Regulatory support in Latin America is “an amazing sign” for firms aiming to ride the wave of a booming fintech space in markets like Mexico and Brazil, according to ID Finance CEO, Boris Batine, though new entrants need to be ready to tackle new risks.
“China was exciting, but we’re all a bit late for that. Most of the lending revolution has already happened there. India and Africa? They’re certainly ones for the future. Today? Latin America is the place to be.”
Latin American governments, says Batine, are encouraging innovation and development with new regulation. In March 2018, Mexico published a new set of laws to regulate financial technology institutions, which seek to promote financial stability, prevent money laundering and create a fintech sandbox. “This makes things much more transparent, especially for fintechs like us coming into the market,” says Batine.
Considering the political instability which can affect Latin American countries, “it’s an amazing sign” that regulators are pushing new fintech laws, he adds. “It ties into the development of these countries. Once [these laws] have been passed it gains much more attention from the US and bigger markets, increasing confidence.
“These are cash economies, and there is a deep legacy there. Penetration of traditional banking services, as a result, is quite low. Only recently, in the last few years, has there been a change, in line with the economic development of these markets.”
Fintech investment in Latin America reached $600m in 2017, with deal activity in the region increasing by 20%, according to figures from Fintech Global. A 2018 study from PwC found that 219 fintechs were founded in Brazil the previous year, up 24% from 2016. Of those operating in the country, 27% are involved in the payments sector, with financial management (18%) and lending (17%) following.
“These populations are very tech-savvy and very young. They’re all very open to using new technologies. This is a region where more people have smartphones than bank accounts." Almost half of people in Latin America are unbanked, according to the World Bank’s Global Findex report for 2017. In Brazil, 40% of the country’s 207 million inhabitants are blacklisted from the banking system.
“Fintechs are grabbing a larger and larger market share [in Latin America]. Of course, there will be challenges eventually, like in Europe or the US. When a market becomes popular there will be new entrants, challengers and other rapidly growing companies. Now, and in the next couple of years there will be a very active period of growth, and some major companies will emerge from the current crop of entrants.”
Although in 2018 major banks in the Latin American markets seemed reluctant to partner with fintechs, “they are being a lot more open minded now,” says Batine. “Or at least their resistance has stopped. The banks are still very active in trying to foster in-house development of new technologies through accelerators.
“I don’t think there is a particular distrust [of the banks] in Latin America. The people and the banks exist in a parallel. They see the banks and trust them, but it’s difficult to join them. There are so many processes to go through, they’re not particularly fashionable, and don’t offer the kind of services [customers] want.”
Fintechs entering into the Latin American space will need to be up to the challenge, adds Batine, and try not to let their home markets cloud define their strategy. “How can a US company cope with currency volatility, if they have never had this experience in the US? How will they cope in a place with much more uncertainty and less information? Will they have enough focus on Brazil when 99% of their userbase is in the US, or in the UK?