In recent years, financial services in Latin America (LATAM) have undergone rapid change. Modern fintech solutions are steadily entering the region, offering faster, more secure, and more accessible alternatives to traditional forms of banking. Currently, LATAM has more than 1,166 fintechs operating, with the largest share focused on payment and remittances. In 2019 alone, these companies secured $2.66 billion in funding.
The boom is certainly a reflection of changing consumer behaviors. Both mobile penetration and internet usage have significantly increased, meaning people are more familiar with online shopping and digital tools. This increased digital literacy has been beneficial for on-demand delivery apps like Rappi and e-commerce platforms like Mercado Libre, but the payments sector has yet to catch-up.
Why? Being able to monetize has been an ongoing obstacle for financial services in LATAM, who struggle to build trust, offer free models, and deal with operational and compliance costs. Nonetheless, as Latin America embraces a more diverse range of fintech capabilities, the potential for financial services to effectively monetize has grown substantially. Here are the secrets to fintech success in LATAM:
Understanding previous behaviors
LATAM is primarily cash-driven — people are accustomed to withdrawing physical money and using it to pay for day-to-day expenses. In fact, back in 2016, some estimates suggested as much as 90% of all transactions in the region were made with cash. While that figure is certainly lower in 2020, many Latin Americans are unfamiliar with alternative card or digital payments.
At the same time, over 60% of the entire population doesn’t have a bank account at a formal institution and are unaware of banking procedures, terminology, and costs. The unbanked are restricted even further by infrastructure challenges, as ATM networks are primarily located in urban areas. Meanwhile, six out of ten people in LATAM are among the informal workforce and tend to hide from banking services out of fear of being taxed.
For businesses in the region, access to financing is limited because people often don't have lines of credit and are therefore deemed higher risk. On the other hand, those who do have credit histories may not have collateral or may face high-interest fees on bank loans.
Against this backdrop, the current COVID-19 pandemic has brought to light the real need for more payment options in LATAM. Families cannot leave their homes to pay for services in cash, businesses need loans to stay afloat, money is seen as unhygienic, and people need instant access to remittances from overseas. The crisis has essentially formed a different reality that has changed how people can buy on a daily basis — and in turn, these new conditions are shaping how people want to buy in the future.
Incorporating existing payment options
One of the biggest considerations for financial services hoping to monetize is to include existing modes of payment in their models. Paying in installments is very common among LATAM users, especially for high-ticket items like travel. Likewise, cash vouchers, and local debit and credit cards are also popular. Companies that disregard these payment types will struggle to gain real traction.
Paulo Shargorodsky, Vice President of Strategic Accounts & Growth at EBANX, believes the variations between countries are important too. The most popular form of payment in Colombia may not be the same as in Brazil. It's crucial to analyze each country separately and tailor payment options to the unique markets. For instance, offering payment with a domestic credit card in Mexico means reaching under 14% of the population. In Colombia, the same payment option means reaching 51% of the population.
When trying to include a wider set of payment options, fintechs can work with local vendors or banks and retailers who accept the risk associated with international payments. Alternatively, they can use end-to-end localized payment and financial solutions that eliminate the need for a local entity, as well as lower the overall risk. For example, EBANX works with global enterprises and connects them to Latin Americans. It does this by processing and collecting payments from the customer, then exchanging and paying the merchant in their local currency.
Restoring user trust & financial control
For decades, trust has been fragile between LATAM populations and banking systems. In Mexico, 37% of adults say a lack of trust in financial institutions is a reason why they are unbanked. Such mistrust could be rooted in the bank's past activity, when the collapse of the financial system in the 1990s plunged 1.75 million people into debt. In response, fintech has the capability to build trust from scratch among users because it gives them more control over managing their finances.
Meanwhile, technology like machine learning and AI allows fintechs to better assess credit risk for those borrowing money. Whereas banks apply general rules to most funding applications, new financial services can provide appropriate interest rates on a case-by-case basis, as well as put limits on repayments, so users don't commit to sums they can't afford. Fintechs can also be more transparent about fees and repayment structures via user-friendly designs that enable Latin Americans to easily track their progress and make payments digitally.
On the other hand, rather than attempt to rebuild trust in traditional forms of banking, some fintechs are taking a different stance. kubo.financiero is a Mexican fintech platform specializing in savings, personal loans, and term deposits. Not only does the company bypass doubts people have about formal banks, it increases access to financing for everyday people, as well as connects people and projects with investors — strengthening the financial network in Mexico as a whole. In 2018, kubo.financiero generated 89 million Mexican pesos (approximately 4 million USD) in revenue from interests.
With mobile use steadily rising in LATAM, people assume financial services will, like e-commerce services, entail quick transactions, immediate confirmation, and faster approvals. The combination of low-risk financing with shorter access times (kubo.financiero pre-approves loans in less than five minutes) mean people have greater financial security and a more positive relationship with new financial services — and are therefore more likely to continue using these services on a long-term basis.
Utilizing the new fintech landscape
Fintech regulation has made significant strides in LATAM lately — countries are realizing the benefits of the industry and are laying the groundwork to make company funding, support, and growth easier. In 2018, Mexico introduced one of the most comprehensive fintech frameworks in the region. The Fintech Law (due to come into effect this year), provides a structured process for new models, along with a regulatory sandbox for licensed and non-licensed companies. Following suit, Peru, Colombia, and Brazil have similar legislation underway.
Open Banking has also established a presence in LATAM, which brings with it new revenue streams and sustainable service models for underserved markets. Elsewhere, more funding rounds and accelerator programs are making clearer pathways for new players in financial services. The companies that make the most of the emerging fintech resources will gain deeper insights into markets and finesse solutions from an early stage.
Roberto Taboada, Chief Exponential Officer at kubo.financiero, says that the fintech resources in Mexico taught him "one of the best ways to monetize fintech services is through offering a multitude of products." Although the lending platform could generate initial profit via its loans, additional products like top-ups, utilities payments, and insurance can increase traffic and retain user engagement. As a result, kubo.financiero launched a fixed-term investment product and 18 months later, 85% of all money from lenders was pooled in it.
Fintech for the future
Predictions state that Latin America's fintech market could exceed $150 billion by 2021, and that figure will likely be surpassed in the wake of COVID-19. In the same way that the pandemic has transformed brick-and-mortar shops to online stores, financial services are being transformed into digital, fintech solutions.
While monetizing fintech certainly comes with challenges, the companies that understand previous user behaviors, incorporate existing payment options, restore user trust and financial control, and utilize the new fintech landscape will see the largest returns and highest levels of success.