In Latin America, technology companies are targeting the large portion of the population that is currently unbanked and underbanked with more financially-inclusive solutions. Last year, the region’s financial technology industry secured $186 million in venture capital investments, and more than one-third of these investments went to startups, according to the Latin American Venture Capital Association (LAVCA).
Until now, cross-border and payment processing solutions have dominated the fintech industry in Latin America. The Center for Latin American Monetary Studies (CEMLA) and the Multilateral Investment Fund (MIF) estimate that Latin America’s income from remittances will set a new record in 2017, with approximately $74 billion flowing into the region.
But fintech in Latin America is much more than just remittances. Solutions in emerging segments, such as asset-based lending and smart contracts, are expected to become more prevalent in the years to come, as more and more traditional financial organizations increase their collaboration efforts with fintech companies in order to remain relevant.
As Latin America’s fintech ecosystem continues to mature, here are 4 Fastest-Growing Fintech Trends in Latin America and a few of the key trends to keep an eye out for 2018.
Electronic Invoicing & Factoring
Governments across Latin America are embracing electronic invoicing, and even making e-invoicing mandatory for businesses as a way to combat fraudulent activities. As a result, the region has become a global leader in the factoring industry. According to a study by the Inter-American Development Bank (IDB) and Finnovista, one in four fintech companies operates as an alternative finance platform, providing loans, crowdfunding, or factoring solutions.
Factoring allows suppliers to meet their working capital needs by selling their invoices, or accounts receivable, to lenders for cash. The industry moves approximately $3 trillion per year worldwide, and factoring startups are jumping on the opportunity in Latin America to capitalize on the value that e-invoicing provides for organizations of all sizes.
Mesfix in Colombia connects investors with SMEs that want to sell their invoices and allows multiple funders to finance a part or all of a certain invoice through a marketplace platform. FynPal in Chile allows SMEs to auction off their invoices online. Buyers can bid their invoices between investors to ensure they receive the most optimal price. Portal Finance, allows small- and medium-sized businesses to deploy supply chain financing solutions to get the mission-critical capital they and their suppliers need in the most business-friendly terms.
Chile was one of the first to implement mandatory e-invoicing in 2003. Today, more than 97% of billing is now filed electronically. A Billentis study showed that Latin America will see an annual growth rate of 32% in the use of e-invoices in the 2017 to 2024 period, with Mexico leading the way in adoption.
Fully Digital Banking
With the goal of creating more open and transparent systems that are better adapted to the mobile-first generation in Latin America, several fintech companies are developing fully digital banking options for smartphones. While fully digital banking is still a relatively new concept in Latin America, the benefits of mobile financial services coupled with the many regulatory changes that are taking place, are leading to increased adoption rates.
For example, Nubank in Brazil allows users to request and access a MasterCard credit card through their mobile devices. As a fully-digital service, Nubank has minimal operational costs and does not charge its customers any fees. Founded in 2014, Nubank has registered more than 8 million applications and raised more than USD$377 million.
In Argentina, less than half of the population has a bank account, according to the World Bank. However, more than 40% of the population has a smartphone, and this number is expected to reach 70% by 2020. Ualá, a mobile-based banking service, also offers people who don’t have a bank account access to a prepaid MasterCard. In July, Mexico City-based bank Ve Por Mas agreed to acquire Bankaool, Mexico’s first online-only banking institution.
In many Latin American countries, trust is low and commerce is typically conducted between well-known parties only. So it shouldn’t come as a surprise that the region has become a leading adopter of blockchain-enabled services and marketplaces.
The blockchain makes it possible to use so-called “smart contracts,” or blockchain-based contracts that are automatically executed when specific criteria that are coded into the contract are met. Contract execution over the blockchain network eliminates the need for intermediaries to confirm a transaction. Furthermore, it provides a more cost-efficient and transparent form of record keeping.
But proof of payment or a transaction isn’t the only way smart contracts can be used. According to Nikolai Kuznetsov, proof of property, such as land titles or other asset certificates, can also be stored in the blockchain.
“Land grabbing continues to be a problem in the world today with the poor being at most risk. Corruption allows unscrupulous groups to take advantage of paper documentation through fraudulent and manipulative practices. It isn’t rare for some groups to acquire lands through rigged titles or falsified documents,” says Kuznetsov.
Blockchain makes it impossible to manipulate records because any attempt to tamper with a contract can be seen by everyone on the network. Smart contract startups, like Argentina-based Ripio, offer a range of financial services built on blockchain technology for borrowers, lenders, and underwriters in emerging markets.
Fraud Prevention & Digital Authentication
Lack of trust online and the fear of fraud are some of the primary reasons why Internet banking only recently emerged in Latin America. In addition to the fear of fraud, a large percentage of Latin American consumers also demonstrate a lack of knowledge and awareness regarding common threats such as phishing and malware, according to a study by Easy Solutions.
To encourage safe online banking practices, more financial institutions are reinforcing their commitments not only to consumer education but also to implementing better technology to prevent fraudulent activities from happening in the first place. Furthermore, many Latin American governments are using biometrics to prevent fraud as well as to bring convenience and security to everyday transactions.
The banking sector is a leading adopter of biometrics as a security authentication factor, especially in Brazil where biometric technology has been used for years at ATMs as a more reliable and safer authentication mechanism.
Fintech companies in the region are also developing solutions to help better evaluate financial risk and mitigate fraud. Nequi, a financial mobile banking service from Bancolombia, was the first in Colombia to deploy mobile biometrics for authentication. According to the study by the Inter-American Development Bank (IDB) and Finnovista, the fraud prevention and risk management segment is now the fifth largest in the region and growing.
The road to a more financially-inclusive Latin America
There are reportedly over 700 fintech companies across Latin America, and a growing number of these ventures are operating in the sectors mentioned above. According to an Oliver Wyman report, Harnessing the Fintech Revolution, “There is a largely untapped market in Latin America that presents tremendous potential to drive profits and long-term business value.”
Although disrupting the traditional financial sector in Latin America is not without its challenges, momentum is building and bringing more and more people who lack access to financial services into the system.