Latin America: the Undiscovered Fertile Ground for Fintech

In the first half of 2019, there were frequent reports of good news in the Fintech field in Latin America. After receiving a strategic investment of US$180 million from Tencent last year, Nubank, a Brazilian digital bank, is said to be about to receive another US$1 billion registered capital from SoftBank. 

At the same time, the Brazilian online lending company Creditas, and the Mexican payment solutions company Clip, have also raised hundreds of millions of dollars this year. which are $200 million and $100 million. 

Tencent also continued to expand in Latin America and invested in Uala, an Argentine digital bank card company. Rappi, a lifestyle service platform that has just won $1 billion, is also aggressively promoting payments, electronic banking, and mobile wallet services in Latin American countries.

The most active industry in the development of the Internet industry in Latin America is Internet finance. No matter the number of startups, the amount of financing, the speed of growth and reshaping, and the progress of policy evolution, they are the most eye-catching in each track. As of 2018, there were a total of 1,166 Fintech startups in Latin America, a 66% increase from the previous year. Fintech companies accounted for 25% of all funded projects throughout the year, the largest proportion of the industry.

(Part Fintech companies in Latin American, from Finnovista)

Why is Fintech so hot in Latin America? To sum up, there are three key words: rigid demand, high income, and policy support.

The serious absence of the traditional financial system

Although the economic development and income level of Latin American countries are generally in the middle-to-high-income range, and the per capita GDP exceeds 9,000 US dollars, it is one of the regions with the lowest bank coverage in the world: nearly half of the adult population is unbanked, and only 41% have a bank card. By contrast, the penetration rate of bank accounts in China and India is around 80%.

In addition to the backwardness of retail banking, corporate banking credit is also imperfect: SMEs account for more than 90% of Latin American businesses, and according to the World Bank estimates, the financing gap for these SMEs exceeds $1 trillion.

Why are traditional commercial banks so unattractive and inefficient for mainstream groups in the market?

The first is a strong distrust of the banking system. People who have money would rather hide it at home and press it under the bed than put it in the bank. Many countries in Latin America have this behavior. Much of the reason for such distrust is the turmoil in Latin America's financial system over the past 40 years.

After the Latin American debt crisis in the early 1980s, many Latin American countries began to implement a series of neoliberal economic policies, including opening up their financial systems, which led to the influx of "hot money" in the international market into Latin America. However, due to the fragility of the economic structure and the lack of government management capabilities, hot money is easy to come by and painful to go away. From the 1990s to the beginning of the 21st century, many countries experienced banking crises, and many commercial banks went bankrupt one after another. After nearly 10 years of rising commodity prices, Latin American countries temporarily spent a good time of high growth. However, when commodities entered the trough of the cycle, the resource-based economy of Latin America immediately weakened again, and the government's unfavorable regulation and corruption caused the contraction of several major economies in Argentina, Brazil and Venezuela, and the attractiveness of Latin America in the international capital market weakened. Many countries were once again hit by currency devaluation and high inflation. In such a volatile environment, coupled with the occasional stock market fraud scandal, the public's hatred of the financial system can be imagined.

(Venezuela's currency is severely devalued, and people use cash to make handicrafts)

On the other hand, the oligarchic phenomenon of banks in Latin America is serious. Financial groups are controlled by big families in various countries, with arbitrary fees, complicated procedures and low efficiency, and they are not user-centric at all. Opening an ordinary deposit account not only requires a minimum deposit, but also pays a monthly management fee, and ATM withdrawals also require a handling fee. Transfers, payments, remittances, credit cards and other fees are indispensable.

Another consequence of oligopoly is the lack of competition. Banks are basically free to do whatever they want. Large enterprises and social elites are unable to serve them, and there is no motivation to reach small and medium-sized enterprises and ordinary people. For example, Brazil's five largest banks control 95% of the country's banking assets. The data also attests to the banks' earning power: even in the years when Brazil's economy began to regress in 2014 and continued to be sluggish, the return on equity (ROE) of the big banks never fell by 15.9%. The largest bank Itaú's ROE in the first half of 2018 was as high as 20.1%, while the ROE of European banks was only single digits during the same period, and the most profitable bank in China was only 10.2%.

Society has a strong demand and willingness to pay for financial products

The groups that traditional financial institutions fail to serve have huge financial needs.

Latin Americans have a good consumption concept and pursuit of quality, and their long-term middle-income level has made people very willing to spend money. Post-consumption installment payment is a common practice in Latin America. For example, in Colombia, when swiping a card for consumption, the cashier will ask how many installments to pay before completing the transaction.

Before the Internet entered the financial field, there was a wave of microfinance in Latin America. It is the region with the largest microfinance assets (nearly 50 billion US dollars) and the largest number of institutions (nearly 300) in the world. It is also a global urban user. The region with the highest proportion (67%). Compared with South Asia, the birthplace of microfinance, Latin America uses less than 30% of the number of South Asian users, creating nearly twice the volume of loans in South Asia, which shows that Latin Americans have a strong demand for credit.

(Comparison of global microfinance data, from the 2018 Microfinance Monitoring Report)

In addition, in Latin America, there are informal credit channels that are common among people and built by people's social network, and the volume is estimated to be 2 to 3 times that of formal channels. For example, in Colombia, a community-initiated financial mechanism is popular, called "Cadenas": people spontaneously form fund-raising groups, and each person puts out a part of the money to form a larger pool of funds, and each member uses the money in turn. After a certain period of time, it will be handed over to the next member together with the principal and interest. This form of organization also exists in Mexico, called "Tandas," where about 30 percent of adults participate in informal credit communities, nearly double the penetration rate of credit cards.

Due to the lack of financial products, Latin Americans pay almost the highest interest rates in the world to borrow money. The annual interest rate of bank credit cards is usually above 30%. Even in Chile and Colombia, the most stable economic development, the annual interest rate has reached 25%-30%+. Compared with the United States and China, the annual interest rate is between 12-18%. Under the oligopolistic financial system of Brazil, the annual interest rate of credit cards can be as high as nearly 300%!

（Comparison of credit card interest rates and penetration rates in Latin America, from Nathan Lustig）

The imperfection of financial services and the inefficiency of informal channels have left huge space for financial innovation.

When Nubank, which started as a digital credit card, launched its first card in Brazil in 2014, it was a subversive change in the financial sector: Nubank not only creatively launched a credit card with an annual interest rate of only 25%, but also extremely simplified the application process, just download the APP, enter basic personal information, upload selfies and certificates, the platform will capture public information to evaluate the user, and the credit card will be delivered to the user within a week. The ultimate user experience is regarded as the core competitiveness of Nubank. Founder David Velez knows that to build users' trust in any emerging financial products, they must have no worries. Nubank insists on answering users' questions and requires customer service to solve all problems within the first call (first call resolution). So far, Nubank still has the highest NPS index in the world (89%) among similar products, and each customer brings 3 new customers on average. In just a few years Nubank became the fifth largest credit card issuer in Brazil, with 8.5 million users, and began to expand in other Latin American countries. It is reported that SoftBank’s $1 billion intentional financing will push Nubank’s valuation to a new high of $10 billion.

(Nubank user growth curve, from Meeker report)

Government policy support for financial innovation

The rapid development of Fintech in Latin America is closely related to government support. The government sees that the road to the industrialization of the country's economic transformation will not work. That is, there is no cheap labor and no industrial chain foundation. It can only rely on the service industry and the new economy to offset the excessive dependence on resources to create employment, stimulate investment, and promote growth. . And finance is an indispensable driving force for development, whether it is driving consumption or helping enterprises. Therefore, governments of various countries are actively promoting the market opening of the mutual gold field to allow more players and capital to come in.

For example, the "Regulatory Sandbox" is a policy tool being implemented by many Latin American governments, including Brazil, Mexico, Colombia, etc. It provides a market-oriented space for financial innovation, similar to the domestic "test the water first, and then regulate it." "the concept of. This tool gives banks and other non-traditional financial institutions the opportunity to test new technologies and business models in a real but controlled environment and gives regulators the time they need to develop regulations. Fintech startups can directly apply to the regulatory authorities to join the "sandbox", and after approval, they can conduct market experiments.

"Open Banking" is another policy innovation, mainly through open APIs, sharing financial data, allowing users to have a smoother financial service experience, and enabling different types of financial institutions to obtain the data they need to Effectively assess customer risks and suitable financial products. This policy is very beneficial for Fintech companies, which can help them obtain user information and data that are monopolized by big banks. This means that Fintech products can not only serve people who are not covered by banks but also compete on an equal footing with traditional financial institutions among middle and high-income customers already covered by banks.

The fastest growing Fintech countries in Latin America – Brazil, Mexico, and Colombia – each have some unique policies to promote Fintech development.

For example, Mexico is the second country in the world (after the United Kingdom) to enact Fintech-specific legislation, which clarifies the position of Fintech companies in the market and opens up legal channels for international Fintech players to enter Mexico. Through legislation, the government is also sending a positive signal to the market, which is of great help in attracting investment, entrepreneurs, and building user trust. This year, the Mexican central bank also put a big move to promote electronic payment: a new electronic payment platform CoDi (Cobro Digital), on top of the existing interbank electronic payment system, adding digital banking and QR code technology to form a similar domestic electronic payment system. QR code payment system. The CoDi platform has now been put into market testing and is expected to be fully rolled out in Mexico in September this year.

(Bank of Mexico electronic payment system CoDi)

Finally, market conditions are also one of the important considerations for the government to promote the development of Fintech. Internet penetration in Latin America is relatively mature globally. It is estimated that by 2020, smartphone penetration in Latin America will reach 79% of the total population, and mobile internet penetration will reach 71%. From the perspective of the use of Internet financial services, Latin Americans also lead the world in the acceptance of Fintech products. In Colombia, Mexico and Brazil, 76%, 72%, and 64% of the Internet population have used Fintech products, respectively, closely following the global benchmark of 87% in China.

(Fintech product usage ranking, from EY report)

With demand, market foundation, and policy support, Internet finance in Latin America still leaves a lot of room for players to imagine. Under the rapid development of the Fintech industry, entrepreneurs in Latin America have questions about how to use technology and data to conduct credit assessment, risk control, differentiated pricing, clearing and payment, market research, quantitative investment, fraud identification, as well as supporting precision marketing and intelligent customer service. Application and knowledge demands are strong. As the most developed Fintech market in the world, China is often the reference answer for Latin American entrepreneurs. The rich experience of Chinese entrepreneurs and capital in this field can also make a lot of difference in the fertile land of Fintech in Latin America.