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Uneven development is curbing excitement about the sector in the region. Barbara Pianese reports.

Latin America’s regulatory environment, which lags behind those of developed countries, is often described as one of the main challenges for the development of the region’s fintech sector.

It is no wonder that governments in the region are pushing for new laws and regulations to support the industry’s development.

However, except for the general excitement, fintech has developed unevenly in Latin America. The region’s digital banks counted more than 30 million users in 2021, but these were largely concentrated in Brazil and Mexico.

Central America in particular is still struggling to offer the right environment for the promotion of the fintech industry.

“We are often asked by governments in the region for advice on how to promote fintech laws,” says an official at a multilateral bank. “My opinion is that countries do not need a law. They first need to build a strong ecosystem which supports entrepreneurs, strengthens human capital and creates the conditions to make financing available for the fintech sector.” 

The increasing focus on regulation could result in the neglect of much more important factors. Existing laws and regulations already allow emerging financial institutions to offer services without the need for additional legislation. 

countries do not need a law. They first need to build a strong ecosystem

Regulation, which could require financial institutions to hold a licence and respect minimum capital requirements, would be too restrictive for such an incipient industry. Only once the sector has matured will it be appropriate to begin thinking about regulating the space. 

The more mature Brazilian digital banking sector has already reached significant levels of adoption. Last year, the Central Bank of Brazil announced that financial conglomerates led by payment institutions will need to comply with the same capital requirements as traditional banks.

In Latin America, fintech tends to be regulated according to the type of activity a firm carries out, rather than according to the firm itself. Argentina, Brazil and Colombia have not published separate acts on the fintech sector but have instead adapted existing regulation.

Mexico is the only jurisdiction that applies entity-based regulation to fintech, having granted licences to fintech institutions. 

Lending spread correlation 

The emergence of digital banks is often associated with a reduction in lending spreads, which have traditionally been high in Latin America.

The average net interest margin between 2000 and 2012 was 3% in advanced economies, but 9% in Latin America and the Caribbean. Banks’ net interest margins in the region have, however, been declining since the 2000s, with the trend continuing since the emergence of fintech in the region a decade ago. 

In Latin America and the Caribbean, an increase in the ratio between digital banks’ transactions and total banks’ loans by one percentage point is associated with a reduction in net interest margin of 0.2 to 1.9 percentage points, according to a 2023 report by the International Monetary Fund. 

Each bank responds differently to the emergence of fintech platforms. Smaller banks tend to compete via pricing by reducing interest margins, whereas larger banks usually focus on increasing their investment in technologies to remain competitive. 

The relationship between fintechs and traditional banks has always been described in competitive terms. More recently, the relationship has evolved into a collaboration. Financial institutions in Latin America have responded by acquiring fintech ventures or making strategic investments in them, as well as building venture programs themselves. 

Fintechs often end up relying on banks, whether for raising funds or for getting connected through their payments system.

Has fintech reached a tipping point?

The overall number of fintech start-ups in the region peaked in 2017 and has since been declining, reflecting the increased maturity of the sector.

More than any other, platforms have so far been focused on the payments and remittances sub-sectors, at 25% of the total, according to a 2022 IDB report. The total value of digital payments grew from $89bn in 2017 to $215bn in 2021. 

Looking to the future, however, it is likely that the growth of the sector will be led by other fintech verticals, such as lending, crowdfunding or insurtech.


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