In the past couple of years, Latin America has been a fertile ground for fintech investment. This industry has flourished, driving more attention and competition between local and international business.
But why has this region become suddenly popular? What factors have influenced the Latin American fintech boom? To understand this phenomenon, we’ll explore how fintech has grown in other parts of the globe and why the global eye is set on the Latin American market.
Technology and Finance Are No Strangers
Although the portmanteau “fintech” is relatively recent, the use of technology in business and financial services is not new. As a matter of fact, the use of technology in this area dates back to 1838. However, it wasn’t until more than a century later that automated teller machines began paving the way from analogue to digital.
Fintech’s current era formally began with the introduction of the smartphone and the need to access financial services anytime and anywhere. Of course, technological development in the past two decades has expanded incredibly. It has now moved beyond banking services and now includes alternative finance, asset management, capital and insurance.
How successful are some of these fintech firms? To give you an idea, a Tech.eu report states that in 2019, 458 firms were valued over $1 billion. Their accumulated value exceeded $1.3 trillion, which is roughly equivalent to the GDP of Australia.
And, when you talk about destinations, fintech is usually centered in the United States and Europe. European fintech firms, in particular, are very attractive for investors. In the aforementioned Tech.eu report, the 3.52 billion euros raised by European fintech companies in 2018 ballooned by 150% in the following year. And according to the amount of deals reported for the first half of 2020, the trend will continue growing.
Fintech in Latin America Is Booming
The Latin American region has experienced an accelerated growth in fintech startups, even though this process started later than other regions. From 2017 to 2019, fintech investment almost doubled. Although the Latin American market still represents a small percentage from the global total, it’s growth has been exponential.
In 2018, 1,166 start ups were operating in the region – most of these were focused on digital payment and transfer services and alternative financing or lending platforms. The financial sector in Latin America covers many more services, however. Financial management, crowdfunding, digital banking and scoring and identity fraud are some of the many services some of the fintech start-ups may offer.
“Just three or four years ago, you only had a couple of companies or institutions responsible for payment platforms and connected to one payment processing network such as Visa or Mastercard. This has now changed, and most payment systems include multi-brand payment processing“, says Fernando Byrne, Lead Consultant for Blankfactor.
The World of Payment Systems
One in every four startups in the region provides payment related services. In an IDB and Finnovista report from 2018, 55% of these startups were based in Brazil or Mexico, though countries such as Colombia and Argentina closely followed suit.
What has made payment systems so popular? Much of the boom in payment systems is attributed to internet penetration, as the region currently counts with over 450 million users. Just in South America alone, the internet penetration rate (that is, the relationship between the total population and the number of Internet users) was 75 percent.
As the amount of users has grown, so has the experience in creating user-friendly digital payment services. A good example of this is the case of Billetera Móvil in Perú, a standardized e-wallet launched by the private sector in 2016. With BiM, as it is known, users were able to transfer money, top-up mobile airtime and many other services.
However, operational issues and low internet coverage hindered Billetera Móvil’s initial reach and usefulness. Despite such issues, BiM still remains one of the country’s most popular financial platforms, and currently competes with services like Yape and Tunqui.
Even though the Peruvian market is relatively small in comparison to México or Brazil, platforms such as BiM serve as a good example of how digital payment platforms have grown significantly in past years. This is mainly because mobile phone technology has allowed for both banks and non-banks to reach the population in remote areas and provide a wider range of services.
Challenges and Benefits
So, what are the potential risks and challenges for fintech in the region? More investment in fintech endeavours offer the possibility of a greater financial inclusion in Latin America. This way, millions of people may now have access to the formal financial sector through low-cost financial services.
There is also an opportunity for collaboration between fintech firms and financial institutions, a phenomenon known as “fintegration”. Both entities may benefit through this, as banks can adopt new technologies and fintech firms can scale and build their brands. A great example of this is Prontomás, a payment gateway created by Blankfactor to integrate the payments landscape in Latin America.
According to the Dawn of fintech in Latin America report, as of 2019, 41% of fintech startups in the region reported serving unbanked or under-banked consumers or small and medium-sized enterprises (SME). Such data provides a strong indicator of some of the effects of fintech tech in the region. However, more research (and time) is needed to observe any substantial results.
“The second step (and challenge) is to open the competition and allow other companies to enter the market”, says Fernando Byrne. Throughout the region, Latin American legislators have responded quickly to the sudden rise in fintech in order to balance the preservation of financial stability, market and financial integrity, competition and consumer protection.
The success and speed of this response depends on several factors like the size of the industry, the existing legislation and the approach to regulation. Mexico, for instance, created a set of comprehensive fintech-specific laws in order to provide more legal certainty while trying to ensure transparency and competition. Their provisions expand to electronic money services, crowdfunding and peer-to-peer lenders and cryptocurrency.
Central banks in different countries have also noted limitations on the supply and demand side, ranging from contracting, ability to penetrate in rural areas, infrastructure and connectivity, geographical complexity and the lack of trust in both financial institutions and technology.
Despite this, Latin American fintech is off to a strong start, and the use of payment platforms and other services may significantly improve the financial and social conditions of the region.