Led by Brazil, an innovative group of fintech companies is rapidly growing in Latin America, filling gaps in services ranging from lending to payment platforms and mobile banking.
Latin America has proven itself to be a magnet for fintech investment.
The region has received $15.6 billion in investment for fintech providers over the past 10 years, with Brazilian companies representing 66.7% of the total, according to Distrito’s Fintech Report 2024. Digital services – e-wallets, accounts and digital banks – attracted the most money at $5.3 billion. But the most numerous transactions, most often aimed at acquisitions, were in the field of credit financial technologies: 477 transactions were registered.
“The region has a large unbanked or underbanked population,” says Andres Fontao, co-founder of Finnovista, a Brazilian venture capital firm specializing in financial technology. “A significant portion of the population, both consumers and SMEs, still do not have full access to traditional financial services, creating significant opportunities for fintech companies to offer innovative and affordable solutions.”
still do not have full access to traditional financial
services, creating opportunities for fintech.
Distrito has planned 1,658 funding rounds in the decade to the first half of 2024, including 1,034 in Brazil. But this year alone, through June 30, there were 83 deals worth $800 million, which corresponds to 80% of all fintech investments in 2023. The two largest rounds this year were from QI Tech and Celcoin at $250 million and $150 million, respectively. . QI Tech’s bid turned it into a unicorn with an estimated value of more than $1 billion.
Explaining the success of the company he co-founded six years ago, QI Tech CFO Marcelo Bentivoglio says: “We are growing at over 100% per year and have 300 clients, the largest in every sector. I think we have filled a gap in the financial market as the company is focused on technology infrastructure for lending, banking, payments, collections, onboarding, anti-fraud and all the necessary tools to advance financial services.”
Regulation and innovation are key, he said.
QI Tech helps companies from different segments create digital banks and provide financial products to their customers. If a retail company, for example, wants to open a finance company that offers payment options, invoicing and credit issues, it can do so using QI Tech’s infrastructure. In a nutshell, it’s banking as a service (BaaS) that allows non-financial institutions to partner with QI Tech – or one of its competitors – to offer financial services to end users. BaaS began with technology companies licensing their software on a monthly basis (SaaS) rather than selling a complete working software package for a one-time payment.
Last December, QI Tech acquired brokerage firm Singulare, which has BRL 120 billion ($24 billion) in custody. This acquisition comes on the heels of an announced investment of R$1 billion ($200 million) in QI Tech in a Series B round led by General Atlantic, with participation from existing shareholder Across Capital, which is doubling its initial investment in the company. .
Brazil takes the lead
According to Distrito, there are 2,712 active fintech companies in Latin America, with the majority located in Brazil (58.7%), followed by Mexico (20.7%). What gives Brazil such a strong advantage? Firstly, it is the most populous country in the region, and secondly, the Central Bank of Brazil has a large contribution to the regulation of financial technologies, a process that began more than 20 years ago. Without regulation, the provision of fintech services would be impossible.
“Because five banks concentrated 80% of financial services, there was very little competition,” says Diego Perez, president of the Brazilian Association of Financial Technologies (ABFintechs). “In 2013 there were only two payment methods, but today we have more than 200 agents offering this service. As a result, competition increases, which is positive for customers.”
Not everyone succeeds. ABFintechs statistics show that out of every 10 new fintech companies, two will be successful within five years. This is like the equivalent of the public market for Brazil as a whole: 80% will fail and 20% will survive. Unlike a decade ago, large banks are now joining successful fintech companies for acquisitions or even collaborations.
“We’re still at the beginning,” says Perez.
Colombian fintechs fill gaps in lending services
While most Brazilian fintech companies are focused on means of payment, in Colombia entrepreneurs are exploiting the reluctance of mainstream banks to provide credit to the bulk of the population. They actively fill the gap between banks and a ring of illegal lenders known as “drip-drop” lenders, who routinely provide money to needy people at illicit interest rates.
“These loan sharks have deposited up to 280% of the original value of the money deposited within 24 hours, which is extortion,” says Eduardo Montañez Silva, CEO of Bogota-based consultancy LiSim International. “In the legal system it’s about 2.5% per month. Thus, fintech has become a viable option for millions of people.”
While a traditional bank might take five days to approve a loan, fintech startups have found a practical way to lend money in two hours.
The Colombian Association of Fintech Companies has about 200 members, but there are an estimated 300 fintech companies in the country. Many of them are small businesses with little investment, making growth difficult in the short to medium term. In this scenario, Montañez predicts, a wave of mergers and acquisitions will be needed to grow the business.
“If two small companies merged, they could together have more customers and attract more investment,” he says. “Colombia is a land of opportunity and foreign investment is very welcome.”
Argentina presents great difficulties due to high inflation and a lack of money in circulation. Fintech companies there are focusing on payment options and investing in services that help customers protect their money, such as Mercado Pago, a digital wallet and payment platform, and Ualá, a mobile app used to manage prepaid Mastercard debit cards.
The rules focus on means of payment, bank transfers and new mobile banking technologies. “Both banks and fintech companies cannot offer credit, so they have to think about other services,” says Fausto Spotorno, director of the consultant OJF & Asociados and director of the UADE business school.
Improved regulation
Regulation is significant in Latin America, notes Finnovista’s Fontao, and countries are at different stages of development in this regard.
Mexico stands out with its 2018 Fintech Law, the first in the region to establish a clear legal framework to encourage innovation and the entry of new players into the market.
“This legislation aims to promote widespread adoption of open banking and create a safer environment for consumers and businesses,” says Fontao. “Countries such as Chile and Peru are taking a more gradual and consultative approach with recent efforts to strengthen fintech regulation and improve competitiveness in the sector.”
The benefits of investing in fintech in Latin America, he adds, are a strong talent pool, increased access to technology, a young and adaptive population and continued interest from investors themselves. “However, the region still has some challenges to face, such as insufficient funding for the ecosystem compared to, for example, the US; economic uncertainty; lack of access to financing in certain regional markets; and political instability.”
However, Latin America’s fintech industry is resilient and growing despite economic, political and regulatory barriers. With appropriate investment, technological innovation and the right regulatory framework, the sector expects to continue to position itself as an important agent in the region’s economy.