Top Drivers Behind Fintech Developments in Latin America

Latin America’s regional economy is capturing the world’s attention as it continues to grow at a rapid pace, stealing the spotlight from other regions such as Asia. Various government drives to increase foreign direct investment (FDI) are leading to legislative reform and competitive commercial outcomes.

Multinational businesses are taking up tax and investment incentives to set up shop in the region and funnel into enviable trade channels built by strong trade blocs such as Mercosur and the Pacific Alliance.

Supporting continuous development and growth is Latin America’s rapid turnover of people from traditional business practice into the online commercial world, where connection and convenience play to the wants and needs of the region’s growing middle classes. The development of financial services into a consumable online commodity is no exception. Financial technology or ‘fintech’ is bringing more of the

We explore top trends in Latin America’s fintech environment, and where the hotspots for fintech activity are.

Overview: technology in Latin America

Latin America has been slower than others to come to the table of technological innovation, and governments are turning to their legislative mechanisms for foreign business and investment as potential culprits for this. New initiatives aim to increase FDI in many of the region’s fastest-growing countries.

The promotion of new, foreign business has brought technological innovation to many of Latin America’s traditional sectors; predominantly, online and mobile commerce, financial services and some agritech initiatives are reaching its shores.

One key contributor to the growing success of these sectors (primarily in the development of the online world) is mobile technology uptake. The region is currently third in the world for smartphone adoption, with 61% of its collective population owning smartphones in 2017.

So, what trends does this kind of rapid digital uptake introduce to financial services in the region’s commercial environment?

Digital inclusion leads to digital banking

Fintech observers report unprecedented growth in technological uptake in Latin America, thanks to various government initiatives to boost digital inclusion. In particular, the region’s top performers are Mexico and Brazil. Colombia, Chile, and Argentina are also demonstrating a keen aptitude for fintech innovation and disruption.

Notably, Mexico’s first left-wing President in around 70 years is expected to place a heavier priority on digital and financial inclusion than that previously seen by its government. Traditional banking institutions are also showing an increasing propensity to innovate their financial service reach. These two factors serve to capture the large proportion of Mexico’s population that remains unbanked or underbanked, and bring them into the fold.

Mexico’s fintech scene is missing a replica of fintech stardom that NuBank, a fintech operator with around 4 million credit card users, demonstrated in Brazil. With the largest Spanish-speaking population in the world, Mexico offers a lot of potential to build digital-first financial services.

Emerging branches of digital banking

Trends in digital banking that are captivating the continent include new options for mobile payments, 100% online-operated banks (known as digital challenger or neobanks), and eWallets.

Diverse and secure mobile payment options are surfacing in Latin America that are helping people manage their money online. Applications that facilitate household bill-paying and QR codes that saw success in Asia are now appealing to the Latin American mobile commerce and online finance market. Large online marketplaces are absorbing diverse credit and debit card payment partnerships with financial institutions, offering easier access to online shopping for those in different financial arrangements.

Banks that operate fully online are also storming the market and capturing increasingly tech-savvy tablet and smartphone users. Virtual credit cards and fully online bank accounts enable those with busy schedules or limited access to a physical branch to make transactions and payments as they need. In countries that prescribe heavy bureaucratic processes to opening accounts, these neobanks offer convenient and helpful solutions for people. Mobile further boost mobile commerce as they quickly become the norm in online shopping options.

eWallets are another big component of what makes digital banking so attractive. These electronic ‘wallets’ offer a secure way for customers to store their banking and virtual credit card details, and allow them to choose from a rang of payment options within their own financial capacities. eWallets facilitate the automation of online purchasing and other transactions.

Investment from Asia

Fintech investors are moving into the region to take up unclaimed market territory in Latin America’s developing countries. China and India led the way in worldwide fintech adoption this year, which increased globally by 64%. Leaders in this space are taking note of the opportunities to establish themselves in the untouched and underbanked region.

One key example of this was Chinese giant Tencent’s investment of US$189 million into NuBank. The company’s subsequent introduction of QR code payments shows that Tencent is interested in employing fintech trends experienced by China in a new market. Chinese company Baidu is reported to have made moves to expand into Brazil, and Alibaba – via Alipay – has also expressed interest in Mexico’s fintech environment.

Observers suggest the region is likely to see more of this kind of investment and market-mirroring going forward.

Rise of insurtech

Insurance technology or ‘insurtech’ is on the rise in Latin America, according to fintech observers.

Traditional banking institutions and digital challenger banks alike aren’t just thinking about how they can make it easier for people to pay their bills or engage in some online retail therapy. Insurance is another area that is being scrutinized for a digital makeover.

The main objective behind insurtech is to maximise on savings and efficiency when undergoing the loan application process. Basic data collection levels for traditional insurance models can categorize some people into risk bands that aren’t necessarily the best fit, and don’t give a detailed picture on people’s credit and viability ratings. Also, traditional models tend to favour those with long insurance subscription (an example of this is reduced excess for low- or zero- claim customers), and therefore, in wealthier positions.

Technological disruptions to the insurance world include using AI, GPS and other data-gathering methods to track customer activity or contents use and create a more personalized risk category that minimizes unnecessary cost for consumer.

Additionally, those further pushing the boundaries of insurtech are building platforms to allow, instant, integrated management of small-scale insurance activities, such as borrowing contents or assets from friends and acquaintances.

Insurtech hasn’t been at the forefront of the Latin American fintech overhaul, but the potential in this space is enticing early-movers, and observers expect to see a boom in this industry in the near future.

Capitalize on early-mover opportunities

Foreign fintech investors and long-standing, local banking favourites are taking notice of the potential to reach more people with their services through the online world. There’s no shortage of ambition to bring the unbanked and under-banked communities of Latin America online.

First movers can shape the future of how the region delivers financial technology solutions to its consumers. Burgeoning fintech ecosystems seek to empower people and give them a greater sense of agency over their finances and financial options. As the market is still developing, there’s time and opportunity to make your mark in the region’s fintech environment.

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