In the last 5 to 6 years, the advancement Latin America has experienced in the digital banking and payment space has been astonishing. With the advent of super apps such as Rappi and neobanks such as Nubank, Latin America has become one of the hottest markets. A quick roll call counts at least 1,166 fintech initiatives currently operating across 18 countries with two out of three of them reporting to being in the advantage stages of development.
This rise in fintech innovation has not gone unnoticed. In 2019 alone, VC investment in fintech startups in Latin America totaled USD 2.1 billion. This number represents a growth of 690% over the past five years. With Brazilian startups collecting 50.5% of funds and Mexico 22.7%. With the fintech sector accounting for 31% of investment capital, though the market faced setbacks in 2020 due to the pandemic, there’s every reason to believe that it’s going to bounce back in 2021 to its pre-pandemic performance levels.
5 reasons why Latin America has some of the most fertile terrains for fintech partnerships
- Cash is king and the local states are pushing consumer away from it – cash reliance is around 85% in the region
- A high percentage of the population is unbanked – 40% on average in the region
- 12% of the population has a “formal” savings account
- High mobile penetration 75%, especially smartphones account for more than 80%
- Spread of “informal” economy
This means that millions and millions of potential customers are just a download or a few clicks away. So where are the Latin American fintechs pushing the boundaries of innovation?
Payments are a key area of innovation, with the government, in particular, backing the expediency of these technologies. The reason for this being that the adoption of cash has made it difficult for the government to tax, prevent fraud, counterfeiting, and money laundering.
For example, Mexico state has pushed for the adoption of Co.Di. (Cobro Digital) a QR code-based payment system. With all the same features of a checking account, transactions under 8,000MXN going uncharged, and all transfers being immediate, this allows the unbanked to move money quickly and safely. After one year from its launch over 4 million people have used Co.Di. at least once for P2P payment or at the POS. This modernization in payment has shaken the industry by tapping into interchange fee revenues, but also by helping banks increase deposit balance as Mexican citizens are slowly getting away from cash.
With the advent of giant neobank such as Nubank and the presence of more than 30 neobanks in the region. There is a switch from Omnichannel to Unichannel: Tolerance for switching across apps and platforms when conducting banking transactions is lower than ever. Powerful, all-in-one banking apps are both the trend and the goal. For this reason, all these banks are branchless, and most operations must be performed through their proprietary app only, which is also more secure and immediate. The success of this strategy can be shown by the large adoption and usage of neobanks accounts as more than 50 million customers are using their services. The unichannel approach is also aligned with what the central banks are trying to push in the region via digital payments. Moreover, a Mastercard survey states that more than 95% of surveyed people would find it useful to receive a push notification from their banks.
What really shook things up in the financial services space was the development of super apps, such as Rappi. This type of development encapsulates three things: Latin American entrepreneurs are looking to trends in China to fill the gap, all banks are now looking at new revenue streams, and expanding beyond banking. What does this mean?
Looking at China – Mercado Pago just launched a savings account mimicking Ant financial’s solution. At the same time, SMEs can use the app to pay employees, suppliers, and take instant cash when paid through card and digital payments. Chinese companies are also supporting Latam fintech, Uala for example is an Argentinian neobank that is backed by Tencent and Softbank.
Going beyond banking – Consumers are interacting directly with brands more than ever before. Banks are therefore moving beyond financial services, into commerce, transportation, and social media. To remain relevant, they can no longer operate in a silo; the race for the super-app is on and everyone must participate.
New revenues streams – Fees as a revenue stream are drying up and banks must make up the difference elsewhere. The single most important revenue stream will be the monetization of customer data. Much remains to be done on the business and technical fronts to leverage banking data, but institutions with their sights on a 5+ year time horizon must prepare for this trend now.
Even if neobanks and traditional banks do this separately or in collaboration, the trends signal a new reality in banking where digital experiences will become a primary way for consumers to interact with their preferred brand. The ultimate winner of these trends is the consumer, who can expect an increasingly flexible, transparent, and affordable suite of banking services while remaining in control of the overall experience. Banks are changing who and what they are, evolving from traditional brick-and-mortar institutions to agile digital providers, able to meet customers wherever and whenever they want to transact. Latin American consumers will benefit as they are provided with mobile banking platforms as dynamic as their own lives.