Latin America and the Caribbean has become a hot region for fintech development. A part of the world long dominated by incumbent banks and other established service providers, Fintech has become a fast lane to deliver traditional and highly sophisticated services to a largely underbanked or unbanked population.
The Inter-American Development Bank (IDB) recently released a report that offers a unique perspective on the fast-growing Latam Fintech sector as well as the state of regulatory developments needed to enable its growth.
The IDB has created an interactive map of fintech regulation in Latin America and the Caribbean that allows a viewer to examine the state of various fintech sectors with respect to regulation.
Alongside its ongoing Fintech LAC section, the IDB released a report providing an in-depth view of Fintech in Latin America and the Caribbean.
This report indicates that the number of Fintech platforms has increased rapidly since 2018, from 1166 to 2482 at the end of 2021.
The IDB FinTech Report shares:
- 80% of them are concentrated in Brazil (31%), and Mexico (21%), Colombia (11%), Argentina (11%) and Chile (7%).
- Payments and remittances account for (23%) and lending (18%), enterprise technologies for financial institutions (14%), enterprise finance management (10%) and individuals (7 %).
- Investments in Fintech platforms have increased significantly to over US$1.6 billion in 2021.
While some incredibly successful fintechs have emerged in the region, the IDB report notes that there has been an increase in “cross-platform collaboration” as traditional finance attempts to keep pace with change.
CI recently connected with Diego Herrera, Principal Financial Markets Specialist who led the creation of the report. Our discussion on Fintech development in Latin America and the Caribbean is shared below.
What are the main barriers to Fintech adoption in Latin America and the Caribbean?
Diego Herrera: The biggest inhibitors of Fintech growth in Latin America, according to the results we share in “Fintech in Latin America: a consolidated ecosystem for recoveryare the impossibility of scaling up, the lack of financing for growth and the launching of projects.
For the first factor, we see the expansion of Fintech platforms in the region to increase the scope of scale. In total, 30% of Fintech companies originating from the region operate abroad.
For the second aspect, the barriers are slowly disappearing: the fintech sector in Latin America and the Caribbean received US$6,093 million in venture capital investments in 2021, or 39% of the total amount of capital invested. The sector continues to consolidate thanks to major investments and dedicated funds, the emergence and growth of new companies.
For the latter, the multiplication and quality of public policies facilitate the launch of their products by entrepreneurs. However, much remains to be done on this front.
Some LatAm Fintechs have seen incredible growth and rapid adoption. How are traditional financial services companies reacting to competition?
Diego Herrera: In general, the reaction of incumbents in the financial sector has been towards coopetition (competition and cooperation) with the Fintech sector. Our study shows how 45% of a universe of over 650 Fintechs surveyed, 45% are engaged with incumbents through business alliances, integrating into the value chain as their suppliers or customers. This is partly due to the significant interactions of payment platforms, which represent more than a third of the sector. On the other hand, Fintechs interact with the traditional financial sector through pilots (15%), testing products within the latter’s value chain. A similar situation occurs with around 11% of platforms carrying out proofs of concept with incumbents. As has happened in other parts of the world, the line between entrants and incumbents is beginning to blur.
Access to capital is critical for start-up/growth stage businesses. Do Fintechs play a role in this in LAC?
Diego Herrera: Our research references what we found for alternative finance and crowdfunding companies.
Last year we produced the Second Global Alternative Finance Market Benchmarking Report deconstructing the alternative finance (AF) and crowdfunding ecosystem in Latin America and the Caribbean (LAC) with the Cambridge Center for Alternative Finance (CCAF). The results were exciting: the region reached $5.27 billion in origination for 2020, which is an astonishing 191% growth from 2018.
More importantly, the LAC AF ecosystem increased the share of corporate funding to 86% in 2020 from 60% in 2018.
In a more recent study that we will publish in the coming weeks with the CCAF, we show how companies that have been able to access fintech financing could also increase or maintain their number of employees (92% of the total), their revenues (86% ) and turnover (84%).
Fintech-backed companies have become resilient even amidst a very adverse situation like the pandemic, thanks to the availability of credit. The results are even more relevant if we take into account the fact that 83% of the enterprises were micro-enterprises (ten employees or less).
Therefore, it is safe to say that Fintech platforms appear to be a viable alternative for financing micro, small and medium-sized enterprises (MSMEs), which make up 95% of their corporate clients.
Overall, are policymakers helping or hindering fintech growth?
Diego Herrera: Policy makers are slowly catching up with the progress of the sector. We have identified seventeen (17) regulations in the region for different segments: crowdfunding and alternative finance (4), rapid retail payment systems (5), open finance (2), trading and robo-advisors (3) and cryptoassets (2). Yet the region needs to move faster because a more organized sector and clear rules allow investment. The benefits of fintech are evident from an MSME credit and payments perspective, as Brazil has shown with PIX.
On the other hand, policymakers have decided and implemented regulatory innovations that enable the promotion and development of the Fintech industry.
The most relevant innovations are innovation hubs and regulatory sandboxes.
In particular, we have seen the rise of eight (8) innovation hubs in the region as a tool for creating dialogue and knowledge between innovators and regulators. The Inter-American Development Bank has supported such initiatives in four countries in the region. Three have set up innovation hubs: Costa Rica, Dominican Republic and El Salvador.
On the other hand, Brazil, Colombia and Mexico have implemented regulatory sandboxes, with varying results, to test innovations for the financial sector.
The results for the regulation of the region are presented in the study and in FintechRegMap, an interactive map showing the status of relevant fintech regulations in LAC. The study also includes visuals for the region’s regulatory sandboxes and innovation hubs. The map is available at www.iadb.org/FintechRegMap.
Financial inclusion is a key theme in North America. Sophisticated services, once reserved for a small part of the population, are now extremely accessible in many regions. Will it fuel collateral development and entrepreneurship in Latin America and the Caribbean?
Diego Herrera: Fintech is no longer a phenomenon or a novelty, and has become a reality with impacts on the lives of citizens of Latin America and the Caribbean through greater financial inclusion.
Examples abound in the region, starting with the adoption of fintech platforms and central banking systems that enable their participation in payments and transfers. Similarly, another example of adoption is the use of crowdfunding platforms to finance micro, small and medium enterprises, taking advantage of public policies that allow factoring.
Finally, the emergence of players such as platforms that offer application programming interfaces -APIs- or blockchain-based infrastructures that promise to change business models to improve financial inclusion in our region are crucial for expand the scope of Fintech.
In summary, the incentives are aligned and we expect more entrepreneurship and the development of collateral alternatives such as cryptocurrencies through DeFi.
Are Fintechs based outside the LAC (like NA or EU) playing a significant role?
Diego Herrera: Not yet, but as the market grows, we expect to see more and more participants from other jurisdictions.
There is one big exception: crypto-assets. We are currently working with CCAF on a report on the crypto-asset ecosystem in Latin America and the Caribbean. We found several global players offering services in the region.