DUO: Building the Next Generation of Financial Services for SMBs in MexicoBy Mandy Epstein
After watching the support pour in from the audience at MIT’s 100K Accelerate, the second event of the three part MIT 100K Pitch Competition, it became pretty obvious that Hugo López-Velarde and Luis Eduardo Torres, first year MBA students at MIT’s Sloan School of Management, had a strong concept with their company DUO. I sat down with both of them to learn more about how they came up with their idea, and what’s next.
Mercado Libre, Rappi, Ben and Frank, Gaia Design, Cornershop, Luuna. You may not have heard of all these companies, but if you ask any of your Mexican or Latin American friends or colleagues, they most likely have. They are highlights from the list of successful startups in Mexico and the rest of Latin America that have leveraged business models from US companies, specifically: Mercado Libre / eBay, Rappi / Task Rabbit, Ben and Frank / Warby Parker, Gaia Design / Wayfair, Cornershop / Instacart, and Luuna / Casper. The list is continuously growing, with perhaps the most notable one to us at Sloan being Clip, a replica of Square, started by Sloanie Adolfo Babatz. All of these companies were created completely separately and independently from their US counterparts and cater to the Mexican and / or Latin American market.
What is DUO?
DUO is building the next generation of financial services for small and medium businesses (SMBs) in Mexico by being the first online SMB business account. The company is based on the foundation of three pillars: customer service, immediate access, and the “cool” factor. DUO makes business banking easier than ever by providing all companies the ability to:
- Apply online in minutes (getting an account in less than 48 hours)
- Fund their account immediately through wire transfers
- Issue cards (virtual cards immediately, physical cards in a few days)
- Set rules and limits on cards for different employees based on a variety of factors (amount, type of merchant, day of the week, etc.)
- Receive instant notifications and expense approval requests
- Complete receipt matching and automated invoicing
- Schedule payments and collection reminders
- Get smart insights on income and expenses
DUO will be supported by best in class customer service with the vision to become the trusted financial partner of SMBs. Through building the initial relationship with SMBs as their bank account, DUO will be able to evolve as it learns more about the business needs of its clients. Potential future service offerings will include credit and lending.
The Financial Services Sector in Mexico
There are many issues and pain points with business banking in Mexico, specifically for SMBs. McKinsey research identifies that 99% of companies in Mexico are SMBs, and 53% of those companies are underserved by banks. Furthermore, McKinsey estimates a $60 billion credit gap in Mexico, with SMBs making up the majority of firms with unmet capital needs.
There are currently estimated to be 4M SMBs in Mexico, representing a 40% contribution to GDP, 80% of total employment, and 400k new companies each year. SMBs are a primary economic driver in Mexico. BBVA Research identifies $380B in total deposits, $205B in business deposits, and $80B in current-account business deposits that currently sits within the Mexican financial sector.
Recently, Mexico has experienced a huge wave of fintech disruption, however most fintech solutions are focused on serving individuals rather than businesses. The business banking experience is still extremely manual and tedious. Currently, businesses are unable to open a bank account online, or even request an additional product, such as a card. Some banks offer partial online applications, but businesses are still required to go into the branch to meet with an individual representative to finalize an application. It typically takes 4-6 weeks to open a bank account for a business. Not to mention, getting a card is a whole other process, which may or may not include online purchasing capabilities.
Currently, banks offer SMBs the ability to view balances online and do wire transfers, but that’s generally the limit of online offerings. Strong banking services in Mexico are only available to large enterprises and corporations. To banks, it’s just as much effort, money, and time to capture a large company as a customer as it is to capture an SMB, so SMBs just aren’t worth it.
IFC studies have identified the biggest hurdle for SMBs as adequate financing. Due to not having access to basic financial products on demand, SMB owners typically mix personal finances with their companies in order to not slow down the business. But limited control and visibility into expenses and charges lead to problems down the road when it comes to requesting loans, introducing a vicious cycle preventing SMBs from entering the next phase of growth.
The Timing is Right
In addition to the major need for financial services in the SMB sector, government regulation is catching up to the fintech industry as well. The Mexican FinTech Law came into regulation in March of 2018, with the secondary measure taking effect in September of 2018. The new regulation oversees all FinTech companies in the country, with the main purpose being to regulate virtual assets and companies that offer means of payment. Under this law and its current business model, DUO is not currently categorized as a financial institution since it is an interface. Therefore, the company does not require a license, which could have delayed the company’s timeline. Similar to how it evolved in the US and European countries, fintech is becoming more widely recognized and adopted in Mexico, as individuals are more willing to consider and use various fintech offerings.
While new companies are targeting SMBs for other financial service offerings, such as loans, there has yet to be a company that is focused on the banking experience and long-term client relationship. The only competition DUO faces in the space is larger banks, who are not focused on capturing smaller clients.
How it Really Works
Specifically, DUO works with a banking partner that provides the company with access to banking-as-a-service under a white label. Banking partners have recently become popular in Mexico to support the increase in fintech. They serve as banks, with no local branches. Under Mexican regulation, they do require licenses as a financial institution. All companies that work with these partners must include a legal disclaimer on their site – that they are not a financial institution and only acting as a front end to the end user – as DUO plans to do once it goes live. The partnership allows DUO to focus on its core service and differentiators – customer acquisition, brand, experience, and interface – for now, without taking on any of the regulatory requirements of being a financial institution.
The DUO platform will have several sources of revenue, ranging from monthly maintenance fees for every client account, to interchange fees and overnight interest on deposits. The DUO platform will be very lean in terms of costs given that it will not carry the burden of being a financial institution.
How DUO Began
Hugo and Luis both came to Sloan with backgrounds in traditional finance, but seeking entrepreneurship opportunities. Hugo had worked for about eight years in Mexico, holding positions in business banking, investment banking, and private equity. He had worked with a range of clients including large companies, SMBs, and startups, even working at one point to help SMBs open bank accounts. He came to MIT with the hope of moving away from the corporate space and doing something on his own. He knew he wanted to ultimately be his own boss and be accountable for the decisions he was making. Luis similarly worked in the financial services industry in Mexico, at JP Morgan and Goldman Sachs. After working in investment banking, he moved to a VC firm, one of the first corporate VCs in Mexico. There he had access to early stage companies, and he recognized the enormous amount of opportunities in Mexico.
As the only two male Mexican students in the class, with SOs (Sloan’s term for Significant Others) that were friends, and living in the same apartment building, Hugo and Luis quickly became close once arriving at school. After learning about each other’s career goals, they realized that their friendship quickly formed the foundation for strong business partners with similar aspirations. Both Hugo and Luis separately recognized the benefits of bringing tested business models from other countries into Mexico. They spent mornings walking to class brainstorming ideas that could be the next Task Rabbit or Instacart brought to Mexico. They weren’t focused on a specific industry, and went through lists of ideas on their walks, never completely satisfied with concepts that they felt could be successfully implemented in Mexico. One day, they thought about corporate credit cards – a pain point that they had experienced and personally dealt with first hand in their previous positions.
That Friday night Luis and Lourdes (Luis’s girlfriend, now fiancé) had plans to have a casual, relaxing night with Hugo and Priscila (Hugo’s wife) at their apartment. When Luis was on his way over, Hugo let him know that that night was the deadline to apply to the MIT Fintech Competition, a pitch competition that was the following week. With Lourdes and Priscila’s support, the four of them spent that night developing a business plan that could be used in the competition.
The next Wednesday, Hugo and Luis were informed that they made it to the finals and would be required to present that Friday. Luis planned to represent the team at the competition and pitch to the slides they had recently created. After hearing the other companies present, Luis quickly realized that he was competing against teams that had businesses – with revenues, customers, and real solutions. He thought they had a nice idea, but at the end of the day all they had was slides. Fortunately for the DUO team, MIT’s FinTech Competition had two awards – “Best Business Plan” and “Most Promising Idea”. DUO won “Most Promising Idea”, along with $1,500. The VCs that were there judging the competition were very interested and intrigued by the concept. It was then that Hugo and Luis realized they had finally found an idea that could be taken to the next level.
From then Hugo and Luis worked tirelessly over the next few months to solidify the DUO business plan. It started with research, connecting back to their networks in Mexico to understand how companies deal with financing, credit, control, and visibility into business financing and expenses. Many of their initial assumptions were confirmed: Owners tended to use personal cards for their companies, dealing with banks were always major pain points, and companies had limited visibility, insight, and control over expenses. Furthermore, they recognized these issues were most prominent in SMBs.
They contacted individuals they knew at Brex, a company providing a similar offering to startups in the US, to understand the company’s go-to-market strategy. They also researched Novo, in the US, as well as Penta, Starling Bank, and Tide, other startups in the space in Europe.
Through their research, they realized their customer focus should be people who need online banking, that are digitally enabled. This lends itself to startups and younger companies, who DUO has now targeted to be its initial clients. By working closely with the companies as their trusted bank, DUO hopes to build relationships through strong customer service for general bank account needs, and further down the road can re-evaluate its core services. Hugo and Luis hope the initial pilot will provide them with the insight to their customers to understand what they need and what future service offerings they should consider adding to DUO’s platform.
In mid-March of 2019, DUO launched a landing page that provided a quick overview of the product and offered sign-ups for additional information. They wanted to see if people were even interested in the concept. They received 150 sign-ups across the country in just a couple of weeks.
Leveraging Sloan Resources
While this was going on, the DUO team also applied to additional funding and competition opportunities at Sloan and other schools. In addition to the $1,500 from the FinTech Competition, Hugo and Luis applied to MIT’s Sandbox Initiative and received the initial $2,000 grant to work on their idea. This month they plan on completing the application for the next phase of Sandbox, which could result in up to $5,000 in additional funding to work on their company over the summer. The final Sandbox round is completed next fall, with potential for up to $25,000 in funding.
In addition to Sandbox, DUO applied to MIT’s $100K Accelerate, part of the $100K Competition. They won, getting $10,000 in additional funding and automatic entry into Launch this May (with the grand prize of $100,000 on the line).
Other programs that they have applied to or worked with while at Sloan include Pear VC’s University Program, Legatum, and Mass Challenge. Most recently they were finalists at the Wharton Latin America Conference Pitch Competition. They have focused their classes on entrepreneurship, taking MIT Sloan’s popular New Enterprises and Entrepreneurial Strategy classes. Not surprisingly, they’re taking most classes together and still enjoy their walks to class to discuss the latest developments with DUO.
DUO plans to launch a pilot in Q3 of 2019 to test the initial solution with target companies. The two major areas of focus for the pilot are legal and operational. On the legal side, DUO is working with one of the top law firms in Mexico to evaluate regulation and understand any requirements.
Operationally, conversations with the banking partner are undergoing, and a contract is expected to be finalized and signed within the next couple of weeks. For the pilot, the banking partner will provide a white-label (unbranded) solution with the core features that they want to offer, such as opening a bank account, adding funds, ordering cards, and setting limits. It will not be the full features or have the complete DUO brand, however it will be enough for DUO to test the pilot and receive customer feedback. Following initial conversations, 14 companies verbally committed to test the product once the pilot is ready. DUO will likely run the pilot with these companies, and Hugo and Luis will work hand-in-hand with the carefully selected customers to understand their experience and further understand their needs for future banking services. Once they get the legal go ahead (and sign a contract with the banking partner), it should take about 2 months before they are able to officially start the pilot.
The DUO team estimates that the pilot program will last three to four months. Following completion of the pilot, the goal is for a public launch in Q4 of 2019, leveraging the sign ups from the landing page. Prior to a public launch, Hugo and Luis anticipate that they will likely need to raise a round of funding. They also plan to focus on hiring a CTO as their next team member to fully build out the DUO platform, with an emphasis on brand and experience.