published by Finnovista.

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Digitisation as a lever of entrepreneurship

Digitisation must continue apace in order to produce fertile ground upon which emerging technology-based companies can germinate and grow. The creation of the Public Digital Innovation Agency (ADIP) in Mexico City, the purpose of which is to improve government services through innovation and technology, is a positive move. Some of its projects include installing free Wi-Fi services and simplifying administrative formalities. In a similar vein, the Mexican capital has been chosen by Bloomberg to receive subsidies to accelerate its digital transformation.

So, how are digitisation and entrepreneurship related? ‚ÄúThe pervasiveness of smartphones and connectivity is greater in Mexico than in most Latin American countries, which has encouraged the more rapid growth of technology-based businesses like last mile delivery and the digitisation of banking‚ÄĚ, explains Ram√≠rez, President of ASEM.

According to data from the National Institute of Statistics, Geography and Computer Science (INEGI), the number of households with an internet connection rose from 39.2% in 2015 to 60.6% in 2020. Over the same period, internet users aged six years or over increased from 57.4% to 72%.

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The pinnacle of the financial sector

While fintech companies are on the rise across Latin America, the Pacific Alliance countries (Chile, Colombia, Peru and Mexico) account for almost half of the total. In fact, in Mexico there was a 16% increase compared to the previous year. Investments also corroborate this bonanza ‚Äď between 2014 and 2020, financial services were one of the industries that received the most investment, the Mexican Association of Private Capital notes. Ernesto Calero, Director of Fintech M√©xico, states that the most relevant verticals are ‚Äúloans and payments and transfers‚ÄĚ.

Mexican fintechs are mainly concentrated in the capital ‚Äď according to a study by Legal Paradox, Mexico City is home to 75% of the total, a similar figure to the 70% that Finnovista‚Äôs report indicates.

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The low penetration of banking and the supply of unsophisticated consumer credit are two other reasons that explain this phenomenon, as outlined by a study of the Mexican fintech market by the Spanish Institute of Foreign Trade (ICEX).

‚ÄúFinancial inclusion is one of the biggest challenges in Mexico, whether that‚Äôs between companies or between businesses and consumers‚ÄĚ, explains Gerry Giacom√°n, co-founder and CEO of Clara. This startup offers a corporate spending management solution for companies in Latin America, helping to remove bureaucratic processes. ‚ÄúThat‚Äôs why those of us who supply financial services have received significant rounds of investment, because we serve a market that was heavily underutilised despite high demand‚ÄĚ, he claims.

Financial inclusion is one of the biggest challenges in Mexico

The passing of the Law to regulate financial technology institutions in 2018, which was ground-breaking in Latin America, has also influenced the boom in this sector. ‚ÄúIt turned Mexico into a very attractive market for local and global entrepreneurs, as well as for venture capital funds‚ÄĚ, argues Calero. He nevertheless stresses the importance of continuing to work ‚Äúwith the financial authorities to define certain aspects of regulation and make them more transparent‚ÄĚ, and to ‚Äúkeep making progress with schemes like open finance and Banking as a Service (BaaS), in order to update the Fintech Law and to reinvigorate the impetus that its publication in 2018 generated, and to promote innovation, competition and financial inclusion‚ÄĚ.

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Mexico, a stomping ground for unicorns

As a result of this peak, unicorns (companies valued at over 1 billion dollars) have started to form a select club in Mexico. The capital is home to five of them, four of which are in the fintech arena, demonstrating the consolidation of entrepreneurship in Mexico City.

Kavak, a second hand car trading company, became the first unicorn after being valued at over $1.15 billion in Autumn 2020. But there is no shortage of fintechs on this particular pedestal. The first startup in the industry to hit this milestone was Bitso, a cryptocurrency exchange company, after being valued at $2.2 billion in May 2021.

Mexican successes then kept coming. Other companies were added to the list shortly afterwards ‚Äď Clip, with its payment processing technology; Konf√≠o, dedicated to financing and tools for payment, collection and business management; and towards the end of the year, Clara, which facilitates access to corporate credit cards through technology.

The emergence of unicorns reflects how the entrepreneurial ecosystem has reached a certain degree of maturity, and how technological solutions promise to keep being one of the country’s most buoyant sectors. Mexico City with its Zócalo is the focal point of this boom, proudly displaying its characteristic entrepreneurial potential to the region and to the rest of the world.

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