The dawn of fintech in Latin America: landscape, prospects and challenges

BIS | Carlos Cantú and Barbara Ulloa | Nov 5, 2020

Abstract

Fintech in Latin America is greeting the dawn. We take stock of how it is transforming financial services in the region. First, we describe the fintech landscape in terms of investment, firms and services provided. We find that fintech has quickly gained traction in Latin America, mainly in the areas of payments and alternative finance. Second, we evaluate the prospects for fintech by exploring the institutional framework to supervise and regulate it. We show that fintech regulation in the region takes an activity-based approach rather than an entity-based one, except in Mexico. Finally, we present the challenges that fintech faces in becoming a game changer for the region. We conclude that fintech can be a strong catalyst to improve financial and social conditions in Latin America by incorporating the unbanked into the financial system and providing alternative sources of finance to firms.

 

Introduction

Technology has quickly become rooted in our daily lives. Fintech, or technology-enabled financial innovation, has changed the way we buy, borrow, spend, invest, save and interact with the financial system.In advanced economies, technology-driven financial firms have risen as powerful challengers to traditional financial institutions and have become economically sizeable in some segments such as lending, asset management and investment (Frost (2020)).

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In some emerging market economies such as China, India and Kenya, these firms have been responsible for incorporating a large share of the unbanked population into the financial system. They have also led the revolution in payment systems, accelerating the transition from cash to digital payments (Pereira da Silva (2018)). While fintech has been quickly expanding and gaining market power in some regions, in Latin America it is just experiencing the dawn. The objective of this paper is to characterise this new beginning.

The paper takes stock of how fintech is transforming financial services in Latin America. We base our analysis on three sources of information. First, we use answers to a questionnaire sent to central banks in the Americas (Annex).4 Second, we use information gathered in interviews with fintech representatives in the region from both the industry and the regulatory side. Finally, we complement and substantiate our analysis with industry data.

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Our paper is the first regional analysis that uses these three integral sources of data. We proceed in three steps. First, we illustrate the region’s fintech landscape by describing the current state of the fintech ecosystem across jurisdictions and the type of services fintech firms provide. Second, we evaluate the prospects for fintech by describing the institutional framework that supervises and regulates fintech activities and firms. In this section, we assess the type and granularity of data related to fintech activities collected by authorities and detail central banks’ research agendas and initiatives on fintech. Finally, we present the challenges that fintech firms face to become game changers for the region.

Fintech’s dawn in Latin America has been a force to be reckoned with. Fintech investment has quickly gained traction, doubling consistently every year since 2016. Firms offering payment and alternative finance services (eg fintech credit, equity crowdfunding, etc) have dominated the landscape, accounting for more than half the share of fintech firms in the region. For alternative finance, business lending has found a fertile land to grow due to the large number of small and medium firms.

This rapidly evolving landscape has been a challenge for central banks and regulatory authorities. These institutions face a tough balancing act: they need to provide regulatory certainty that lets fintech firms flourish while making sure not to over-regulate and risk stifling innovation. In addition, central banks need to ensure that fintech firms do not pose new or additional risks to financial stability.  To understand better the implications of fintech for the financial system, central banks have quickly adapted and expanded their research capabilities on the topic.  They have actively engaged in data collection, created technical groups and included fintech as a top research priority.

Fintech, however, faces challenges in the region that will not be simple to overcome. First, low financial inclusion and lack of a digital identity are major barriers for consumers who want to access fintech products and services. Second, more progress is necessary in building the infrastructure that boosts digital payments and digitalises cross-border payments. Finally, as society and technology become increasingly connected and more data are collected, one key challenge is how to protect consumer privacy and use data for consumers’ benefit.

Global Fintech Ecosystems

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