In Latin America, Fintech is driving banking innovation and improving financial inclusion

by James · April 26, 2023

The rise of fintech in Latin America (LatAm) over the past decade has shaken up the region’s financial landscape, driven innovation in the banking sector, increased competition and contributed to increased inclusion, says a new article from the International Monetary Fund (IMF).

In a Fintech Note released on March 29, IMF analysts look at the state of fintech in LatAm, examine how the evolution of the industry has affected the region’s financial landscape and share the trends emerging in the sector.

According to the paper, LatAm’s fintech industry has experienced strong growth in recent years, due to favorable demographic factors, including the region’s large population of unbanked and underbanked, as well as digitization efforts by governments to modernize payment infrastructures. This has led to significant improvements, efficiency gains and increased accessibility for both consumers and businesses.

Financial transactions that took days can now be completed instantly on Mexico’s Cobro Digital (CoDi), Costa Rica’s SINPE Móvil or Brazil’s Pix payment systems, the report notes, while banking services such as account opening and loan applications that were previously only available at a bank. Physical branches can now be done online in digital banks.

By simplifying access to financial services, fintech companies help to increase inclusion. Today, about three-quarters of LatAm digital banks’ customers are unbanked and underbanked consumers and small and medium-sized enterprises (SMEs), and two-thirds of their loans go to this demographic, the report said.

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Fintech companies also increase competition in the banking sector both directly and indirectly. A direct impact comes from competition between established and fintech companies themselves, especially those operating in the lending sector. This has led to several smaller banks reacting by reducing prices and interest margins, a trend that has been visible since the 2000s, the report says. Indirectly, fintech startups provide incentives and opportunities for established companies to invest in new fintech innovations and leverage efficiency gains and offer improved customer experiences.

Digital payments and neobanking lead the LatAm fintech industry

According to the paper, LatAm’s fintech industry is currently led by digital payment service providers and neobanks. These two segments are the largest in the region, serving 300 million and 30 million users respectively across LatAm and the Caribbean (LAC).

Number of fintech users in Latin America and the Caribbean (LAC) by segment, 2021 (in millions), Source: The Rise and Impact of Fintech in Latin America, International Monetary Fund, March 2023

Growing from US$89 billion in 2017 to US$215 billion in 2021, digital payments are mostly used for e-commerce and mobile point-of-sale (mPOS), with more than 10% of e-commerce spending now done using digital wallets , says the report.

Cross-border digital transfers are another fast-growing vertical, growing almost threefold in the Caribbean and Central America and twofold in South America, it said.

Digital payment transaction value by segment (in billion USD) in Latin America and the Caribbean, Source: The Rise and Impact of Fintech in Latin America, International Monetary Fund, March 2023

Digital banking is another prominent fintech segment in LatAm. The sector has grown from just ten neobanks in 2017 to now 60 players, with Mexico and Brazil leading the way by being home to 55 digital banks and serving most of the region’s neobanking customers.

By 2021, online digital banking transaction volume in Argentina, Brazil, Chile, Colombia, Mexico and Peru (LA6) will reach US$123 billion, the report says, growing more than sixfold from US$17 billion in 2017.

Digital banking transaction value in Argentina, Brazil, Chile, Colombia, Mexico and Peru (LA6) (in USD billion), Source: The Rise and Impact of Fintech in Latin America, International Monetary Fund, March 2023

Alternative finance and insurtech on the rise

Although still relatively small compared to digital payments and neobanking, alternative finance and insurtech are two fintech verticals that are flourishing and creating important innovations, the report says.

Alternative financial platforms provide new solutions for limited access to financing, so that customers can bypass intermediaries and directly borrow from and lend to a company or person.

Between 2017 and 2020, the volume of alternative financing in LAC increased ninefold from USD 700 million to around USD 6 billion. During the period, the number of providers more than quadrupled to 502 in 2020, with lending platforms accounting for most of this growth. Brazil is the clear leader in alternative finance, accounting for two-thirds of the volume, followed by Chile and Mexico.

Value and Transactions in Alternative Finance in Latin America and the Caribbean, Source: The Rise and Impact of Fintech in Latin America, International Monetary Fund, March 2023

LatAm’s insurance technology sector, meanwhile, remains small and nascent, with just 127 companies in 2021. About half of these companies’ customers are SMEs and low-income consumers. Insurtech companies also provide technology solutions to 23% of all traditional insurance companies.

LatAm insurtech business models and markets served, 2021 (%), Source: The Rise and Impact of Fintech in Latin America, International Monetary Fund, March 2023

According to the report, LatAm’s insurance engineering industry has a strong potential for expansion, due to low insurance penetration in the region. Rates range from 1% of gross domestic product (GDP) in Venezuela to around 4% in Chile, the report said, compared to 9.4% in OECD (Organization for Economic Co-operation and Development) countries.

As of April 2023, around 1,000 fintech companies were active in LatAm, according to a new report from Flagship Advisory Partners. 65% of these companies are based in either Brazil or Mexico.

Brazil is home to the six most well-funded fintech companies in the region, namely Nubank, C6 Bank, Inter and Neon, four neobanks, as well as XP Investments, an investment management company, and Creditas, a consumer loan startup.

Nubank went public in December 2021 and became LatAm’s most valuable listed bank at $41.5 billion.