Digital Banking and Insurtech among the fastest growing Fintech segments in Latin America
The fintech ecosystem in Latin America (LatAm) has risen rapidly in the last couple of years with sustained growth observed in all segments and in the number of active fintech companies, according to a new report from the Inter-American Development Bank (IDB) and Finnovista. But across all main categories, it is digital banking, technology/IT and infrastructure, as well as insurtech that have witnessed the strongest growth.
As of the end of 2021, the LatAm and Caribbean (LAC) region was home to 2,482 fintech companies. The region’s largest economies, Brazil and Mexico, accounted for more than half of the total number of fintech companies, with 771 and 512 fintech ventures respectively. These two countries, combined with the other three top fintech markets in the region, namely Colombia, Argentina and Chile, accounted for 81% of all LAC fintech startups.
Looking at the growth trajectory of the fintech industry in recent years, the IDB notes that the number of fintech companies in the region more than doubled between 2017 and 2021, demonstrating the dynamism and expansion that the industry has experienced in recent years. On average, the number of fintech companies in LAC’s five largest fintech markets has grown by 34% per year between 2017 and 2021.
Evolution of the fintech ecosystem in five major Latin American markets, Source: Fintech in Latin America and the Caribbean: A Consolidated Ecosystem for Recovery, Inter-American Development Bank (IDB) and Finnovista, 2022
A deep dive into key fintech sub-sectors shows that payments and remittances have remained the region’s largest fintech segment, now representing 25% of all fintech companies in LAC or 604 enterprises. The payments and remittances category is followed by lending (19%), business technology solutions for financial institutions (15%) and corporate finance (11%).
Distribution of fintech companies in Latin America, by segment, Source: Fintech in Latin America and the Caribbean: A Consolidated Ecosystem for Recovery, Inter-American Development Bank (IDB) and Finnovista, 2022
LatAm’s booming digital banking sector
Although digital banks only represent 5% of all fintech companies in LAC, the research found that it had been the fastest growing fintech segment between 2017 and 2021, with the number of digital banking companies growing at an average annual rate of 57% between 2017 and 2021 to reach 60.
Average annual growth of fintech segments in Latin America (2017-2021), Source: Fintech in Latin America and the Caribbean: A Consolidated Ecosystem for Recovery, Inter-American Development Bank (IDB) and Finnovista, 2022
Digital banking has been one of the most talked about fintech trends in LatAm, amid booming adoption in markets including Brazil and Mexico, and soaring funding activity.
Brazil’s Nubank has collected more than 48 million customers across LatAm and is today the country’s largest digital banking company. Last year, it became LatAm’s most valuable listed bank after raising $2.6 billion in an initial public offering (IPO), giving it a market capitalization of more than $40 billion.
Banco Inter, another Brazilian digital bank, ended 2021 with year-over-year (YoY) customer growth of 93% to reach 16.3 million users. This helped increase revenue by 131% compared to previous years, as well as net profit by 1,307%. The company, which provides both financial and non-financial services to its clients, has been working on a US expansion, acquiring Los Angeles-based startup Usend in January 2022 and officially launching its US operations in June 2022.
The rise of digital banking in LatAm has been made possible by strong venture capital (VC) activity supporting the sector. An analysis conducted as part of the IDB and Finnovista report found that digital banking companies in LatAm have raised more funds on average than the rest of the fintech ventures in different segments.
Of the digital banking startups surveyed for the report, 68% indicated having received funding. Of these, 36% said they have raised more than $1 million, a share that is much higher than the average reported for the entire fintech sector of 27%.
Infrastructure, technology providers, insurtech are seeing increasing traction
After digital banking, business technology solutions for financial institutions recorded the second strongest growth, rising at an average annual rate of 49% between 2017 and 2021. The report highlights a correlation between the rise of digital banking in LatAm and increasing demand from financial institutions for digital platforms and technical solutions . It notes that within the business technology segment, digital banking platforms and services are the most represented category, suggesting that growth in the neobank space has pushed incumbents to step up their digital transformation and turn to technology providers for their digital needs.
The insurtech segment also saw significant development, growing at an average annual rate of 46%. This segment was already witnessing a natural growth trend before the pandemic, but COVID-19 has accelerated the rise of the sector, the report notes.
Most insurance companies in LatAm operate under a business-to-consumer model (27%), and cater to consumers who are banked. 23% of LAC’s insurance companies operate under a business-to-business (B2B) model and serve financial institutions, and 20% serve bottom-of-the-pyramid consumers.
Insurtech is a promising area in LAC, the report said, given the low penetration of insurance products which averaged 3.1% of premiums/GDP in 2020 compared to the global average penetration rate of 7.2% in 2019.
Business models and market niches served by insurtech startups in Latin America, Source: Fintech in Latin America and the Caribbean: A Consolidated Ecosystem for Recovery, Inter-American Development Bank (IDB) and Finnovista, 2022
This article first appeared on fintechnews.am
Featured Image Credit: Edited from Unsplash
