With Brazil in the lead, Latin America is rapidly growing an innovative coterie of fintechs, filling service gaps ranging from credit to payment platforms to mobile banking.
Latin America has established itself as a magnet for fintech investment.
The region received $15.6 billion in investments for financial technology providers over the past 10 years, with Brazilian companies making up 66.7% of the total, according to consultant Distrito’s Fintech Report 2024. Digital services—e-wallets, accounts, and digital banks—attracted the most money, with $5.3 billion. But the most numerous deals, and those most often targeted for acquisitions, were in credit fintech, with 477 reported.
“The region has a large unbanked or underbanked population,” notes Andrés Fontao, co-founder of Finnovista, a Brazilian venture capital firm focused on fintechs. “A significant portion of the population, both consumers and small to medium-sized enterprises, still lack full access to traditional financial services, creating a substantial opportunity for fintechs offering innovative and accessible solutions.”
Fontao, Finnovista: Much of the population
still lack full access to traditional financial
services, creating opportunities for fintechs.
Distrito charted 1,658 rounds of financing in the decade through first-half 2024, including 1,034 in Brazil. But this year alone, through June 30, has seen 83 deals worth $800 million, equal to 80% of all investments in fintechs in 2023. The two largest rounds this year were from QI Tech and Celcoin, for $250 million and $150 million, respectively. The QI Tech offering turned it into a unicorn, with an estimated value of over $1 billion.
Explaining the success of the company he co-founded six years ago, QI Tech CFO Marcelo Bentivoglio notes, “We have been growing more than 100% per year and held 300 clients, the biggest of each sector. I think we filled a gap in the financial market, as the company is focused on technological infrastructure for credit, banking, payments, collections, onboarding, anti-fraud, and all the necessary tools to boost financial services.”
Regulation and innovation have been key factors, he says.
QI Tech helps companies from different segments set up digital banks and provide financial products to their customers. If a company in retail, for example, wants to open a finance company offering payment options, billing, and credit issues, it can do so using QI Tech’s infrastructure. That, in a nutshell, is banking as a service (BaaS), which enables non-financial institutions to partner with QI Tech—or one of its rivals—to offer financial services to end users. BaaS started with tech companies that license their software for a monthly payment (SaaS) rather than selling a full operational software package for a one-time payment.
Last December, QI Tech purchased brokerage firm Singulare, which has $120 billion Brazilian reais ($24 billion) in custody. That acquisition came on the heels of an announced investment of R$1 billion ($200 million) in QI Tech in a Series B round led by General Atlantic with the participation of an existing shareholder, Across Capital, which is doubling its initial investment in the company.
Brazil takes The Lead
Latin America counts 2,712 active fintechs, the majority in Brazil (58.7%), followed by Mexico (20.7%), according to Distrito. What gives Brazil such a strong lead? First, it’s region’s most populus country, and second, the Central Bank of Brazil contributes a lot to regulating fintechs, a process started more than 20 years ago. Without regulation, fintech services would not be allowed.
“As five banks concentrated 80% of the financial services, the competition was really low,” says Diego Perez, president of the Brazilian Association of Fintechs (ABFintechs). “In 2013, there were only two means of payment, and today we have more than 200 agents offering this service. As a result, there is more competition, and it’s positive for customers.”
Not everyone succeeds. Statistics from ABFintechs reveal that for every 10 new fintech companies, two will be successful in five years. This is similar to the public market equivalent for Brazil as a whole: 80% will fail and 20% will survive. In contrast to a decade ago, big banks are now joining successful fintechs for acquisitions or even collaboration.
“We are still in the beginning,” says Perez.
Colombian Fintechs Fill Gap In Credit servicing
While the majority of Brazilian fintechs are focused on means of payment, in Colombia entrepreneurs are exploiting mainstream banks’ reluctance to provide credit for the bulk of the population. They are busily filling a niche between the banks and the coterie of illegal lenders known as “drop-to-drop,” which typically lend money at abusive rates of interest to needy people.
Fontao, Finnovista: Much of the population still lack full access to traditional financial services, creating opportunities for fintechs.
“Those moneylenders applied up to 280% of the original value of money credited in 24 hours, which is extortion,” says Eduardo Montañes Silva, CEO of Bogotá-based consultant LiSim International. “In the legal system, it’s around 2.5% monthly. So fintechs became a suitable option for millions of people.”
While a traditional bank can take five days to approve a loan, fintech startups have found a practical way to lend money in two hours.
The Colombia Association of Fintechs has around 200 members, but estimates the country has 300 fintechs in all. Many are small operations with little investment, making growth difficult in the short- to medium-term. In this scenario, Montañes foresees, it will take a wave of mergers and acquisitions to develop the business.
“If two small companies join, they together can have more clients and attract more investments,” he says. “Colombia is an opportunities country and foreign investments are very welcome.”
Argentina poses greater difficulties, due to high inflation and a lack of circulating money. Fintechs there are focused on means of payment and investing in services that help customers protect their money, such as Mercado Pago, a digital wallet and payments platform, and Ualá, a mobile app used for managing Mastercard prepaid debit cards.
Regulations focus on the means of payment, banking transfer, and new technologies for mobile banking. “Both banks and fintechs are unable to offer credit, so they have to think about other services,” says Fausto Spotorno, director of consultant OJF & Asociados and director of UADE Business School.
Improving Regulation
Regulation makes a significant difference in Latin America, notes Finnovista’s Fontao, and countries are at different stages of development in this respect.
Mexico is a standout with its 2018 Fintech Law, the first in the region to lay out a clear legal framework, facilitating innovation and the entry of new players into the market.
“This law focuses on the widespread adoption of open banking and creates a safer environment for consumers and businesses,” Fontao says. “Countries like Chile and Peru are taking a more gradual and consultative approach, with recent efforts to strengthen fintech regulation and improve competitiveness in the sector.”
The pros of investing in fintechs in Latin America, he adds, are a strong talent pool, increasing access to technology, a young and adaptive population, and continued interest from investors themselves. “However, there are still some challenges to face in the region, such as the underfunding of the ecosystem compared to, for instance, the US; economic uncertainty; lack of access to funding in some regional markets; and political volatility.”
That said, Latin America’s fintechs are robust and growing, despite economic, political, and regulatory barriers. With appropriate investment, technological innovation, and a proper regulatory environment, the sector expects to continue positioning itself as an important agent in the region’s economy.
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Publish date : 2024-10-14 10:22:00
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