The Rise of FinTech Where Cash is King; Let’s Talk FinTech in LATAM
After the financial crisis, the banking industry had a target on its back due to the mismanagement of home lending guidelines and predatory bank fees. Since then, Financial Technology or FinTech, has successfully disrupted large banks taking billions in market share.
Banks are now playing an increasingly smaller role in the financial system, most notably in payments, deposits, and lending sectors. This is somewhat due to entrepreneurs realizing a far more capital-light and efficient approach to providing consumers access to financial products through technology, while always keeping the best interests of the customer front of mind.
Although FinTech has caused major waves of disruption in the western world, Latin America has been slower to adapt and is currently experiencing an eruption of FinTech activity. This has been met by a proliferation of leading global venture capital funds entering the region to gain access to some of the most exciting new companies in the sector, with funding increasing at a CAGR of 77% from 2015 to 2020, according to PitchBook.
For several reasons, Latin America serves as a perfect incubator for FinTech startups, with immense untapped opportunities and strong secular tailwinds. The key market dynamics that have triggered this sector to flourish are discussed below:
Massive market with favorable dynamics: Latin America is home to more than 650 million people across 33 counties. Its two largest countries, Brazil and Mexico, have populations of 210 and 130 million, respectively. 40% of the people in Latin America are under 25 years old, which is coupled with widespread smartphone adoption and high internet penetration that now surpasses 66%, above the world average of 53%. This tech-savvy population now expects their bank service to be as seamless as the other consumer apps they use. These shifts have accelerated FinTech startups to build fully digital products which passes the cost savings through to the consumers.
Concentration of banks: Unlike the US which has over 5,000 banks, the Latin America market is far less fragmented. Many countries across the region have fewer than ten banking institutions. Due to this lack of competition, incumbents have become complacent and their pressure to innovate has consistently remained minimal. Because there are no other options for the customer, it has led to Latin America banks being some of the most predatory in the world, charging outrageously high-interest rates, and causing the region’s banks to be the most profitable in the world. In Brazil, consumers pay an average of 190% interest per year for consumer loans and credit cards. As new players continue to enter the market, bank monopolies will be challenged to improve all areas of their business. However, if history is anything to go off, banks have been notoriously slow to innovate and the odds stacked against them.
Unbanked population: Because Latin America has historically only served affluent individuals with stringent credit requirements, the majority of consumers are still unbanked (those without access to a formal bank account). For example, in Mexico there are an estimated 42 million people that are unbanked, only 13% of Mexicans aged over fifteen make online transactions, and nearly half of the entire Latin America population is unbanked. Neobanks, or challenger banks, are now providing financial products to a segment of the market historically overlooked by the financial system, who have massive pent-up demand.
Cash dependent: The Latin America economy still relies heavily on cash due to the high cost of using financial services, lack of trust in the system, and the size of the criminal economy in most countries across the region. Cash management company Brink’s estimates that 85 percent of Brazil’s market relies on cash, while in Mexico, the figure is 90 percent. Unsurprisingly, this high level of cash has disincentivized merchants from adopting digital payment solutions. Despite the Western world becoming accustomed to paying for things online and transacting digitally, this problem is still pervasive across Latin America.
In addition to all this, regulators across Latin America have taken Europe’s open banking playbook model, with the ultimate goal to improve financial inclusion and break up incumbent bank monopolies. And like the rest of the world, COVID served as a massive accelerant for FinTech in Latin America, forcing businesses to adopt digital payment methods and consumers to try new financial products.
After spending time analyzing the market dynamics, it becomes abundantly clear why neobanks, like Nubank, have managed to attract over 40 million customers in as little as eight years. The fact that over 80% of Nubank’s Brazilian customers are sourced through word of mouth and unpaid referrals speak volumes to how much better the customer experience is against traditional banks.
High rates, hidden fees, and lack of innovation have left Latin America customers feeling cheated. Many FinTech startups have realized this need to reach the unbanked population and are starting to turn the fortunes of millions of people across the continent. While Latin America’s FinTech industry has made significant progress, things are only just getting started, be sure to watch this space.
Hamish Baillieu, Venture Capital
In 2021, Nubank became the biggest digital bank in the world by number of customers and the fourth most valuablefinancial institution in Latin America.
Looking to learn more about the Latin America FinTech ecosystem? David Velez, co-founder of Nubank, lays out why its so exciting to be a FinTech company in the region right now. Listen to his conversation with Patrick O’Shaughnessy, on Invest Like the Best, Building the Branchless Bank.
Fifteen years ago, the only technology firm that was among the 10 most valuable companies in Latin America was Mercado Libre. Highly recommend reading Mario Gabriele’s long form article on The Generalist to learn more about the company’s journey.
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