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Fintech in Latin America
ALABC
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Fintech in Latin America

One of the main differences between the Latin American region and developed countries is that there is still a significant part of the population in the region that lacks access to formal financial services.

The figure is currently 49%, which represent an unbanked population of 300 million people, making financial inclusion one of the main goals of the 21st century for governments, development agencies, multilateral banks, and NGOs in Latin America.

  • In Latin America, 10% of the operating costs of most banks can be attributed to compliance.
  • De-risking – where banks are withdrawing from certain sectors and geographies (particularly SMEs in emerging markets) to mitigate KYC costs and Anti-Money Laundering (AML) – has become increasingly common practice. As such, smaller companies in regions such as Latin America and the Caribbean face a significant challenge in accessing finance to support their businesses.
  • In addition to contributing towards de-risking, increasing integration costs mean that financial inclusion is becoming an even more distant possibility for the region’s unbanked population.
  • Subsequently, regulatory technology – or “regtech” – is beginning to gain real traction in the market, with a growing number of companies developing digital solutions with the aim of helping financial institutions comply with regulations more cost-effectively and efficiently.
  • Regtech, however, is well-placed to enhance regional efforts to uproot the problem. Artificial intelligence (AI), for instance, can be used to intelligently mine for specific information and patterns within cluttered big data sets, identify discrepancies, and alert banks to unusual or suspicious activity.

Cooperation among start-ups and the industry’s traditional stakeholders is a key element that must become rooted in Latin America. Regulation is a factor that needs to be covered by governments and legislators –as has happened in countries such as Singapore in Asia and the UK in Europe.

The point of this is not to restrict or apply further controls but to promote competitiveness and innovation in the national and regional spheres.

This drive could give birth to a more innovative and inclusive digital financial services industry, as long as corresponding public policies–such as economic and regulatory conditions– promote their consolidation and growth–especially considering the existing gap between their development in Latin America vis-à-vis Europe, Asia and the United States.

Research has allowed us to identify 703 Fintech start-ups located in 15 out of the 18 countries in Latin America in which the survey was conducted. Brazil provided the largest number of start-ups to this poll followed by Mexico, Colombia, Argentina and Chile. Together, these five countries concentrate almost 90% of all Fintech activity in Latin America.

Even though people and SMEs who are –willingly or not– excluded from the financial system do save and have access to credit, they do so in the informal sector, which tends to offer them insufficient solutions with foreseeable consequences in terms of high costs and insecurity.

All of this indicates that Latin America is currently going through a highly favourable moment combining several positive trends that show that Latin America is on the brink of a huge digital leap that will bring generalised low-cost digital financial solutions to large population segments, leading to the eradication of the region’s financial exclusion.

Small businesses have substantial financing needs. This sector represents 95% of businesses in Mexico and is the national economy backbone. However, it has not been a priority for large financial institutions.

The region’s start-ups have progressively managed to establish a dialogue with authorities and other internal and external agents with the goal to produce changes in public policies so as to both promote the activity and to regulate it.

Some countries such as Mexico, Colombia, Brazil, Chile, Argentina have already begun to explore changes in the regulation of Fintech platforms, directly consulting the Fintech entrepreneurs on their requirements and needs.

In every case, besides offering recommendations for the activity’s regulatory framework, governments have been prompted to create regulatory sandboxes pursuing one main goal:  establishing a more direct dialogue between the Fintech industry in general, and supervisors and regulators to understand the nature of these businesses and regulations.

1.    What are the challenges?

  • Compared with the United States or Europe, a Fintech company in Latin America faces similar challenges when it comes to scaling up and developing their projects: securing funding, finding the best talents, operating under homogeneous rules, and building on homogeneous platforms.
  • Balancing regulatory compliance while meeting the demands of world-class customer service, especially during new customer integration.
  • Challenges related to the lack of adequate value proposals –all of which affects current product and service demand of the traditional financial sector. In turn, lower supply costs thanks to digital channels, new approaches that leverage numerous sources of information, and new techniques to evaluate clients, their behaviours and risks have simplified the emergence of services more affordably targeting under served segments.
  • Consequently, it is not by chance that several governments throughout the region are considering Fintech development as one of the pillars to reduce financial exclusion.

2.    How can we help RegTech companies expand overseas?

  • Startups in Latam have a local focus. They rarely look at international expansion.
  • When it comes to Fintech, regulations may operate as obstacles and inhibit growth outside their country of origin because the regulatory framework under which the financial services of each nation operate is different.
  • We are working on that area as we speak. We are putting together a Fintech Conference for the 15th August 2019, with the support of Stone and Chalk. The goal of the conference is to identify where the gaps are in the areas of Regtech and Fintech in particular, what are the specific problems and challenges in the region.
  • All countries are different, and it seems there is more potential in Argentina, Argentina, Mexico and Colombia, but we would like to cross check that with a trade mission towards the third quarter of 2019. ALABC will be organising matchmaking meetings with potential clients, regulators and the local start-up ecosystems.

3.    What’s the process of setting up shop in your region:

Depends on the country, for instance in Chile there are incentives to set up shop over there, but that is irrelevant until you are sure that there are business opportunities for your company. It is a matter of cost/benefit analysis, if the opportunities are big, then it is worthwhile to invest the time and the money to get the proper advice.

  • Latin America is still not at the levels of Europe or Asia, where collaborative programs are already in place among important actors within the industry. Nevertheless, collaboration in the region is becoming more frequent and the growing development of the Fintech industry will allow the expansion in quantity and quality of synergies between different actors in the ecosystem

4.    What is one piece of advice you would give to someone here thinking about exporting?

  • Establish a local entity, partner with the locals and learn the language. By deciding to focus on specific segments, Fintech firms seek to resolve concrete problems putting the consumer at the centre of their activities

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