Are Colombia and Mexico becoming LatAm fintech hubs?

Bnamericas Published: Monday, April 22, 2019

By Biz Latin Hub

The rise of financial technology firms, or fintechs, in Latin America has been swift. Financial institutions often pioneer innovations, such as paying for your coffee with your iPhone or securing capital for your SME through an online lending platform. These innovations have made their way into Latin America and are changing the way people use financial products and services.

Predictions suggest that the Latin American Fintech industry will exceed $150 billion by 2021, with Brazil, Mexico and Colombia leading the region in fintech incorporations. While Brazil is the undisputed leader in the region, the fintech ecosystems in Mexico and Colombia have grown significantly over the last few years and deserve investors’ attention.

Overview of Mexico’s Fintech Industry

Mexico is the second largest market for fintech startups in Latin America with an impressive yearly growth of 40%. Over 300 fintech startups now operate in Mexico. Between 2010 and 2018, US$22 billion was invested into the country’s startups.

A major engine of growth in Mexico’s startup ecosystem is incubation and acceleration programs. 500 Startups and Startup Mexico, among others, host notable programs. Top Mexican startups include Linio, Sr.Pago and Corner Shop (Chile-Mexico). Between 2017 and 2022, Mexico’s fintech market is expected to double, reaching a value of US$68.2bn.

Mexico’s tech startup boom has the potential to gain more than US$245bn in cumulative GDP through 2025. While at present only 0.5% of GDP is contributed to R&D, continued trends of tech innovation are expected to boost this figure, a goal also supported by the new administration. Currently, the main segments for fintech in Mexico are:

Payments and remittances
Enterprise financial management
Personal financial management
Enterprise technologies for financial institutions

In particular, the personal financial management sector has experienced high growth rates above 30% in the past year. Payments and remittances grew by 42% between 2017 and 2018, while lending increased 37%. Crowdfunding was boosted 36% and enterprise financial management was up 29%. Moreover, the last year has not seen a decline in growth for any fintech segment in Mexico.

Growth in fintech supported by Mexican law

The Mexican government has developed a legal framework to facilitate fintech development. Regulators want to promote a higher level of financial inclusion in Mexico and fintech innovation has the potential to achieve this.

A key reason for this exponential growth is the Mexican Fintech law, approved in September 2018. The law establishes a framework to facilitate the execution of financial products and services from fintech platforms such as IT platforms or apps. It also provides general provisions, to which fintech firms must adhere. The law’s focus is to regulate the industry, protecting consumers and businesses. 

As fintech companies aim to capture 30% of the Mexican banking market by 2025, the legal framework is key to supporting and facilitating this growth. It also positions Mexico as a key innovator for financial services and products in Latin America. 

This has assisted in solving a substantial problem in Mexico, where approximately 40% of the population of 120 million people does not have a bank account. Furthermore, many rural areas do not have access to banking services such as a bank branch or ATM. Fintech can provide financial products and services to consumers without the need for physical infrastructure.

Fintech also creates opportunities for businesses. The ability to be able to source financing from independent providers means firms with little collateral can borrow. Microfinancing becomes a possibility, something many banks are not interested in. Consumers previously excluded from accessing products that required a bank account could now engage due to alternate payment processing software. Fintechs are also transforming the traditional financial services, helping business to become more efficient and accessible to consumers.

The government’s support for practical, affordable and accessible financial services has created an environment where its citizens have increased access to more innovative products. Businesses now operate in a market more conducive to innovation and investment, where access to financing and other financial products make their services more efficient. Such reduced barriers to entry have pushed Mexico to become one of the most attractive countries to incorporate fintech businesses in Latin America.

Colombia’s Fast Growing Fintech Sector

Colombia, on the other hand, has a fintech sector 2.5 times smaller than Mexico, but has experienced much faster growth. Mexican startups have seen an annual growth rate of 40% in 2017 compared to 52% in Colombian startups. Colombia is also a key destination to which Mexican startups expand to. About 30% of Mexican fintech firms started their global expansion process in Colombia in the 2017-18 period.

One of the main reasons for this swift growth in Colombia is the work done by Colombia Fintech, the association that assists startups with consulting services and hosts networking events. Another reason is the government’s support of a transition to digital finance solutions. Businesses are now required to process invoices electronically. The law will affect over 800,000 businesses.

As well as receiving domestic support, Colombian startups such as Rappi, Ubits and Ropeo have joined US-based accelerators Y Combinator. Rappi is Colombia’s most famous startup, while Colombian fintech startup Sempli raised US$5.7mn last year. It hopes to become the leading top digital lender for its country’s SMEs. Aflore and Alegra are among 124 promising Colombian fintechs.

Currently, the main segments where fintechs operate in Colombia are the following:

Payments and remittances
Enterprise financial management

The four largest segments in Colombia have experienced tremendous annual growth rates of 60-100%. In particular, the segments of payments and remittances and enterprise financial management have doubled in the number of startups, while crowdfunding has annually increased by 83% and lending and loaning by 69%.

The high growth rate of the payments and remittances segment has been caused by the ease and facility of electronic payments services. Growing confidence among consumers has seen an increase in purchases, payments, and online transfers. In Colombia, 24 million online transactions were executed during the first half of 2017. The Transactional Report presented by ACH Colombia declared that approximately COP $64 trillion was exchanged through payments and online purchases. Additionally, an increasing proportion of Colombians prefer to execute transactions online.

What's Next for Colombia's Fintechs

In order to continue growing Colombia’s FinTech ecosystem, its government should look to Mexico’s “Ley FinTech” and follow suit. Although the government is supportive of growing the Fintech industry, a legal framework is necessary. Regulating the industry is forward-thinking and a way to future-proof its growth. Regulation lowers potential barriers to entry for startups.

Remittances make up a big part of the Latin America economy. Last year, remittances sent to Latin America and the Caribbean grew 9.3%. Reducing the cost of sending remittances is a necessary to reduce the burden on low-income recipients. The Global Sustainable Goal has set a global target to reduce remittance cost to 3% by 2030. If Fintech continues to provide innovative and sustainable solutions, this sector could play a major role in achieving this goal.  

How do these Fintech Hubs Compare?

There are some key insights to highlight when comparing the Mexican and Colombian Fintech sectors. The three Fintech sectors with the highest number of startups are the same in both countries: payments and remittances, lending and loaning and enterprise financial management. However, in Mexico, the largest sector is lending, which makes up 23% of all FinTech startups, while in Colombia this sector is second largest with 17% of startups. These figures indicate promising growth opportunities in both countries’ FinTech industries.

Based on these growth trends, both countries have an extremely promising future. As cellular data becomes more accessible to citizens across Latin America and broadband prices fall, internet adoption is on the increase. In 2013, 278 million Latin Americans had access to the internet. By the end of 2019, that figure will increase to 387 million – more than half of Latin America’s population of 626 million. Smartphone use in the region has also seen a sharp increase in recent years, particularly amongst millennials. These numbers are promising for the Fintech industry and help it to connect with Latin American citizens.

The future of Latin American Fintech

As FinTech subsectors continue to grow in western markets, the same can be expected of Latin America. The region poses an untapped consumer market, many of whom have not yet been introduced to online banking and online transfer platforms.

Considering that Latin American consumers are becoming increasingly ‘internet literate,’ demand for online banking will increase, along with online payment processing and purchasing of financial products. FinTech company formations in Latin America are already on the rise and the number of startup success stories are increasing. Considering such promising growth rates, Mexico and Colombia are emerging as Fintech hubs in Latin America.

This growth is fortified by increased government support for Mexico and Colombia’s growing Fintech industries, and foreign investment in the various Fintech sectors. Fintech activity is now present in 18 countries in Latin America; the region is gaining its fair share of the spotlight. Now is the time to capitalize on this exciting startup culture. Investors looking of projects should not over look at the region as a promising investment as it is prime for innovative disruption. If opportunities in Latin America’s largely untapped Fintech market can be explored and maximized in the coming decade, Colombia and Mexico stand to share a significant proportion of Latin America’s Fintech development.

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