Why is Latam struggling with fintech? –

Latin America’s regulatory environment, which lags behind developed countries, is often described as one of the main challenges for the development of the region’s fintech sector.

It is no wonder that governments in the region are pushing for new laws and regulations to support the industry’s development.

But apart from the general excitement, fintech has developed unevenly in Latin America. The region’s digital banks counted more than 30 million users in 2021, but these were largely concentrated in Brazil and Mexico.

Central America in particular still struggles to provide the right environment for the promotion of the fintech industry.

“We are often asked by governments in the region for advice on how to promote fintech laws,” says an official at a multilateral bank. “My opinion is that countries do not need a law. They must first build a strong ecosystem that supports entrepreneurs, strengthens human capital and creates the conditions to make funding available to the fintech sector.”

The increasing focus on regulation can lead to the neglect of much more important factors. Existing laws and regulations already allow emerging financial institutions to offer services without the need for additional legislation.

Regulation, which could require financial institutions to hold a license and respect minimum capital requirements, would be too restrictive for such a nascent industry. Only when the sector has matured will it be appropriate to start thinking about regulating the space.

The more mature Brazilian digital banking sector has already reached significant levels of adoption. Last year, the central bank of Brazil announced that financial conglomerates led by payment institutions will have to comply with the same capital requirements as traditional banks.

In Latin America, fintech tends to be regulated according to the type of activity a firm performs, rather than by the firm itself. Argentina, Brazil and Colombia have not published separate laws on the fintech sector, but have instead adapted existing regulation.

Mexico is the only jurisdiction that applies entity-based regulation to fintech, having granted licenses to fintech institutions.

Lending spread correlation

The rise of digital banks is often associated with a reduction in lending spreads, which have traditionally been high in Latin America.

The average net interest margin between 2000 and 2012 was 3% in advanced economies, but 9% in Latin America and the Caribbean. However, the banks’ net interest margins in the region have been declining since the 2000s, and the trend has continued since the rise of fintech in the region a decade ago.

In Latin America and the Caribbean, a one percentage point increase in the ratio of digital bank transactions to total bank loans is associated with a reduction in net interest margin of 0.2 to 1.9 percentage points, according to a 2023 report from International. Money fund.

Each bank reacts differently to the rise of fintech platforms. Smaller banks tend to compete via pricing by reducing interest margins, while larger banks typically focus on increasing investment in technologies to remain competitive.

The relationship between fintech and traditional banks has always been described in competitive terms. Recently, the relationship has developed into a collaboration. Financial institutions in Latin America have responded by buying fintech ventures or making strategic investments in them, as well as building venture programs themselves.

Fintechs often end up relying on banks, either to raise funds or to connect through the payment system.

Has fintech reached a tipping point?

The total number of fintech start-ups in the region peaked in 2017 and has since been declining, reflecting the increased maturity of the sector.

More than any other, platforms so far have been focused on payments and remittances sub-sectors, at 25% of the total, according to a 2022 IDB report. The total value of digital payments grew from $89 billion in 2017 to $215 billion in 2021 .

Looking ahead, however, it is likely that growth in the sector will be led by other fintech verticals, such as lending, crowdfunding or insurtech.