The Strategist

Is it worth investing in Latin American fintech?

06/29/2018 - 09:53

Fintech projects from Latin America are breaking records in terms of attracting investments. For instance, Brazilian payment service PagSeguro held the second largest IPO on the New York Stock Exchange in 2018, collecting $ 2.3 billion.

The financial technology sector is growing all over the world, but Latin America will become the most powerful driver for its development in the coming years. New legislative and regulatory reforms in this region are opening the market for foreign companies. Those who will be able to cope with all the risks and difficulties of such countries as Brazil and Mexico will win.

According to the World Bank, almost half of the adult population in Latin America does not have access to the banking market. In Brazil, a country with a population of 207 million people, 40% are blacklisted by banks, and many of those who have accounts have limited access to financial products and services.

In addition, about 8 million micro and small enterprises in this country receive insufficient funding. McKinsey estimates the volume of these lost funds at $ 237 billion. This huge structural demand is now met by fintech companies that offer more competitive and convenient services compared to traditional banking .

According FinTech Global, investments in fintech in Latin America in 2017 reached a record $ 600 million, which is 20% more than in 2016. Analysts have a firm belief that this dynamic will persist.

Projects from Latin America are breaking records in terms of attracting investments. Brazilian payment service PagSeguro held the second largest IPO on the New York Stock Exchange in 2018, raising $ 2.3 billion. This is the largest deal of the Brazilian business since 2011. In total, the volume of the Latin American fintech market may exceed $ 150 billion by 2021.

Latin American takeoff

Latin America is considered to be one of the most fertile soils for the fintech industry. Goldman Sachs believes that payments, loans, personal finance, insurance will experience the greatest changes.

Mexico and Brazil account for two-thirds of all 700 financial technology companies on the list of the Inter-American Development Bank (IDB) and the accelerator Finnovista in 2017.

Experts predict that the fintech sector can take up to 30% of the Mexican banking market in the next decade, and the total revenue of technology companies in Brazil over the next ten years will be at least $ 24 billion per year.

Not surprisingly, Goldman Sachs and Morgan Stanley recently invested in the Brazilian fintech startups in search of higher yields.

Statista reports that this year's transactions in the fintech markets of Brazil and Mexico will amount to $ 50 billion and $ 36 billion, respectively. For example, Statista’s forecast for the UK is $ 216 billion, which indicates a significant growth margin for the relatively less mature market of Latin America.

Rapid growth rates are explained by a number of factors. Oligopoly in this region led to an extremely uncompetitive banking sector, which never managed to innovate. This is especially evident in Brazil, where 95% of the market is concentrated in the hands of the five largest banks, and fees and interest rates are among the highest in the world. Until now, the largest banks have been reluctant to cooperate with each other, and no one has yet provided a transparent open API banking structure.

Controlled acceleration

Latin American governments are beginning to support fintech, as they gradually understand the enormous potential of this industry to stimulate economic growth and create an organic financial system.

Recently, the Central Bank of Brazil has published new rules for start-ups in the lending sector. They will be able to increase competition and ultimately lower interest rates for customers. This provision allows Brazilian fintech companies to act as direct creditors and holders of credit platforms, without cooperating with banks. Also, the terms of obtaining licenses for financial activities were reduced.

In March, Mexico passed a law on financial technology. It was the first of its kind in Latin America, aimed at promoting financial stability and preventing money laundering. The law regulates crypto-currencies, crowdfunding, and also introduces a "regulatory sandbox" for fintech firms.

Eduardo Guraieb, CEO of the Mexican Association Fintech, expects increased investment from local and foreign investors. According to him, other regions of Latin America will follow the example of Mexico to expand their markets for financial technologies. This forecast has already begun to come true: the Chilean authorities announced that they will develop their own rules for the fintech market and create "regulatory sandboxes".

The new rules are an important milestone for the whole finteh community in these countries. This is also a vote of confidence on the part of state structures. Despite the continuing political and economic uncertainty in many countries of Latin America, the ongoing support of regulatory authorities plays a key role in the region's growing attractiveness for foreign investors.

Fintech in Latin America still needs to take many steps to make it possible to say with confidence that the sector is really flourishing. But a huge population, uncompetitive financial services, a stable banking and payment infrastructure (compared to a limited supply of loans) and a friendly regulatory environment evidence radical changes in the coming years.