Latin American financial technology start-ups have experienced strong growth in recent years. But higher interest rates are posing a headwind to the sector. // File Photo: Nathan Dumlao via Unsplash.com.

JPMorgan Chase and the World Bank’s International Finance Corporation are leading a $27 million investment round for Colombia-based KLYM, a financial technology start-up that provides working capital to small- and medium-sized companies in Latin America, Bloomberg News reported Jan. 19. Latin America’s fintech sector more than doubled in size between 2018 and 2021, the Inter-American Development Bank said last year. How much growth can the fintech sector expect this year in Latin America and the Caribbean? To what extent are higher interest rates hampering the sector’s growth? What role are government policies playing in the sector’s expansion in the region to reach underserved companies and excluded populations from gaining access to financial services?

Ray Ruga, CEO of Fintech Americas: “After some furious growth, the fintech sector in Latin America is taking a globally induced macroeconomic breather. This is not unique to the region; the whole world is experiencing a post-Covid slowdown driven by a mix of higher interest rates, inflation and political instability. However, I believe this to be only a temporary hiatus. As a region of 669 million people, with 70 percent estimated to be unbanked, and with nearly 60 percent of point sales transactions still being in cash, there remains too much opportunity for disruption. The financial services sector has been in a steady state of transformation throughout the region, a trend that was hyper-accelerated during Covid. Fintechs and neobanks have pushed forward the traditional banking sector, which still strongly dominates, and have compelled it to become leaner, faster and better. This increased competition is reducing the cost of financial services, which in turn is making them more accessible to more people, with estimates of over 50 million becoming banked during Covid. However, there remains much to be done. As in most parts of the world, regulators are struggling to keep up with the speed of innovators. Regulators throughout the region are increasingly realizing their role is as much about growth as it is control. This is a challenge because sensible, steady and predictable regulation is critical to creating environments that attract the talent and capital that are essential to fueling the innovation that leads to greater financial inclusion, which as we know today, is the tide that lifts all boats.”

Philip Benton, principal analyst for financial services at Omdia: “The Latin American fintech sector is still in its infancy and therefore experiencing exponential growth. What’s encouraging is the speed of adoption from consumers and businesses alike. In just two years since launching its open finance initiative, Brazil has reached five million connected open banking accounts five times faster than the United Kingdom. Neobanks have been growing at a rapid rate in Latin America and the Caribbean, taking advantage of a largely unbanked population, which has prompted European neobanks such as Revolut and N26 to expand to Latin America. With venture capital funding drying up in Europe and North America, Latin America is likely seen as a prime target for 2023 for investors to make a strong return on their investment. As for high interest rates, this is a problem, together with high inflation, given the risk for higher bad debt and reduced income that low-income population can be particularly affected by these factors. Fintechs in the region struggled to get to new rounds of investment in 2022, and this may lead to consolidation in 2023 and a lower appetite for risk. The introduction of open finance in countries like Brazil and Chile has led to increased competition in the financial system including lower costs/fees that can create the conditions for fintechs to take market share from incumbents. Chile approved a ‘fintech law’ in October 2022 that regulates the sector, including the introduction of open finance, as well as a framework for fintechs to operate in payments and banking. Brazil approved open finance in January 2021, and there is a total of 17.3 million customers consenting to sharing information. Latin American and Caribbean governments have been favorable to the notion of cryptocurrencies, in fact the Bahamas was the first country to launch a central bank digital currency in late 2020. In Brazil, the president signed a cryptocurrency regulation bill that legalizes cryptocurrency payments for goods and services which should see growth of cryptocurrency adoption during 2023 for Latin America following the crypto winter.”

Lourdes S. Casanova, senior lecturer and director of the Emerging Markets Institute at the Cornell S.C. Johnson College of Business at Cornell University: “According to data from investment data company Preqin, more than three quarters ($26.8 billion) of the total amount of venture capital investments in Latin America between 2017 and 2021 went to fintech startups. About 70 percent of Latin Americans are either unbanked or underbanked, and fintech companies bridge the gap and provide access to financial products and services to leverage financial inclusion. In 2023, and due to higher interest rates, funds are being cut, and there is more scrutiny over their use. Investors want start-ups to cut costs and become more efficient and profitable. Governments in emerging markets such as Nigeria, the Bahamas, China, Uruguay and India are launching central bank digital currencies (CBDCs) as a pilot, which could make some of these fintechs obsolete. CBDCs are allowing ‘free’ payments and transfers including remittances from wallet-to-wallet as well as government handouts to the families in need.” 

James Bosworth, author of the Latin America Risk Report: “Financial technology startups can be split into two groups. There are those whose value comes from the money they loan, and there are those whose value comes from technology tools that allow users to manage and move their money. Fintechs based around buy-now-pay-later and other money-lending models will see challenges in 2023. They are definitely hurt by rising interest rates and increasing levels of consumer default. The only good news is that those that survive the challenges of last year and this year will be more resilient for future growth. In contrast, the second group of fintech companies will continue growing no matter the economic environment. Fintech companies that provide needed services—banking the unbanked and underbanked populations of the region, providing methods for easy and cheap electronic transfers and payments, and giving people smart tools to manage their money—are needed around Latin America and the Caribbean. There is a space for them to thrive, even during an economic downturn or a moment with high interest rates and inflation.”

Camilo Gantiva Hidalgo, partner at Holland & Knight in Bogotá: “Colombia has created a particularly positive environment for the fintech industry. This is a trend that has been growing for more than a decade. Analysts expect to see lower interest rates in the second quarter, and this could benefit investment, as well. In the last decade, Colombia has become an international leader in the area of financial inclusion. Since 2016, Colombia has been one of the top countries for achievements in financial innovation, according to The Economist. Due to the implementation of electronic wallets, simplified financial products, financial innovation and new consumer protection rules, Colombia has been able to increase the percentage of people with access to financial products. In 2011, 64.6 percent of Colombia’s population used a financial product, compared to 90.5 percent by 2021. However, there are still big challenges. The Colombian central bank reports that women do not have access to credit at the same percentage as men. Also, that credit is mostly limited to people living in cities. Another big challenge is to allow people to access more complex products. Even though most people have bank accounts, the use of digital payments and electronic transfers is still low. Colombia has enacted regulation that fosters the industry, such as regulation on e-wallets, crowdfunding, open finance, payments, cybersecurity, cloud computing and regulatory sandboxes. Also, regulation on cryptocurrency is currently under discussion. These steps will allow the fintech industry to continue to grow in 2023 and beyond.”

Rasheed Griffith, nonresident senior fellow with the Asia & Latin America Program at the Inter-American Dialogue and head of operations at Merkle Hedge: “It is difficult to say something concrete about fintech in general since it is a category that encompasses a vast spectrum of business models and target markets. It is too vague to talk about a ‘fintech sector.’ The firms in Latin America that are oft-categorized under that label are primarily fueled by cheap capital from international funders. These firms did not need to be especially concerned about cash flow and profit. Business models that only work because of subsidies (be it government or venture investment) are not business models at all --- they are just performance art pieces. In our new interest-rate environment, this cheap capital will become increasingly scarce. This will pressure many so-called fintech firms in Latin America to rush to profitability. Most will be unable to do this and instead try to cut operating costs or fail. Government policy throughout the region has not had a material influence on the growth of these fintech firms. Nor should we expect such influence in the future. Also, I explicitly stated Latin America and not the Caribbean. None of these prominent firms has a presence in the Caribbean, and it is crucial to understand that. That part of the world remains severely underserved in financial services.”

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