Latin America is making headlines when it comes to the fintech scene. A study conducted by the Inter-American Development Bank (IDB) and Finnovista highlights there was a 112% growth in the fintech ecosystem in the region since the last report released in 2018. In just a three-year window, the number of platforms rose from 1.166 to 2.482, with Brazil boasting the largest fintech market in LatAm.
But what fuels this explosion of fintech activity? How do tech companies thrive in a fast-changing scenario with so many challenges like the one in Latin America? The truth is there isn't a predominant reason behind it, but a combination of factors instead.
Historically, the region offered poor financial services, leaving many people unbanked. And we can see it in a World Bank report that states that an estimated 135 million people in Brazil, Colombia, and Mexico were unbanked in 2017.
But that's not all. The massive mobile internet usage has proved to be the catalyst in this combination of factors to create the perfect environment for fintech to thrive. According to Statista, in 2019, there were 343 million mobile internet users in Latin America. Striking for sure. So, let's dig a bit deeper into one of the hottest fintech markets in the world and see what's ahead!
The Fintech Landscape In Latin America
Before delving into the reasons why fintech companies thrive in such a complex environment, let us paint a picture of the tech ecosystem in Latin America. The pandemic during 2020 was a tipping point for the economy globally.
In LatAm, the region was already experiencing significant growth, and despite the economic bumps, the COVID-19 outbreak boosted fintech development. Let's see some facts and figures.
- Venture capital in LatAm's fintech scene for the first half of 2021 surpassed the 2020 total by $4.7B (Fintech Global)
- Deals $50M and above went up by $3.9B in H1 2021 compared to 2020. (Fintech Global)
- The number of fintech platforms in Latin America reached 2,482 in 2021. (IADB)
- Brazil has the largest number of fintech companies in the region, with 1,446 financial technology startups in December 2021. Almost a 90 percent increase compared to August of the previous year. (Statista)
- Nearly a quarter of fintech platforms globally, 22.6 percent, are from Latin America and the Caribbean. (IADB)
- Nubank is LatAm's largest neobank in the region, serving around 40 million customers, and is the world's third most valuable fintech company at US$30 billion. (CB Insights)
The Reasons Behind The Fintech Boom
What makes LatAm so attractive for international venture capitalists? Here are some of the most relevant factors that combined created the perfect recipe for fintech to thrive in the challenging Latin American scenario.
More Competitive Scenario
Over the past years, Latin America has embraced a digital transformation creating a more competitive landscape for financial solutions. The rise of neobanks, also known as digital challenger banks that operate 100% online, forced traditional banks to digitize their services in order to stay competitive.
Until not so long ago, banks in Latin America didn't offer mobile apps, and if they did, they were poorly developed. With fintech emerging to cover this pain point, people shifted massively to online banking options.
The COVID-19 Factor
The pandemic that occurred in 2020 hit the economy globally, leaving a trail of consequences that impacted people's consuming habits. Though there was a steady development of the fintech landscape in Latin America, COVID-19 accelerated this growth.
Innovation was forced out of necessity. Historically, cash was widely preferred in the region, but the lockdown and business shutdowns increased the need for digital payment options. As a consequence, large amounts of the population shifted to fintech fueling its growth.
The Rise Of E-Commerce
Another consequence of the aforementioned point was the boom of e-commerce. There was a sudden shift from offline to online retail due to strict lockdowns in the region, generating a substantial demand for fintech solutions.
Though e-commerce is not new and was already on track before the pandemic, the situation spiked its use and showcased the need to streamline payment processes and logistics. The outcome: consumers boosted the adoption of digital payment methods.
From Informal To Formal
One of the biggest game-changers in the fintech environment in Latin America was inclusion. Fintechs emerged to bridge the gap between a large sector unbanked population and the financial system, becoming a gateway for digital inclusion. According to the World Bank, only an average of 55% of Latin American adults have an account at a financial institution.
What's more, monopolistic practices of certain traditional banks over decades have also caused consumers to lose trust in these institutions, becoming more open to adopting alternative payment methods. Neobanks and digital wallets emerged as a more inclusive and streamlined solution for people in the region, enhancing their banking experience.
The Bottom Line
Certainly, Latin America has become a hot spot for fintech companies, and it keeps developing with venture capital pouring in. Of course, there's room for innovation and growth. Countries in the region are changing regulations to entice entrepreneurs and investors, with inclusion at the forefront of this digital revolution.
Today, Latin America has a plethora of possibilities for tech companies, and we are witnessing the growth of unicorns and projects with potential. The financial ecosystem is still taking shape, but the opportunities are real.
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