LatAm: The new kid at the FinTech table

Booming financial support and a maturing approach to regulation are helping LatAm establish itself on the FinTech map

LatAm is not traditionally considered a popular region for FinTech developments. With major headlines being hogged by China’s FinTech giants, America’s booming VC investment and the growth of open banking in Europe, it’s not hard to see why LatAm struggles to get a look in. But is the lack of attention justified, or is this region flying under the radar?

In terms of investment value, it’s fair to say that the LatAm region is significantly behind other areas. The region’s lack of investment value is not down to an insufficient number of deals though. For example, LatAm saw only slightly fewer FinTech deals than China did in 2018 but its investment value was over 20 times smaller.

Total FinTech Investment and Number of Deals in 2018

Source: KPMG

With a noteworthy number of deals going ahead in the region, there are clearly plenty of FinTechs to invest in, and this number is growing rapidly. The estimated total number of FinTechs in the region increased from 619 to over 1100 during 2017-18, representing a 73% increase year-on-year, with Brazil (150%) and Mexico (93%) experiencing the biggest increases. Recent estimates put the number of FinTech start-ups in the US, Canada and LatAm combined above 5,700, so LatAm is starting to make a dent from this perspective.

When it comes to producing FinTech unicorns – companies with a valuation over $1BN – LatAm has some way to go but is certainly making up ground. Brazil gained 2 new FinTech unicorns in 2018, while Argentina gained a new FinTech unicorn in January this year as Prisma Medios de Pago, one of the country’s leading payment providers, attained a valuation over $1.5BN. Let’s look at some of the FinTechs that have managed to thrive in LatAm so far, including one of these recent unicorns.

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Sources: Latam List, Forbes, Tech Crunch, Medium, Scribd

Prospects for LatAm

Latin America certainly has some promise as a force in the FinTech world. While there is still some way to go before it can compete with the world’s established FinTech hubs, there are a few trends that will govern its progress.

1. Interest from global tech giants

The last few years have seen companies such as Amazon, Visa, Tencent and others step into the LatAm ring. This trend could provide the necessary capital injection to even out the discrepancy between the number of deals and investment value in the region. For instance, it was Tencent’s $180M investment that took Nubank to a valuation of $4BN, making it one of Brazil’s first FinTech unicorns. The conglomerate’s investment in NuBank is far from a one-off occurrence, but reflects a greater trend of China’s investment focus shifting away from infrastructure towards service industries such as financial services. Most recently, Tencent invested in Argentinian mobile payments firm Ualá at the end of April this year, making a bold statement when most are reluctant to invest in a turbulent Argentinian economy.

Visa has also weighed in through its Visa Everywhere competition for FinTech funding, and by backing several accelerator programs, including Kyvo/GSVlabs in Brazil and Startupbootcamp in Mexico.

One downside of this attention from overseas is the addition of experienced and affluent competitors to the market. Amazon, for instance, saw the opportunity to launch a debit card product in Mexico, one of the few Latin American countries that doesn’t lean heavily towards credit cards. The tech giant has an effectively endless pot of money to develop and push its offering, as well as a wealth of data on the Mexican population and similar markets from its e-commerce channel. If more global conglomerates make similar moves, the growth of FinTech from within the region may be supressed.

2. An increasing focus on innovation from regional banks

Banks in the LatAm region are increasingly supporting the development of FinTech. Bradesco and Santander have launched innovation spaces in Brazil (InovaBra Habitat) and Mexico (Spotlight) respectively, aiming to promote collaboration and developments using emerging technologies. Other banks, such as BBVA Bancomer, have similar programs with a focus on inviting FinTech start-ups to work with the bank on new product developments that can add value to their offering.

Meanwhile, Colombia has played a key role in this trend through established players such as Bancolombia, which has partnered with the Silicon Valley-based ‘Plug and Play’ start-up program to promote collaboration between early-stage FinTechs and larger financial companies. This forward-thinking approach from banks promises to foster a stronger FinTech ecosystem in the region, while offering access to funding for those that can use these platforms to gain the support of financial institutions.

Playing the game under the bank’s rules places limitations on the types of FinTechs that can thrive though. Many of the schemes call out specific focus areas, such as Blockchain, AI and Big Data, so FinTech sub-segments like crowdfunding, which are less directly valuable to a bank’s operations, may be left by the wayside.

3. Regulation is catching up

As is the case in other regions, LatAm FinTechs in many areas have been calling for more supportive regulation.

In recent years though, the regulatory framework for FinTechs in the region has been making up lost ground. Brazilian regulators have released an array of policies covering several FinTech sub-segments. Notably, its National Monetary Council issued a regulation in 2018 allowing direct lenders and P2P lenders & marketplaces to provide banking services without using an incumbent bank as an intermediary.

In terms of FinTech regulation in LatAm though, Mexico’s FinTech law is the key talking point. The regulation, claimed to be the first of its kind globally, covers areas such as licensing requirements, the use of APIs and authorisations for sandbox testing. However, while providing a framework for growth, Mexico’s FinTech Law exemplifies some of the downsides of accelerating regulation. FinTechs in the country will now need to adopt a host of new processes and many will need to go through time-consuming, and likely expensive, licensing processes. Depending on how well-balanced these requirements prove to be, they may provide unwelcome roadblocks.

More than meets the eye

At first glance LatAm seems to be trailing the world’s established FinTech nations despite the promise of a large number of investment deals and a huge underserved population. In recent years though, we’ve seen the region start to deliver on its potential, aided by booming international investment, a commitment to FinTech innovation by banks, and the creation of more supportive regulation by government bodies.

LatAm’s FinTech sector may not be able to compete with the world’s established regions just yet, but with a forecast value exceeding $150BN by 2021 you won’t regret keeping one eye firmly on this one.