Hi guys. Welcome to the Fintech Coffee Break. I’m your host Isabelle Castro, and today I’m sharing my coffee break with David Poritz, co-CEO, and co-founder of Latin American digital bank Covalto.
Cobalto was founded in 2015 under the name Credijusto, focusing on the underserved SME sector and Mexico. Since starting up, they have provided credit for millions of SMEs, building the technology infrastructure to leverage digital tax invoices and other financial data to underwrite and service SMEs at scale.
In 2021, they were the first Mexican fintech to acquire a regulated bank to support their growth.
I caught up with David before the launch of day two at Fintech Nexus’ LatAm event in Miami. With slightly foggy heads, we sipped on tea and talked about David’s journey with Covalto and the ongoing financial challenges for the SME space in Mexico.
Enjoy.
To listen to this podcast episode, there is an audio player directly above, or you can download here. You can also subscribe on Spotify and Apple Podcasts. Read a transcription of the interview below.
Isabelle Castro – David, really nice to meet you. How are you this morning?
David Poritz – Excellent, a little tired, but doing well?
Isabelle – So we’re here in Miami. You’ve got a pretty big day ahead. You’re going to be talking in 40 minutes. What gets you up in the morning and motivates you to get going?
David – For me, I think we’re we are solving a challenge that is absolutely critical for small businesses and for the Mexican market. And what excites me and gets me up every morning is the fact that I actually feel as though we’re having a tangible, real impact—and addressing that problem.
We started the business in 2015, it’s been seven or eight years, and we’ve become a major dominant player in the small business, finance, and SME finance space in the Mexican market. And I feel as though particularly in the last two, three years, we’re really moving the needle in terms of solving a problem that is top of mind for so many small businesses and other, you know, other participants in the Mexican market.
Isabelle -When did you realize that this is what you wanted to do?
David – I have a long history of working in Latin America. So I’ve been for about the last 15 years. And I’ve been in Mexico for the last seven or eight. And I think through that time spent, you know, in the Mexican market, it became clear to me that traditional finance, traditional financial institutions, specifically, banks, were so focused on kind of corporate enterprise lending and as well as the consumer segment. And everything in between, which we call the missing middle, was basically not being addressed because incumbent institutions didn’t have the technology. And they didn’t have the risk profile to properly serve that market segment. And it was really through that kind of “aha!” moment that we realized, you know, how big the opportunity was, from an economic point of view, but also the impact that we could have as a company in Mexico.
Isabelle -I’m interested. Do you think that fintech is the driving force for that ability to do that, then if technology was a factor for incumbent banks?
David – I think it’s very much a combination. So I think technology and particularly the new availability of data, specifically e-invoice, and digital tax data, which was implemented in Mexico in 2014, I think it’s a combination of technology and systems and infrastructure, combined with risk management, and really, you know, capital markets. So you know, technology on its own can’t solve the problem. But bringing together relevant technology with, in our case, a banking platform, those are kind of like the two, I guess, the two elements that make it possible. And I think banks, they have the capital, but they generally lack the technology, and many fintechs have the technology, but they lack access to sufficient capital to do it. So if you can solve those two things, that’s really where I think you can unlock, you know, you can unlock solutions in the Mexican market.
Isabelle -Do you think this is particularly critical for the Mexican market? And Latin America? Or is it something that could be is applied and is relevant to the rest of the world as well?
David – Yeah, I think Latin America and Mexico in particular, is kind of like, I would argue, it’s like ground zero for Financial Inclusion and the credit gap. Given that, you know, I think, you know, Mexico has approximately half of the credit penetration on the loans to GDP basis that Brazil does. And that’s the case in many other Latin American countries. However, the issues in Mexico are also very real and other emerging markets. I think many of our investors and financial backers also have portfolio companies, for example, in India, and it’s really it’s, it’s very, very, very interesting. To see the overlaps and the similarities between the challenges that businesses face and the solutions that are being used in the Indian market, for example, compared to Latin America.
So I think it’s, it’s it this is real, these are real problems that affect people and businesses on a day-to-day basis. That, you know, requires, I think, you know, people taking risks and people finding kind of innovative solutions. And I think Mexico is a great case study of that.
Isabelle -You’ve been running for a few years now. And what’s the biggest impact that you have seen that you guys are having?
David – So when we started the business, if we would have ever imagined that we would have bought a bank? You know, I think it would have been at that point in time, kind of like, it would have been like a cute joke. Yeah, and, you know, four or five years into our journey, that’s what we did. And I think that is, like, there’s no better kind of example of how the market has evolved than that, you know, so we started, as you know, a challenger or disrupter to the traditional banking system, given that they were not properly supporting small businesses. And we’ve now kind of gone on the other side of the spectrum. We’ve actually become a bank and are not really innovating from within. And for me, that’s incredibly gratifying. And it was one of the best decisions that we ever made, given how given the stability that a bank and the ability to take deposits gives to an overall platform such as ours.
Isabelle -What are the biggest challenges that small businesses are facing right now?
David – I think the biggest challenges that small businesses are facing today and historically is just the volatility and the availability of finance. So you know, banks will create programs, other financial institutions will create programs to support small businesses, it’ll maybe go on for a year or so. And then economic conditions will change, and then that will disappear. So there are not really reliable partners that, you know, you can continue to go to throughout the evolution of your business. And that’s very much the gap that we’re trying to fill.
We want to be here today, tomorrow, and in 10 years, and we want to continue to offer products and services that support businesses in real ways.
Isabelle -Yeah, I really liked your business mission to “Empower Latin American businesses to achieve their potential by enabling access to innovative financial and technological solutions. I thought that was amazing. I think you guys are really making a lot of headway with that. I mean, you started very much focused on increasing access to credit. Has this been a particular sticking point for SMEs? Do you think?
David – Yes, I think that in the context of Latin America, financial inclusion and access to credit is really like the day-to-day challenge that so much so many of them face. We started with credit. So there’s if you look across Latin America, you look globally, different fintechs have taken different approaches, some of them start by selling, you know, accounting software, or they, they launch an ERP, and then they subsequently offer credit solutions through that means, in our case, in the context of Mexico, the real pain point was credit. So we began with credit solutions.
So we have about a four or five product suite, or that we call it a multiproduct set of solutions for credit, you know, secured and unsecured loans, factoring leasing, were recently launched a credit card. So that’s, that’s, that’s for us, the driver. And then we’ve subsequently then once you have once you’re engaging with an SME and offering them credit, you can then offer them bank accounts, and checking accounts, you can then offer them financial planning tools, etc. So every business kind of goes about the problem in a slightly different way. But for us, credit was the driver, and the sticky product that we saw was really the top of mind for the clients.
Isabelle -I was actually covering a talk yesterday on credit in Mexico. And I was wondering, how do you guys underwrite within that context? Because it sounds pretty mad. It sounds difficult to do that.
David – I think it’s one of the things that got us most motivated and excited by the Mexico opportunity, which was in 2014. The Mexican government, shortly after Chile, implemented a digital tax in digital e-invoice transformation in the Mexican market, where they basically digitized the all B2B transactions. And we were one of the very early companies that developed the technology to be able to harvest that invoice data.
So the first thing that we do in our application process is an SME obviously gives us basic information on themselves and their business, and they give us access to the repository that they can grant permission to on all their inflows and outflows or tax data.
When people historically think of Mexico or historically think of Latin America, they generally think, Oh, really poor data quality, very informal, really hard to understand financial and credit risk. Through invoice information. It’s been a completely transformational force in Mexico. And I would argue, really, across Latin America. And Mexico, I believe, was the second country after Chile in order to implement that. And we were one of the, I would say, like the early innovators in doing that. And then we also acquired, a few years ago, a company called Visor, which was the other market leader in that space. So in order to properly support small businesses and manage risk, one of the critical kind of factors in the Mexican market is developing the technology and tools that leverage this E-invoice information.
On average, a small business has about 50 to 60,000 individual e-invoices. And we have, you know, let’s see, between 540 and 600 million unique invoices in our database today. So it’s a yes. I would call it. I think the word transformational is appropriate in the context of small business credit, specifically for B2B interactions.
Isabelle – And your clients, how have you seen them react to this kind of having access to this stuff?
David – It definitely requires a level of reciprocity and trust between the financial institution and the borrower because the borrower, the client, is giving access to very confidential private information. But when they know that there’s a reputable organization or company behind it, and they know, in our case, that we’re a bank. They know that in exchange for the information, they’re going to get access to affordable products. We found that it’s something that people are very comfortable doing.
Isabelle -Yeah, I can imagine that you’re changing a lot of lives. Going back to like the full scope of your products, What effects do you hope providing this infrastructure will have on the SME market as a whole in kind of Latin America and Mexico?
David – So Mexico is going through a very transformational moment, again, until I use that word again because I think it’s applicable in this context. So you have, you know, pretty strong economic growth in Mexico. You have nearshoring, where you have a significant relocation of manufacturing and other large businesses that were perhaps previously in Asia that are now moving to Mexico, given its proximity to the United States, which is a major market.
So the first thing I’d say is I’m incredibly bullish and excited about the Mexican market and the Mexican economy. However, one of probably the biggest economic challenges for Mexico is financial inclusion is so dismal in Mexico. So if you look at, you know, loans as a percentage of GDP in Mexico versus Brazil, it’s like almost half. So even though Brazil is a larger economy, the credit penetration in the Mexican market is incredibly low.
I think the World Bank estimates that there’s like a $500 billion credit gap in Mexico. So for us, you know, we’re solving a problem that is very top of mind, both for us, but it’s also top of mind for SMEs or small businesses in a day-to-day context. And I would argue that it’s top of mind, you know, for government, and other, you know, other regulators, given that it’s really an inhibitor to economic growth if not properly managed.
So I think for us, we’re very, very excited about what’s happening in Mexico. In 2008, and 2009, Mexico actually managed the financial crisis quite well. COVID, I think you saw a lot of kind of entrepreneurial spirit in terms of the flexibility in terms of how people adapted their businesses. I think Mexico is coming out of COVID in a pretty strong way, particularly with, you know, the increase of, you know, nearshoring and more economic activity and businesses that are coming to Mexico, whether that’s, you know, auto plants or, you know, other manufacturers.
Isabelle – Do you think the underbanked nature and lack of financial inclusion in Mexico can be solved by businesses like you, even though you’re focused on asset SMBs fintechs and all that, do you think it can be solved by that? Or do you think there are other things in play that need to happen in order for that to happen?
David -Both? I think it’s a combination of many factors. I think we are not the solution. We are, I would say, an element or a part of the solution. So you need credit providers who can we’re willing to take risks and who have the technology. I think we’ve spoken about invoice data and how that was a real enabler in terms of facilitating financing. You need institutions that have the capital and the willingness to lend to small businesses and take that risk.
I think that there are also considerations that are outside of credit in terms of creating, like, an overall ecosystem where there are other, you know, fintechs are playing. There are other digital products, and there are other digital infrastructures, that are also just making it generally easier for people to get access to these products. So I think credit is, I would say, kind of like one leg of the stool, but you also need other, you know, you need institutions, and you need the infrastructure in that technology to continue to support it. So I think we’re moving the needle. You know, and I think that we have the capacity to, I think, actually make a dent in the challenge of financial inclusion, but we’re not going to be able to do it alone. We’re going to need a lot of other market participants to support it.
Isabelle – What excites you most about the year ahead than 2023?
David – So in the last 12 months, in the Mexican financial services market, there’s been some of the most change that we’ve seen in the last 15 to 20 years, some of the largest non-bank lending platforms, and many of them actually went out of business. This is an example of sometimes, one step forward, two steps back, where you think we’re really making a major steps, for Financial Inclusion is starting to be addressed. But then you have situations like 2022, where some of the largest players in the market are no longer active and are no longer extending credit. Most of these are traditional players. And that obviously created a huge amount of volatility because you had investors who became concerned about the market fundamentals in terms of why this happened. But in our case, it also created a huge opportunity, where there’s, literally hundreds of millions of dollars of credit that was going into the Mexican market that was going to small businesses, from these providers, that’s no longer there.
So there’s kind of like a generational opportunity, this is something that happens maybe every 10-20 years when you have a reset in a market, where major participants, basically overnight disappear, and new participants are going to have to fill that demand and fill that need. So what excites me most is the fact that, unfortunately, this happened, but for us, it creates this pretty unique situation for us to kind of fill that void. And hopefully, we’re positioned to be able to do that.
Isabelle -Well, I think so. So, what’s the best piece of advice that you have been given that you would give to other people?
David – Proper Preparation Prevents Poor Performance. If you go into it, a mentor of mine said that, the five P’s it’s almost it’s a little bit of a joke. Still, it’s very true that if we approach every situation in the most prepared way possible I think it’d be the best suited to navigate that situation.
Isabelle -Okay, I like that. I’m going to take that. So we’ve come to the end of our questions, but I have one more for you, which is the curveball question. Random question. If you could invite anyone, dead or alive, to lunch, who would it be?
David – So prior to co-founding Covalto in 2015, my interest in focus was actually in the field of anthropology. So maybe one day I’ll become an anthropologist again when this journey concludes.
So the person that I would most enjoy sitting down with would actually be an individual named Dr. Paul Farmer. He, unfortunately, passed away recently, and he was a major innovator in the field of public health, particularly in developing economies such as Haiti and a number of other countries globally. And he is someone who, I had the opportunity to read a lot of his books and a lot of his literature, and he’s one of the founding fathers of the field of medical anthropology. And it’s something that I’m passionate about and very different than fintech or, you know, financial services, or the financial services space and someone that I would have loved the opportunity to have some face-to-face time with.
Isabelle -Well, it’s a shame that you didn’t, but I hope that you realize your dream of becoming an anthropologist. If the listeners want to get a hold of you. Where can they go?
David – Easiest is my email is [email protected]. So David at Covalto.com and always open to interesting conversations or opportunities.
Isabelle – Okay, well, thank you so much for your time. And have a great day and good luck on the stage.
David – Thank you so much.
Isabelle – As always, you can reach out and chat with me on my personal LinkedIn or Twitter @IZYcastrowrites. But for access to great daily content, check out Fintech Nexus on LinkedIn, Twitter, Facebook, or Instagram.
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That’s it from me. Until next time, enjoy your downtime.