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The digital transformation experienced by different sectors of the economy, characterized by the disruptive arrival of companies such as Uber, Airbnb and Netflix, has been knocking on the door of the financial sector for some years, giving way to the emergence of companies known as fintechs that use ICT to provide services to satisfy needs that traditional banking has neglected for years.
This new generation of firms specializing in financial technology provide services ranging from loans, financing, mobile payment solutions and remittances to income management, tax preparation, crowdfunding, insurance and cryptocurrency transactions.
According to a study by IDB and startups accelerator Finnovista, in Latin America "patterns that predominate are the segments of alternative financing platforms with 25.6%, and payment solutions with 25.2%," that is, half correspond to fintech ventures.
For the study, published in May, the high number of startups focused on financing and different payment services is a response to the "limitations and deficiencies" that traditional banking has in this area, which are reflected in a rate of bank penetration of 51% in those over 15 years old in the region, according to the Global Index 2014 of the World Bank.
The emergence of these innovative companies contributes to overcoming barriers to entry and use of financial products. Africa is a good example, as it has some of the lowest rates of banking penetration in the world. However, the penetration of rudimentary mobile payment systems in countries like Kenya equals the number of bank accounts, according to the Global Index 2014.
As in the rest of the world, Latin American fintechs are based on some of the links in the value chain of the financial system, developing operations with lower costs and more efficient services thanks to the application of ICT. These benefits are passed on to customers through more affordable prices, real-time answers and simple procedures.
Johanna Harker, manager of institutional relations at startups accelerator Wayra Colombia, which is owned by Spain's Telefonica, told BNamericas that "it is clear that the fintech ecosystem in Latin America is growing rapidly." And she considers that "this happens because there is a very big opportunity, since a large part of the population is not banked."
Indeed, 41.3% of the leaders of 703 companies consulted by Finnovista and IDB highlighted that their mission is to reach the segment of the population that today remains excluded from traditional financial services.
This group is also made up of SMEs, in which fintechs have identified a key niche to direct their services by offering alternative financing solutions, debt collection, digital accounting, international payments, invoice financing and digitalization portfolios, which will allow them to formalize their operations and access credit.
PROSPEROUS TIMES WITHOUT REGULATION
Three of every five fintechs in the region were founded from 2014 to 2016. And they all want to capture part of the more than US$22.3bn that, according to consultancy Accenture, is invested by venture capital funds in these companies globally each year.
Many of these companies are in their initial stages in search of a niche to reach scales that allow them to be sustainable.
The countries with the most financial startups in Latin America are Brazil, Mexico, Colombia, Argentina and Chile. Each market has nuances, but in general the private sector creates a good environment to boost their development.
Colombia, for example, has experienced 61% growth in the number of fintechs in the last year, according to Finnovista.
For Wayra's Harker this increase is due to the fact that not only technology-based accelerators boost the ecosystem. "You see a lot of interest in financial institutions, so there are more and more banks and insurers talking about innovation issues, technological ventures and accompanying startups in adopting services that solve internal problems or with customers," she said.
But, in spite of the optimism, the Colombian financial system is highly regulated, which is one of the great barriers to the development of these ventures.
The opposite happens in Mexico, where the senate is preparing to vote on a bill to regulate financial technology institutions, which would provide clear rules for establishing businesses under an updated legal framework. The bill will require foreign fintechs to be domiciled in Mexico.
For its part, the central bank of Argentina decided in October not to intervene in the industry, so a company is regulated by the legal framework that corresponds to the vertical it belongs to, whether that is insurance sales, stock trading or fundraising. However, the regulations for banks do not apply to those that offer loans because they use their own capital or that of third parties, without accepting deposits.
The decision of the central bank seeks, according to its representatives, to stimulate competition in the financial sector and, in doing so boost fintechs, which until now had not grown in number in line with other major Latin American economies.
Alejandro Cosantello, vice president of the chamber and CEO of Afluenta, told BNamericas that the entity was created because they see that there is growth in the fintech industry worldwide as well as in Argentina, and what they want to do is lead this process in financial technology. "We understand that Argentina has been a bit behind in development, but we want it to become a center of innovation and financial inclusion, and to be an international benchmark," he added.
SOME FINTECHS THAT SERVE THE UNBANKED
- Afluenta (Argentina)
Collective financing of personal loans. It currently operates in Argentina, Mexico and Peru and is preparing to launch services in Brazil and Colombia.
- Nexoos (Brazil)
Online loan platform that facilitates access to credit for small and medium enterprises via P2P transactions.
- Pago46 (Chile)
Application that allows one to make purchases online without using a credit card.
- ePayco (Colombia)
Electronic payments solution for SMEs, accessible and adaptable to different platforms: virtual stores, web and mobile applications, online markets, subscriptions and social networks.
- Flink (Mexico)
Online bank that allows accounts to be opened 100% online, providing a personalized card and any transaction to be carried out through an application.