Mexico , Brazil , Argentina , Colombia , Chile , Peru and Uruguay

Spotlight: Tapping the crowd to help close LatAm's US$900bn SME financing gap

Bnamericas Published: Monday, June 17, 2019
Spotlight: Tapping the crowd to help close LatAm's US$900bn SME financing gap

Rumblings on the crowdfunding regulations front in Latin America have been growing louder.

In terms of key developments this year, Colombia has announced a fast-track licensing scheme that incorporates these types of fintechs after regulating them in 2018, while Peru’s executive has submitted a bill and Chile’s finance ministry is drawing up draft legislation.

These follow in the footsteps of Mexico, Argentina and Brazil, which have already introduced rules, the latter two via their respective securities commissions.

The industry largely welcomes regulation as long as rules do not hamper innovation or set the market entry bar too high. Banks and other incumbents, meanwhile, seek a level regulatory playing field.

Few countries in the region currently have specific regulations in place - and having clear rules of the game can help attract investment.

In outlining Chile’s pending crowdfunding bill, which will also cover cryptocurrency trading platforms, the government’s capital markets coordinator, Catherine Tornel, said the country must keep pace with change.

“Every country in the world is advancing in this area,” said Tornel. “Fintechs have a space to make an important contribution to the innovation of the markets, competition and financial inclusion.

“We believe these three things are fundamental to achieve development and to be able to continue making the market more international and, as well, more interesting to foreign investors.”

Alternative finance is growing apace in Latin America. The regional online alternative finance market – which crowdfunding and the likes of crowdlending are a part of – grew to US$663mn in 2017 from US$342mn in 2016, according to the 3rd Americas Alternative Finance Industry Report, produced by the Cambridge Centre for Alternative Finance, a research center based at University of Cambridge Judge Business School in the UK.

"Responsible for 2% of the overall Americas regional market volume, alternative finance markets across Latin America and the Caribbean (LAC) have continued to grow rapidly, up by 94%
year-on-year," the report states.

The biggest market in the region is Brazil (33% of regional volume), followed by Chile and Mexico (23%) in joint second place, and Colombia (8%). The four countries together accounted for around 87% of the region’s total, with Colombia exhibiting growth of more than 100%.

The report authors found that 85% of all alternative finance activity in the region is related to business-specific fundraising.

The biggest crowdlending player in the region, meanwhile, is Chile’s SME financing-focused Cumplo, which was founded seven years ago and has said it wants to be handling US$1bn in loans annually by the end of 2020. Last year it expanded into Mexico. Founded in 2012, the company focuses on SMEs which are growing and operate in the business-to-business segment. Most loans awarded are invoice-backed.

According to the Americas Report, marketplace/P2P business lending was the fourth biggest alternative finance segment in the region in 2017, accounting for 16% of the LatAm market share.

A focus of crowdlending platforms are SMEs. And there is a clear reason. In Latin America there is an estimated US$903bn SME financing gap. This is a rich seam to mine for companies which can offer SMEs more competitive rates and repayment terms than incumbent lenders.

“The gap has emerged in the region as a result of limited financial products, high pricing and excessive demands for collateral,” James Scriven, CEO of IDB Invest, the IDB’s private sector institution, told BNamericas recently.

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Multilaterals such as IDB Invest are helping ease access to loans by partnering with local banks. But with a massive region to cover and limited funding resources, such players can only do so much to help close the gap.

Against this backdrop, BNamericas spoke about crowdlending with Mercedes Aramendía (pictured), a Uruguayan lawyer and academic who specializes in the areas of public policy and ITC, and provides consulting services to Uruguay’s fintech chamber.

Under the crowdlending model, individual or institutional funders provide a loan to a consumer or business borrower, via a platform. Uruguay has crowdlending regulations in place at the central bank level. In terms of crowdfunding, an associated bill is in congress.

In the business space, one main type of crowdfunding involves contributing capital for equity shares, rather than lending money for the likes of working capital. 

BNamericas: What potential does the crowdlending segment have in Latin America? For example, owing to the fact that SMEs are, generally, underserved by traditional financial institutions, does that make them a highly attractive market?

Aramendía: The platforms and solutions that involve technology and finance are constantly developing as they serve social needs. They deliver solutions to people who have fewer resources and they make services more universal, helping achieve the [UN’s] sustainable development goals.

The crowdlending segment facilitates the visualization and connection of excess capacity of some parties with demand for financing of others. It has three fundamental planks. On the one hand it promotes, improves and facilities access to credit required by companies and individuals, providing them with more and better options: tailored to the needs of the consumers and at a lower cost. On the other hand, it improves the returns on the savings of companies and individuals, creating new savings options for all small and medium-size savers (currently non-existent in our country); finally, it supports transparency, inclusion, security, innovation and development.

The bulk of our companies [in Uruguay] are SMEs, accounting for more than 90%. Many often have difficulty in being able to access quality loans or agile, accessible and affordable solutions that are compatible with their circumstances. In this sense, crowdlending platforms provide greater opportunities, which, without doubt, support their daily work and needs, directly contributing to development in a sustainable manner.

BNamericas: Are there any barriers to the development of the crowdlending industry in Latin America? If there are, how can they be overcome?

Aramendía: For the correct development of solutions it is fundamental that people (1) have access to platforms, (2) have the digital skills to use them, (3) trust the solutions and (4) that the regulatory framework establishes clear rules that reflect the real world and what the needs are.

In Uruguay, the principal barrier for the development of the industry is currently regulation – which has become a real regulatory barrier – since dialog between the diverse sector stakeholders has not been sufficient or fruitful on account of a lack of understanding or knowledge of the industry, the technology and the products. We cannot expect to respond correctly to new realities with outdated models. We need to reach solutions that are more innovative and efficient, that permit us to develop and to create jobs, attract talent and investment.

People must be empowered, protected. The development of networks and of digital services and applications must be promoted, with a view to providing access to everyone. Spurring innovation and defending competition is fundamental, as is ditching regulation based on preconceived rigid frameworks, in order to start to work on the new, dynamic reality characterized by permanent change.

BNamericas: How important is having sector rules, regulations?

Aramendía: ICT spans all sectors of the economy and, as such, regulation must acquire a collaborative nature, with links between the different stakeholders fundamental. Clear rules are needed – and these should not be confused with rigid regulations that quickly become dated and end up limiting, or directly prohibiting, like what has happened in our country. It is necessary to provide frameworks that promote and facilitate, and provide predictability and security, without limiting or hindering.

The idea is not to prohibit or to establish irrational regulations because this affects the user as well as wider social and economic development; what we have to do is re-think the models. We have to open the door for innovation, but we must not introduce asymmetric regulations for services only because they are delivered through different means.  

Ways of doing things change, business models change too, and, without doubt, in many cases regulation that is in force does not reflect the real world.

All of the above makes an in-depth analysis of regulations necessary, with the aim of ensuring it responds to the real world, putting people at its core, addressing the solution and not the medium through which it is provided.

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