Despite headwinds, Argentina’s fintech ecosystem expands apace

(Corrected. Changes number of companies identified in first study)

Argentina’s fintech sector has expanded rapidly by number of players since 2018. 

That is among the main findings of the second comprehensive study of its kind of the country’s fintech ecosystem, authored by financial services analyst Marcelo Bastante and published by Deloitte and the IDB’s innovation unit, IDB LAB.

Fintechs have mushroomed amid COVID-19 headwinds this year and a challenging macroeconomic environment since 1H18.

Data was gathered via a survey of fintech companies conducted in partnership with industry association Cámara de Fintech de Argentina, which identified 268 firms compared with 133 in the first study, carried out in 2018.

To find out more about the report and to discuss the outlook and more, BNamericas spoke with Bastante.

Read the report, titled Estudio Fintech 2020 – Ecosistema Argentino

BNamericas: Marcelo, you are the author of the 2020 Argentina fintech ecosystem report published by the IDB and Deloitte. What was the main takeaway? 

Bastante: The main takeaway is that the ecosystem underwent significant growth and consolidation despite the adverse economic context, due to both Argentine macroeconomics and the effects of COVID-19. One fact to highlight is that, today, there are nine business segments, or verticals. I was pleasantly surprised by the number of segments, and there are international studies that identify more – as many as 11. This highlights the dynamism and breadth of the services offer. The report is very rich in describing the business segments and the solutions that each one provides. It has an educational part that gives a complete overview of the breadth of the industry. I am convinced that, as the ecosystem evolves, the offer of services will grow and adapt to new trends.

BNamericas: According to data in the report, during 2018-20 there was notable growth in the number of fintechs operating in the areas of payments and blockchain and cryptoassets in Argentina. In your opinion, why are we seeing this trend? 

Bastante: Growth in the means of payment vertical is a trend that is aligned with the experience in other countries, in which means of payment is the main segment, followed by loans. 

Within the payments segment, we can see the growth and spread of digital wallets that offer payment accounts. It is a very visible phenomenon that has gained exposure. Also within payments, payment aggregators have gained prominence, complementing the offer of services in the acquiring market, in a context in which the growth of e-commerce has been exponential amid the pandemic. 

As for blockchain, the technology has begun to be applied successfully to contracts, control structures, etc. The diversity in terms of ways it can be applied is incredible. And cryptocurrencies have also grown significantly, although a legal framework to provide them with greater support is still being discussed.

BNamericas: Do you think this trend will continue or decrease? 

Bastante: I think the trend is going to continue. If one looks at the evolution from 2018 to 2020, service offers that were previously incipient or non-existent are identified. We are in the middle of a process of change; in a few years the offer of services and range of solutions will surely be far different than the current one, it will evolve hand in hand with the development of new technologies and changes in demand.

BNamericas: Regarding the Fintech B2B services segment, do you think we will see more collaboration between fintechs and traditional financial institutions? 

Bastante: I believe the banks vs fintech antinomy, today, is settled. It is clear they are not antagonistic players but, rather, they can have a lot of complementarity. Both in the finance industry and in the capital markets, there are many situations in which two players can be competitors in a specific service, but completely complementary in terms of product diversity. 

Banks are licensed to receive deposits from the public and be able to carry out foreign trade and exchange operations, something that the other economic agents - including fintech companies – cannot do. That gives banks enormous strength. Likewise, all banks have their area of innovation, or R&D, or digital transformation. However, these areas, in most cases, work to improve or reconvert the traditional product offer, creating an enormous opportunity for fintech companies to collaborate in the development of new products, or complementation agreements in services that, today, are not part of the traditional offer of the banks, and that developing them from scratch would take a long time. That is why I see a strong complementarity between traditional banking and the fintech industry.

BNamericas: In Argentina, fintechs are helping to increase levels of financial inclusion. How important is the role of fintechs in this task compared, for example, with that of traditional banks, digital banks and public policy? 

Bastante: The traditional indicators of financial inclusion are credit vs GDP and deposits vs GDP. A primary analysis would be that the digital loans and payments segments contribute to financial inclusion, that is, two of the nine segments. 

Now, if we analyze the subject in greater depth, we see that all the segments contribute to the inclusion process to a greater or lesser extent. Argentina has a relatively high number of bank accounts – the study indicates that 80% of the adult population has a bank account. However, the degree of utilization of these accounts is much lower. Argentina has a high number of retirees, pensioners and beneficiaries of social plans. They all receive payments through a bank account. However, many of these beneficiaries withdraw the funds in full once they are credited to them. There is a huge challenge for funds to stay in the system. All use through virtual wallets and payment accounts contributes to this objective, since the money is kept in the financial system – under central bank regulations, the money that is in an instant access payment account must be 100% backed by bank deposits. Fintech investments keep the money invested by investors within the system. In the contracting of all fintech products, an attempt is made to reduce the use of cash, as in insurtech products, crypto assets and crowdfunding, to name a few examples. Similarly, the solutions provided by technology providers are designed to ensure that loans, payment accounts and fintech products have higher and better levels of security, which contributes to the greater use of the products. This is the case with the rest of the segments; they all contribute to the inclusion process.

BNamericas: Finally, according to data in the 2020 study, venture capital funds play a relatively small role in terms of sources of financing. Are the funds focused on a particular segment and do you expect any trends in the years to come? 

Bastante: Leaving the fintech space, we see that, in general, venture capital funds are more closely targeting the healthcare and drug industry, the software industry, agritech and biotechnology. It is expected that in the medium term, as the ecosystem consolidates, venture capital funds may have a greater interest in the fintech industry. Among the potential areas of interest, we could mention service providers - in its three aspects, computer security, technology provider and fintech B2B services – as well as digital payments. An improvement in the macroeconomic framework is also necessary for these funds to increase their participation.