It is no secret that Fintech is booming across Latin America. The three largest economies —Brazil, Mexico and Argentina—, boast of extremely innovative players in a wide range of activities, including neobanks, loan originators, prepaid card providers, ecommerce fulfilment services and others. The dynamic economies of Colombia, Peru, Chile and Uruguay also display a vibrant fintech scene.

Latin American fintechs bring tangible improvements in terms of financial inclusion, credit creation and capital formation. In this article, we argue that, by scaling their operations into the wider world of Emerging Markets, these companies have a unique opportunity to take their pioneering expertise to the next level, while injecting more dynamism into the business world.  

Latin American fintechs: when necessity breeds invention

Why is the fintech industry booming across Latin America? The sheer diversity of countries, currencies and economies in the region makes it difficult to provide a uniform answer to this question. Yet, a core common denominator is easy enough to spot: 

• The incentive to take on banking oligopolies. Incumbent banks have a way of luring tech-savvy competitors to seek a piece of the lucrative action in domestic markets. Until very recently, only five Brazilian banks had a share of commercial banking assets north of 80%. Unsurprisingly, Latin American countries are among those with the highest Net Interest Margin (NIM) in the world.

• The pervasiveness of smartphones and connectivity. A young, educated and smartphone-savvy elite is eager to embrace entrepreneurship and bring financial services to wide segments of a still largely unbanked population. With more than 80 million Mexicans having access to the internet and using smartphones, many are signing up for debit/credit cards and are eager to embrace the digital economy. 

• The ingrained culture of instalment payments. Generalising Kate Jaquet’s views regarding the “well-ingrained culture of instalment payments” in Brazil, the region lends itself well to digital finance. This has resulted in a plethora of fintech payments companies, including the ‘explosion’ of Buy Now Pay Later in Mexico, where BNPL could reach as much as 4% of total payments by 2025.

• The impact of market events. In Mexico, recent high-profile defaults are leading some fintech players to turn their attention to international credit and FX markets to diversify their sources of funding. Meanwhile, Argentina’s high inflation rate, well north of 100%, is emboldening fintech entrepreneurs in the payments and crypto space.

Mexico as a template for Latin American fintechs

It would be unfair to single out only a handful of players amongst the vibrant Latin American fintech companies. There are just too many of them out there. Instead, let us focus on one country —Mexico— to get a sense of what the future of Latin American fintech looks like as it continues on its expansion path. 

• Scaling. It is often said that the ability to successfully compete in the Mexican market, where more than 9 million inhabitants are ‘digital natives’, is the hallmark of a Latin American fintech worth its salt. That is certainly the experience of Argentinean prepaid neobank Ualá, recently authorised to buy the bank ABC Capital. The firm seeks to reach 5 million users in Mexico alone.

• Taking on incumbents. Equipped with strong data analytics and state-of-the-art payments and low-fee transfer solutions, the fintech industry has its sights set on incumbents’ high NIM. While start-ups like Konfio focus on SME lending, a niche segment traditionally underserved by banks, the upshot is that they will need to beef up their expertise in global credit and FX markets to access new sources of funds.

• Promoting financial inclusion. Introducing itself as “The bank of the future, today”, Covalto directs its attention to retail investors. As it markets a 14% rate on promissory notes, the fintech lender shows that high-interest rates need not be a privilege of the banking oligopoly. 

How to become emerging market leaders 

In the 1990s, Peruvian economist Hernando de Soto shook emerging market economics by focusing on property rights for the inhabitants of large slums. From his base in Lima, Mr. De Soto went on to advise many cities and governments across the developing world in Latin America, Africa and Southeast Asia.

A similar pattern may be emerging in the fintech world. The leadership provided by innovative fintech companies in Brazil, Mexico and other countries is the springboard for a wider approach across the entire Emerging Market spectrum. These Latin American fintech pioneers offer a roadmap to financial innovation in emerging market economies, making financial systems more competitive, more digital, and more inclusive.

For that to happen on a large scale, however, politicians and regulators in Latin America must lean against the siren song of over-protected local banking systems. In some cases —notably in Argentina— they should also embrace sound macroeconomic policies, including liberalising the FX market by letting exchange rates be fully determined by market forces.

Finally, they need to be bolder in terms of securing creditor rights. Whereas it takes 11 months for creditors to recover an average of 88% of their money in a bankruptcy procedure in Finland, it takes 4 years for a Brazilian lender to recover only 18.2%, on average, of their money in a comparable situation. This hinders the growth of credit markets.

A more efficient system for bankruptcy resolution would go a long way in helping fintechs access international capital markets in more favourable terms. Surely, astute Latin American fintech entrepreneurs are already preparing innovative solutions in this area.