Covalto

Market position

Covalto has been described by its investor QED Investors and in its own announcements as a leading digital banking and services platform for SMEs in Mexico. It positions against a market where outstanding loans equal only about 38% of Mexican GDP — the lowest credit penetration in Latin America versus 70% in Brazil and 216% in the United States — and an SME funding gap estimated by the International Finance Corporation at more than $160 billion. QED lists Konfío and other lenders among similar investments.

Covalto pairs fintech origination and underwriting with a full Mexican banking licence obtained through the 2021 acquisition of Banco Finterra — the first such acquisition by a Mexican fintech — which provides direct access to the interbank payment system and a deposit-based, lower-cost funding source. Its underwriting relies on near-instant analysis of digital tax and e-invoice data, and management has cited one of the lowest loan loss ratios among Mexican fintechs. Deposits carry IPAB protection up to 400,000 UDIS.

Technology

Covalto built technology infrastructure to leverage digital tax records, e-invoicing and other financial data for near-instant analysis and automated underwriting and servicing of SMEs, delivered through a 100% digital application process, a customer web portal and iOS/Android apps, with anti-fraud systems and a specialized fraud-prevention team. The company has published material on working with Google Cloud to expand internal AI adoption.

Go-to-market

Covalto acquires customers through a fully digital, self-service application flow on its website and mobile app, supported by named sales executives who can be credited during account opening, and publishes customer case studies and financial-education and employer-branding content on its blog. Investment products are promoted directly to companies and individuals through app-based and web account opening.

Small and medium-sized enterprises in Mexico, including companies in agribusiness, mobility and consumer lending, plus individuals and businesses seeking fixed-rate deposit and investment products. Named credit clients include Grupo Bebo, Vemo, Maxikash and Alvos.

Geography

Operations are focused on Mexico, with headquarters in Mexico City; the company has stated intentions to pursue acquisitions and expansion in other Latin American markets.

History

The company was founded in 2015 and originally operated as Credijusto, an early builder of technology infrastructure in Mexico for using digital tax, e-invoice and other financial data to underwrite and service SMEs at scale. In June 2021 it acquired Banco Finterra, becoming the first Mexican fintech to acquire a regulated bank, and subsequently rebranded to Covalto. In August 2022 Covalto Ltd. agreed to a business combination with LIV Capital Acquisition Corp. II, a Nasdaq-listed SPAC sponsored by Mexico City-based LIV Capital, in a deal implying a $547 million pro-forma enterprise value and including $60 million of committed financing; it would have been the first Mexican fintech to trade publicly in the United States. The listing was delayed and the merger agreement was mutually terminated on November 20, 2023, with the SPAC redeeming its Class A shares effective December 8, 2023 and Covalto owing a termination fee of $5.5 million in cash or 1,125,251 preference shares. The company has continued operating as a digital bank for businesses in Mexico.

Risks & controversies

The planned Nasdaq listing through LIV Capital Acquisition Corp. II was quietly delayed and then mutually terminated in November 2023, obliging Covalto to pay a termination fee of $5.5 million in cash or 1,125,251 preference shares and leaving the company without the up-to-$177 million of capital the transaction had been expected to generate. Growth figures cited in the 2022 transaction announcement for 2022 and 2023 originations were forward-looking projections rather than reported results.