The fintech ecosystem in Latin America and the Caribbean has doubled in size in the past three years, with the most recent trends in the industry showing clear signs of maturity and sophistication, a report shows.
The fintech platforms reached 2,482 in 2021, a growth of 112 percent since 2018, a study by the Inter-American Development Bank revealed. The distribution among countries saw little to no change, with Brazil and Mexico as the prime destination for startups.
Of perhaps greater significance, nearly a quarter of fintech platforms globally are now officially founded in the region, the bank said. The growing relevance of the regional ecosystem reflects its potential to address many of the enduring difficulties that the continent faces, such as swaths of unbanked population and large informal economies which rely most heavily on cash transactions.
“The fintech ecosystem is becoming a key tool for promoting greater financial inclusion,” Juan Antonio Ketterer, head of the Connectivity, Markets and Finance division at the IDB, said.
It also underscores a momentum for startup funding, as venture capital into the region surpassed 21 billion last year, fueling further growth of the ecosystem. The region saw an increased demand for services as the pandemic strengthened the case for digital channels to conduct financial transactions.
Digital lending grows fast
To be sure, fintechs that operate in the payments sector remain the most numerous, accounting for 25 percent of the market. However, the latest trends show signs of diversification regarding services provided.
The number of fintech companies offering digital loans in Latin America has registered the fastest growth in the period, the study found, to the point that 19% of all regional startups now operate in the sub-segment.
Until now, fintechs across the region have had remarkable success in advancing payments products, securing market share from traditional players in the industry, and racking up clients through digital acquisition.
In terms of digital lending, however, its impact remains limited.
“The is a wide scope for offering digital credit in Latin America, as in many other fintech verticals,” said Facundo Mangieri, Co-Founder & Managing Director at Ceibo Créditos, an Argentinian firm specializing in digital loans. “In developed economies, a typical family can have relatively easy access to all sorts of credit, whereas, in LatAm, those same needs are far from being covered in full.”
To be sure, traditional banks continue to dominate the market widely. But most Latin American lending fintechs target middle to low-income segments and small and medium-sized enterprises, which banks have historically circumvented.
‘No access to capital’
“There are over 27 million SME firms in Latin America, a vast majority of which have no access to the capital they need to grow,” said Nicolás Shea, founder at Cumplo, a digital lending fintech in Chile catering digital credit to small companies.
To serve this clientele, fintechs base their strategy on their algorithms to develop adequate pricing for their loans. It is pretty standard that they would take input from multiple data points simultaneously, given that either the low income or SMEs all so often lack financial records in the traditional banking system.
To be sure, lending to these segments does not come without bearing risk. Although most fintechs do not report their default rates, delinquency rates are likely to be far higher than that of a traditional, more cautious banking institution.
In this regard, the importance of a well-built and ever learning algorithm is crucial to the financial success of these companies. This is especially relevant in a region with traditionally high default rates from its borrowers. Mangieri from Ceibo Creditos expects that artificial intelligence will continue to play a decisive role in the industry.
“There will be a consolidation of AI to help us make more accurate and faster decisions to grant credit,” he said. “Until now, AI has been used by early adopters or companies with a budget. We believe that this technology will become increasingly widespread.”