Spotlight 2023: A good year for Fintech in Latin America

by James · February 22, 2023

Fintech in Latin America (LatAm) saw a boom like no other in 2021. Some even went so far as to say it was the sexiest market for fintech investment. This came as a result of $4.6 billion flooding into the fintech vertical, and saw the creation of fintech unicorns across the region. Two years later, fintech unicorns account for 50 percent of the region’s total unicorns.

However, 2022 was not so bright. Investments fell in a very dramatic way and it doesn’t look like they will recover anytime soon. And yet the outlook for fintech startups in Latin America remains promising in 2023.

Latin America is an ideal location for fintech growth

Although the words “Latin America” are often accompanied by the words “economic crisis”, “social explosion” and “political crisis” in the media, the LatAm market is characterized by a GDP/capita level of about $8,327 higher than those. found in Africa and other developing areas.

Moreover, this is a continent where internet coverage reaches 92 percent of households in Chile (the highest area) and 50.5 percent in Bolivia (lowest coverage before Haiti), for an average of 75 percent of households covered by the internet in the area. But paradoxically, levels of financial inclusion are still far from what might be expected:

Only 51 percent of adults have a bank account, and of those, only 28 percent make direct payments with those accounts
Only 45 percent of SMEs have access to financial systems, even though they contribute 30 percent of each country’s GDP and up to 67 percent of employment.

Fintech entrepreneurs visualized this opportunity. Back in 2018, there were 1,116 fintech startups in LatAm. In 2021, this number reached 2,482 fintech companies, which makes up 23 percent of all fintech companies globally.

However, it is crucial that most of these developments are in Brazil. Eighty percent of these fintechs are located there, while Mexico has 21 percent of the stock, Colombia and Argentina share 11 percent, and Chile has seven percent. Peru currently has 132 fintechs. However, growth in the number of fintech companies located there has grown by 69 per cent annually. It now belongs to a group of countries with a high-growth fintech sector that includes Ecuador, the Dominican Republic, Costa Rica, Uruguay and Guatemala.

Verticals where Latin American fintechs operate:

according to Finnovista and Inter-American Development Bank study:

25 percent of fintechs operate with payments and money transfers
18 per cent in lending, 15 per cent are engaged in supplying technology to banks
Eleven percent deal with corporate finance management
Seven percent deal with personal financial management
Seven percent are in the insurance vertical
Five percent engage in crowdfunding
Five percent are digital banks

The distribution of these verticals did not occur by chance. It reflects the major structural problems in the region that fintechs aim to solve:

Lack of massively distributed payment systems for the bottom of the economic pyramid. Access to electronic payment systems for shops serving the bottom of the pyramid has been costly. In addition, the low penetration of formal employment has limited the number of people with valid and formal bank accounts.
Difficulty accessing formal credit: Given the high degree of economic informality in the region and high levels of structural unemployment, banks are constrained in placing credit under a regulation aimed at providing credit to formal workers and businesses with moderately predictable revenues.

2023 is a year of opportunities and challenges

Early stage VC investments will not recover

With interest rate hikes and recession clouds over the global economy, venture capital investment in Latin American fintech fell by 60 percent in the second quarter of 2022. VCs have no intention of reversing this trend in 2023, whose recovery towards growth will depend on whether there is a recovery from U.S. economy in the second quarter of this year.

As a result, in 2023, investors will prefer mature fintechs. Investors still see opportunities, but the focus will be on strengthening existing investment portfolios, rather than seeking new investment opportunities.

But less VC funding can be a good thing

In 2021, there was an explosive amount of investment in Latin American fintech, which led many fintechs to focus on “getting VC sweet” and not focus on achieving real organic growth. This year, fintech will focus on growing organically.

We will see a year where some fintechs combine to create digital banks. We will probably see many fintech operators from foreign markets come to the region to shop. In addition, traditional Latin American banks themselves may buy prominent fintechs. The drop in foreign investment will only catalyze the maturity of fintech companies and the LatAm fintech/digital banking ecosystem.

The regulatory landscape is improving

While in 2018 only Mexico had a law regulating fintechs, Ecuador recently passed a similar one, with laws in the pipeline for Chile, Argentina, Colombia and Panama as well. Regulation in a trust-demanding environment such as the financial sector is always a welcome and necessary vector for consolidation. In Ecuador, the law was promoted by a cluster of fintech companies and financial institutions organized under an association by name Cluster Financieroundoubtedly a type of associativity that other countries should replicate.

2023; Is Latin America in a recession? Unlikely

While the economic cycle of most countries in the LatAm zone depends directly on developments in the US economy, the region is increasingly linked economically to Chinese purchases of primary exports. Latin America will fall into recession if the price of oil, gold, copper and other raw materials falls sharply and by more than a quarter. This is something that probably won’t happen.

And the structural reasons for growth are still present

Markets remain underserved and unsatisfied, financial inclusion is not improving significantly, credit delivery models remain linear, industrial and outdated, the digitization of traditional banking-digital channels significantly improved the Latin American user experience, but interest and fees charged for services remain high, and Financial customer acquisition costs for traditional banking are still very high.

As a result, the banks are very dynamic in the region, but the scope and size of the markets are more extensive than their capabilities.

What are the opportunities in the region?

For investors

Since much of the VC will focus on deals to strengthen their investments, it is also an opportunity for many important early-stage fintech startups. In addition to investing in those aiming to tackle underserved markets, emerging digital banks in other regions may find fintech acquisition opportunities at desirable prices given the capital drought coming in 2023.

For fintech operators outside Latin America

These are the “jobs to be done” that are not yet fully resolved:

The need for inexpensive, reliable, fast international transfers and money transfers. This is a critical opportunity considering that there are countries whose GDP is highly dependent on remittances (El Salvador) or economies where the level of remittances increases the economy significantly (Ecuador, Peru, Dominican Republic, Mexico). In addition, although most of the region’s immigrants are in the United States, some European countries, such as Spain and Italy, are important sources of remittances.
Electronic payment-ready POS (hardware for mom-and-pop stores) that should be incredibly cheap (less than $100 or less per unit) and not dependent on fixed broadband. It is estimated that more than five million mom-and-pop stores cannot accept digital payments. Local players solve this problem by using software like PayPhone (Ecuador), but they don’t have enough capital to grow exponentially.
Economic education, information security education and privacy education, affordable and massive
Access to cheap, long-term credit for university education abroad
Access to financing options for SMEs in the region
Alternative models for financial customer profiling
Risk-based alternative scoring for SMEs
Access to real estate investment vehicles in the region and the first world
Property Tokenization Services
Access to global markets for regional fintechs
Access to global talent for local fintechs
Fintech maturity assessment and fintech maturity certification
ESG assessment of fintechs and banking