Fintech companies preview big innovations and changes in financial markets in Latin America

Wave of new financial companies bring innovative instruments and business models, seeking to reach segments not served by the traditional financial industry, but present a challenge for regulatory systems

In the past two years Latin America has experienced a rapid emergence of new financial companies based on technological platforms, known as Fintech, which signals a profound change in the financial markets but at the same time presents a challenge to regulators, according to a study by the Inter-American Development Bank (IDB) and Finnovista, an organization that promotes the development of Fintech companies.

The report “Fintech Startups in Latin America” identified 703 startups in 15 countries, offering solutions across all segments and technologies that are observed globally, a dynamism that favors the emergence of a more innovative and inclusive digital financial services industry in the region.

Three out of every five Fintech startups were established between 2014 and 2016, reflecting the potential of the sector perceived by entrepreneurs. The study notes, nonetheless, that this reflects that most products and models need to mature and grow before they become sustainable companies.

One in four Fintech companies operate as alternative finance platforms, offering loans, crowdfunding or factoring. Another quarter of the companies operate in payments, and the remaining operate in segments such as enterprise and personal financial management, wealth management, insurance and digital banks.

Brazil is the country that provides the greatest number of startups, with 230 firms, followed by Mexico with 180. Colombia ranks third with 84, followed by Argentina with 72 and Chile with 65. These five countries concentrate nearly 90% of the Fintech activity in Latin America.

Among those surveyed, 41.3% stated that their mission is to serve customers who remain excluded or underserved by the traditional financial services industry, whether they are individuals or small and medium-sized enterprises. Considering that Fintech companies seek to solve concrete problems of their target segment; this approach is quite promising to address financial inclusion constraints arising from the demand side.

"We are witnessing a revolution in the way in which people and businesses manage their finances" said Gabriela Andrade, financial markets specialist at the IDB. "In addition to achieving lower costs by adopting digital channels, Fintechs use different sources of information and new techniques to evaluate customers, their behavior and their risk, which allows to reach excluded segments in a more affordable way".

Advances in regulation and the role of the public sector

To enable the sector to develop and achieve greater impacts, it will be necessary to deepen the dialogue between entrepreneurs, policymakers and regulators. The study recommends, for example, the creation regulatory sandboxes in which Fintech companies can operate, evaluate their business models and offer their products in monitored environments, as well as facilitating a smooth transition, for both startups and oversight bodies, towards an adequate regulation and supervision.
Fintech companies preview big innovations and changes in financial markets in Latin America

"The countries better prepared in terms of regulation will be able to take advantage of the impact that Fintech companies can offer", said Juan Ketterer, Division Chief of the of Connectivity, Market and Finance division of the IDB. "In this regard, time is a key factor, considering the speed with which these enterprises are developing. Several governments in the region are considering the development of Fintech as one of the pillars to reduce financial exclusion".

Countries such as the United Kingdom and Singapore are offering temporary exemptions on authorizations for Fintech companies, while a more proactive role of the public sector to create a support system for the sector is observed. Another trend recommended is the creation of some type of public figure or institution that serve as the interlocutor between the industry and policymakers.

The collaboration between Fintech startups and traditional players in industry is an indispensable element that must be built up in Latin America," comments Andrés Fontao, Managing Partner of Finnovista, "Regulation is a factor that needs to be addressed by governments and legislators, not with a restrictive purpose and stricter controls, but from a perspective that promotes competitiveness and innovation at the national and regional level".