While Brazil and Mexico are leading the charge, other Latin American fintech ecosystems are starting to emerge, creating new business models and leveraging open banking. 

Nubank

The Latin American (Latam) fintech scene is booming, fuelled by supportive regulatory environments in several countries, the changing attitudes of banks and, of course, the move to digital transactions brought on by Covid-19. Consequently, the investment environment has remained robust even during the pandemic.

According to data from Latam Fintech Hub, the region’s fintechs raised a total of $545m in the first half of 2020, with 98% of funding concentrated in Brazil, Mexico and Colombia. Three business segments — lending, payments and financial tools for small and medium-sized enterprises — absorbed 84% of the total funding.

“The regulatory environment has given confidence to the venture capital (VC) industry, which has been investing in fintech quite extensively over the past few years,” says Fermin Bueno, co-founder of Finnovista, an innovation and venture development firm that bridges the start-up ecosystem and the financial services industry.

He reports that fintech is the most active investment sector for VCs in Latam. “Between 25% and 27% of the $4bn of VC — early stage VC, not private equity — is invested in fintech,” he says. “So the fintech law in Mexico, for example, provides comfort to investors, as well as confidence to the population to trust these new players and neobanks.”

Manuel Silva Martínez, general partner, Mouro Capital, the $400m successor fund to Santander Innoventures, believes that the funding rounds in Latam is a reflection of two phenomena, one local and one global. “On the global side, Covid has accelerated a general shift to digital. We have seen that across our portfolio and across all geographies. So it is no surprise that Latam alternative online lenders or neobanks have seen their customer metrics accelerate the most and have thus concentrated investor interest,” he says.

On the local side, there is an acknowledgement of a new level of maturity for the Latam ecosystem, says Mr Martínez. This is illustrated by several fintechs reaching ‘unicorn’ status, which are privately-held companies worth $1bn or more, including: Brazil’s challenger Nubank and payments processing platform eBanx; Prisma Medios de Pago, an online transaction platform and OLX, an e-commerce platform, both from Argentina; and dLocal, Uruguay’s paytech platform.

“It is now clear that those players are here to stay, and that the ‘virtuous circle’ of fintech innovation has reached new levels of sophistication and acceleration,” Mr Martínez says. “All that has changed the mindset of the investor in Latam, that is not an ‘explorer’ or a ‘discoverer’ anymore, but that is now playing with more certainty and visibility into one of the large fintech ecosystems of tomorrow.”

The region’s fintechs raised a total of $545m in the first half of 2020, with 98% of funding concentrated in Brazil, Mexico and Colombia

And it’s not just VCs that are investing; traditional banks are also financing fintechs. For example, in September, Banco Bradesco and Itaú Unibanco participated in Brazilian open banking platform Quanto’s $15m investment round.

Brazil leads on open banking

According to the most recent data from FinTech Global, fintech investment in Brazil grew at a compound annual growth rate of 82.4% between 2014 and 2018, and the growth continued into 2019 with funding hitting a record of over $1.4bn raised in the first three quarters. The largest round of the period went to Nubank, which raised $400m in a Series F round led by TCV.

Larissa Arruy, partner in banking and finance at Brazilian law firm Mattos Filho, comments on the speed of change in the country’s regulatory environment over the past five years. “The central bank has shifted its views towards technology and innovation, and implemented a new regulatory infrastructure to foster competition and allow new business models to flourish,” she says. She adds that financial inclusion is also an impetus for regulatory change.

For example, Brazil has embraced open banking, following the likes of Australia, Singapore and the UK. Banco Central do Brasil’s (BCB’s) new regulation on open banking, ‘Sistema Financeiro Aberto’, was passed in May and allows the sharing of data and services among financial institutions, payment institutions and other institutions licensed by the BCB. It will be rolled out in four stages, from November 2020 to October 2021.

MattosFilho_Larissa Arruy1

Larissa Arruy

The first stage of open banking is open data. Regulated entities, whether mandatory or voluntarily participating, will be required to share client personal and transactional data among each other through application programming interfaces (APIs).

João Del Valle, co-founder and chief operating officer, eBanx, which processes payments for Amazon, AliExpress, Wish and Uber, to name a few, says that the fintech community is taking advantage of open banking, working together and integrating technology tools to provide new services. “Open banking creates a world of possibilities for enterprise resource planning (ERP) systems, for example, which are popular in Brazil because of the complex accounting and foreign exchange rules. [With open banking] companies can manage all their bank accounts through their ERP system without needing multiple integrations,” he says.

The BCB is also launching an instant payment platform, PIX, in November 2020, whereby transactions will occur within 10 seconds and are processed 24/7. All financial institutions and payment institutions can offer PIX; however, institutions with more than 500,000 active accounts are required to offer this new payment method.

“PIX is going to be very transformative for the payments scene in Brazil,” says Mr Del Valle. “Any e-wallet can make transfers to bank accounts or vice versa in real time. PIX is peer-to-peer but also can be used for purchases and bill payments.”

Sebastián Kanovich, dLocal CEO agrees, calling PIX “a great innovation”.

“Brazil is trying to level the playing field to ensure that as many challengers — whether neobanks or payment processors or credit companies — have the opportunity to serve the end user,” he continues. “And it’s the customers who are going to benefit.” dLocal powers payments in emerging markets for the likes of Amazon, Spotify, Zara Inditex and other large enterprises.

Maturing ecosystem

Mexico has also been at the forefront of the fintech boom in Latam. In 2018, it passed a fintech law, which encourages new entrants in the financial services market. In June it passed an open banking regulation, requiring the establishment of APIs to enable connectivity, access and sharing of specific data.

The country’s regulatory landscape has fostered a strong investment environment. According to FinTech Global, Mexican fintech companies raised more than $821.5m between 2015 and 2019, with marketplace lending, payments and remittances, and wealthtech companies capturing 97.9% of the country’s total funding. In one of the biggest deals in the sector, Konfio, a Mexican lending platform, raised $250m in debt financing led by Goldman Sachs and Park Capital in September 2019.

Finnovista has run several start-up innovation programmes in Mexico, with the support of several financial institutions, and has invested in 45 early stage start-ups in the seed and pre-seed stage. “We are very active in supporting all the best fintechs that emerge from the region, and also helping banks and financial institutions to explore the innovation that they can do in partnership within the start-up ecosystem,” says Mr Bueno.

Brazil has embraced open banking, following the likes of Australia, Singapore and the UK

Scotiabank, for example, has worked with several fintech bootcamps in Mexico to see how start-ups could fit within its operations. “It was not just about having them in production, but helping them prove out the concept,” says Kristal Au-Yong, senior vice-president of innovation and insights at Scotiabank.

Ms Au-Yong says that Scotiabank approaches the fintech ecosystem not just through an innovation lens, but also how the bank can act as a partner to the fintech. “We are partnering them with our innovation or digital factory teams, but we also engage from an investment banking and lending side, so that we build a solid partnership together with these companies.”

Over the past few years, Finnovista has also been promoting pilot programmes and is working with a few banks on co-creating solutions with fintechs. Mr Bueno says, “There is much potential in helping finance financial institutions solve business problems with the specific technologies and products from start-ups. In these programmes, we focus on maximising the exchange of value between the start-up and the financial institution.”

He believes that the industry is ripe for innovative solutions that deliver tangible results for financial institutions. “There has been a lot of focus in building internal capabilities, changing the culture and gaining proximity to the ecosystem, which has been done by participating in events, acceleration programmes and start-up challenges. But now many players need collaboration initiatives with start-ups and entrepreneurs that deliver tangible business results and leverage the entrepreneurial mindset of the ecosystem. This phase is now opening up in the region, specifically in Mexico with pilot programmes and venture building.”

Jorge Ruiz, founder and CEO, FinConecta, has observed infrastructure players in both Mexico and Brazil offering services to support financial institutions’ digital transformations. He identifies the creation of digital marketplaces as a new trend that has already started in Mexico. “The idea is to create a place where financial institutions, or any entity that wants to do something in the financial space, can look for solutions that they can quickly integrate,” he says.

Mr Ruiz highlights Mexico-based Prosa, a large payment processor, which in June 2019 launched FintSpace, together with FinConecta. FintSpace is the first digital solutions marketplace in the region, built to help Prosa’s financial institution clients digitally transform and leverage open banking.

Regional advances

Other Latam countries are also fostering their start-up communities. Colombia’s fintech ecosystem, for example, is expanding quickly, following an updated regulation to cover new technology trends in payments and biometric security in 2019.

“Colombia has a fintech regulation covering areas such as e-wallets, payment aggregators and gateways. This has fostered the domestic fintech community, which was already quite relevant with many important fintechs playing a role in the local financial system and some with international exposure,” says eBanx’s Mr Del Valle.

Scotiabank_Shawn Rose

Shawn Rose

However, Mr Bueno estimates that Colombia plus other emerging ecosystems in Chile and Peru are about three to four years behind Mexico and Brazil. “A major influence in these countries is that often the biggest bank is not a global bank, which means they move a bit slower. In Colombia and Peru, the biggest players are strong national banks, Bancolombia and Banco de Crédito del Perú, which initially delayed a willingness to collaborate with the fintech ecosystem; whereas in Mexico, for example, the biggest bank is a global player, BBVA.” In addition, the entrepreneurial ecosystem and the VC industry have yet to mature in these countries to the level of Mexico or Brazil, he says.

Despite not being as mature as other markets, Peru provides an excellent case study of traditional banks using a fintech to solve a real-world issue. The government wanted to address the persistently high levels of cash transactions and informal economy activities, even before the pandemic struck. Three of the country’s largest banks — BBVA, Interbank and Scotiabank — teamed up with a fintech, YellowPepper, to launch a real-time payment system, PLIN, for person-to-person payments, which is 24/7, free of charge and only needs a mobile phone number.

“The banking heads realised that they could get cash out of the hands of about 10 million customers by doing free interbank transfers,” says Scotiabank’s chief digital officer, Shawn Rose. “They used a fintech to stitch the banks together, instead of having one bank do all the work or getting three technology teams to agree to a standard. So PLIN was developed very quickly and went live in January. It’s a great story because the banks are doing what’s right for customers in this time of need. PLIN surpassed 1 million users after five months on the market and 2 million users after nine months. Adoption has been exponential.”

Remaining challenges

Working across borders remains one of the biggest pain points for many burgeoning Latam fintechs, due to disparate regulatory environments. “We thought the borders would be thinner under globalisation, but some countries are now imposing stricter rules, which makes it difficult for cross-border businesses,” says Mr Del Valle. “This is our day-to-day — solving these problems so that companies and people can connect cross-border.”

However, he believes common goals are surfacing across the region. “Many countries are working on the same principles, such as increasing competition, a more open environment, and clearer regulations around the main areas, including lending, payments or taxes,” he says.

Mr Bueno, on the other hand, does not think that progress has been made in terms of regulatory harmonisation. He says, “Absolutely not, because there is not an entity like in Europe, for example, that is trying to create the ‘super laws’ that are then implemented at the national level. The regulatory environments are very different from each other and we don’t see that changing.”

Ms Arruy points to the possible effects that fintech giants like Mercado Libre (and Mercado Pago) and Nubank, which are expanding across the region, will have on the regulatory environment. “As this situation develops, they will draw attention to the advantages and disadvantages of a certain regulation, which will help to create harmonisation,” she says. “Today, we still have rules that are very focused on the domestic market and the peculiarities of each country. But financial services have become increasingly cross-border and we are waiting for when the regulation will catch up with that reality.”

This article first appeared in the November edition of The Banker magazine. View a digital edition here.

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