Over the past two years Latin America has experienced an accelerated emergence of new financial companies based on technological platforms known as Fintech, which augurs a profound change in the financial markets, but at the same time poses a threat for its regulators, according to a study conducted by the Inter-American Development Bank (IDB) and Finnovista.
The report Fintech: Innovaciones que no sabías que eran de América Latina y el Caribe has identified 703 entrepreneurial projects in 15 countries, with an offer of solutions that includes all segments and technologies observed at a global level, a dynamism that promotes the emergence of a more innovative and inclusive industry of digital financial services across the region.
Three of every five Fintech companies were established between 2014 and 2016, which reflects the potential of the sector according to entrepreneurs. The study highlights that, at the same time, this reflects that the majority of products and models need to mature and grow before becoming sustainable companies.
One in four Fintechs operate as alternative financing platforms, offering loans, collaborative funding (crowdfunding) or funding through bill intermediation. A further quarter operate as payment companies, and the remaining companies fall into segments such as enterprise and personal financial management, wealth management, insurance and digital banking.
Brazil is the country with the highest number of entrepreneurial projects with 230 companies, followed by Mexico with 180. Colombia ranks third with 84, followed by Argentina with 72 and by Chile with 65. These five countries concentrate almost 90% of the Fintech activity in Latin America.
Among the survey respondents, 41.3% says that their mission is to serve clients that have been excluded or underserved by traditional financial services, whether they are individuals or small and medium enterprises. Taking into account that Fintech startups aim to solve specific problems of the segment to which they are dedicated, this approach is very promising in addressing the limitations to financial inclusion originated by the demanding side.
“We are witnessing a revolution in the way in which people and business manage their financial matters”, explains Gabriela Andrade, a specialist in financial markets in the IDB. “In addition to lowering costs by adopting digital channels, Fintechs use different information sources and new techniques to assess clients, their behavior and risk, which enables companies to reach excluded segments in a more affordable way”.
Progress in regulation and the role of the public sector
In order for the sector to develop and achieve greater impact, it is necessary to strengthen the dialogue between the entrepreneurs and those who design politics and regulation. For example, the study recommends the creation of temporary regulatory sandboxes where Fintechs can operate, assess their business models and offer their products in mentoring settings; as well as enabling a smooth transition for entrepreneurial projects and their entities towards an adequate regulation and supervision.
According to Juan Ketterer, head of the division of Connectivity, Markets and Finance of the IDB, “the most prepared countries in regulatory terms will be able to take advantage of the impact offered by Fintechs. In this sense, time is a key element if we consider the speed at which these companies are developing. Several Governments around the region are considering the development of Fintech startups as one of the foundations to reduce financial exclusion”.
In countries such as the United Kingdom and Singapore, they are offering temporal exemptions in authorizations for Fintechs, and we can observe a more dynamic role of the public sector in creating a support system for the sector. Another recommended trend is the creation of a sort of public institutionality that serves as a mediator between the industry and the policy makers.
“The collaboration between young companies and traditional players of the industry is an essential element that must have a solid base in Latin America”, highlights Andrés Fontao, Managing Partner of Finnovista, “regulation is a factor that must be dealt with by Governments and legislators, and not with a restrictive end and towards more controls, but from a perspective that fosters more competitiveness and innovation in the national and regional level”.
We invite you to download the complete report in English clicking HERE. Discover the greatest information-collecting process carried on until now in Latin America, which gathers 147 pages on how the progress of Fintech companies augurs major innovations and changes in the financial market of the region and, at the same time, poses a threat for regulators.
About the IDB
The Inter-American Development Bank aims to improve lives. Founded in 1959, the IDB is one the main long-term funding sources for economic, social and institutional development in Latin America and the Caribbean. The IDB also carries on cutting-edge investigation projects and offers counseling on politics, technical assistance, and training to public and private clients across the region.