How VC Firm Magma Partners is Tapping Into the Untapped Chilean Fintech Market

EXCLUSIVE — With government-backed initiatives and a finite business of copper export, Nathan Lustig, co-founder and managing partner at Magma Partners, saw huge potential in the Chilean fintech market.

Lustig points out that only 30% of Chileans have credit cards, while only 50% have bank accounts, “and that’s the more advanced population,” he said. Additionally, consumer experience is “pretty horrible for about 80% of this population,” he said.

“Another big problem is that large FIs have not had a lot of competition, so they had no incentive to take on ‘unprofitable’ clients,” Lustig told Bank Innovation. “Credit recording and the entire report system is not favorable to this sector of the population.”

Lustig explains that the credit scoring system in Chile only considers credit-damaging behavior, not credit-boosting activity such as consistently paying bills on time, etc. Also, there is no central database for this credit information, Lustig added.

“So, you see a huge amount of potential to promote innovations to have better financial inclusion,” Lustig said. “Areas like P2P lending and payment infrastructure also have a lot of potential,” he said, (a single payment platform like Stripe is not available throughout the region).

For Magma Partners, a privately-owned VC focused on fintech, the decision to set up shop in Chile was a no-brainer — especially for Lustig, who gained a lot of insight on the region when he ran a tech company in the country, which was backed by Chilean government initiative Startup Chile.

One area within the fintech space that Magma has been particularly interested in is invoice-based lending, also known as factoring. In its portfolio is Portal Finance, a startup that provides SaaS for the factoring industry.

Portal Finance cuts the loan processing time to 20 minutes from two weeks (the average time it takes a Chilean to get approved for a loan). The startup uses artificial intelligence to provide banks with suggestions on the most suitable candidates for loans. In turn, Portal Finance earns between 0.5% to 1% for every deal the bank accepts.

“Factoring is more advanced in Chile than the U.S.,” Lustig said, “this is because it is widely accepted as collateral and considered an asset-backed loan.”

Not to mention that the interest on these types of loans are relatively low, he said.

In fact, Portal Finance has been doing so well, that Lustig said they are preparing to launch its services in Mexico later this year.

As for Magma, the firm closed its second fund of $15 million and plans to invest as high as $2 million ($25K is the base investment amount) in 60 pre-seed and seed-stage startups over the next three years.

“The new funds also give us the ability to invest in Series A rounds for the best startups in our mix,” he said.

Lustig declined to name the private investors in this new fund.

Established in 2014, Magma Partners, so far has invested in 32 startups. Earlier this month, Magma also secured a partnership with Chinese co-working space Kr Space to establish a Sino-Latin America Accelerator to help Chinese entrepreneurs gain access to the Latin American markets. This accelerator will have a physical presence within Kr Space in Shanghai and Beijing, host monthly events, and provide a space for both investors and Chinese and Latin American entrepreneurs to come together.

To learn more about the latest developments in fintech investment and digital lenders, join us on March 5-6, 2018 at the Parc 55 in San Francisco for Bank Innovation 2018. Click here to register.