FinTech operates economic inclusion in Latin America
Latin America (LatAm) has lagged behind much of the world when it comes to technology solutions that improve economic well-being. Today, 70 per cent of LatAm’s population remains without a bank or subbank, and 58 per cent of purchases at points of sale are still made in cash.
That said, the tide is finally turning as much-needed fintech solutions have begun to hit the market. LatAm is undergoing a digital transformation and the opportunities – both for entrepreneurs and the financial partners who support them – are enormous. In 2021 alone, venture capital over $ 6 billion was invested in startups across LatAm.
As a result of increasing investment and wider interest in the region, local governments have become increasingly supportive of fintech. In 2018, for example, Mexico adopted “Fintech Law” in connection with support from Mexican fintech entrepreneurs, and created a framework for fintech companies to legally offer new services within the Mexican regulatory system. Now, more than ever, fintech entrepreneurs – many of whom helped scale large local outcomes such as Mercado Libre, Nubank and DLocal or have been part of US companies that have seen rapid international expansion in the region – are prepared to scale innovative solutions that expand access in the region.
The economic and political changes that have taken place in recent years have exponentially increased access to fintech services in the LatAm countries, and established fintech as a true driver for financial inclusion in the region.
Expand access to underserved populations
Access to credit and e-commerce infrastructure are the two critical drivers for expanding economic access to underserved populations in LatAm.
Extending access to credit beyond the wealthiest class has historically been challenging for several reasons. In Mexico, for example, only 10 percent of households have a general credit card. The traditional banking system has evolved over time. After the debt crisis in 1982, Mexican banks were nationalized and heavily regulated. In the 1990s, the sector was then deregulated and the credit industry flourished and loosened credit requirements, which resulted in savers losing deposits and borrowers defaulting. Confidence in financial institutions deteriorated, pushing many consumers out of the credit markets.
In addition, because much of the LatAm population is underbanked, large sections of the population are not covered by credit bureaus. Because these people are harder to underwrite, seated operators will not serve them. This is where fintech companies come in. With access to alternative data and better fintech infrastructure, they can make better credit guarantee decisions. They can also build credit “on ramps” in a more digestible way for insurers, such as expanding smaller amounts of credit to begin with and then quickly repeating their models to allow higher limits as they gain confidence in a consumer’s ability to to pay back.
An example of this is Aplazo, the leading provider of buy now, pay later (BNPL) in Mexico. Aplazo is partnering with over 2,000 retailers, including brands such as Adidas and Tommy Hilfiger, and 5,000 store fronts to offer greater credit to a fast-growing pool of consumers. The company uses alternative credit sources to guarantee consumers on retail / clothing purchases (both online and in-store), offers an elegant “Pay-in-5” digital payment solution and is even the first report to the Bureau de Credito for many of its customers, establish a credit file that the consumer can then build over time and use to access other credit products.
In addition to access to credit, the maturation of LatAm’s e-commerce infrastructure has enabled sales growth and greater access to consumer e-commerce products. Although there has been significant progress in this area, there is still a long way to go to ensure that both consumers and sellers benefit from infrastructure developments.
To support the consumer, digital payments must accept all payment methods that the consumer may wish to pay with, which extend far beyond the credit / debit rails that are so common in the US and into country-specific payment mechanisms – for example PIX in Brazil, Oxxo in Mexico and PSE in Columbia.
On the merchant side, many areas need to be improved to get the product from the “factory floor to the customer door”, including fulfillment, logistics between between and the last mile, return handling and shipping insurance. Last mile logistics alone leave a lot to be desired with high costs for the seller, low geographical coverage, greater risk of package theft and low routing efficiency. One company, 99Minutos, now based in Mexico, Chile, Columbia and Peru, is completely focused on using software to create a faster, cheaper and more accurate delivery option for merchants. Using their smart routing technology, integrations in e-commerce platforms and growing driver networks, 99Minutos delivered over 16 million packages last year. They are now larger than UPS in their core market in Mexico.
Opportunities abound as Latin America undergoes digital transformation
As LatAm undergoes a digital transformation over the next ten years and opportunities continue to flourish, the two themes will increase access to credit and improve e-commerce infrastructure will continue to be the two core areas for innovation.
On the credit side, there are three areas that are likely to experience the most change and progress. First, alternative data sets will continue to improve and increase the information that lenders have to guarantee. This will include unit data, bank account data, employment data, previous repayment history and much more.
Second, the breadth and variety of credit products will increase. Today, traditional installment plans and payment loans are the primary lending products. However, products we now take for granted in the US – such as BNPL, credit cards, mortgages and car loans – have low penetration and plenty of room for growth. Credit product growth will be significant over the next ten years as consumers demand these products in all areas of life.
Third, interest rates on credit products will fall. Three-digit annual percentages are all too common in LatAm, even in relatively more mature credit markets such as Brazil and Mexico. As the data increases and the product portfolios expand, more credit providers will enter the credit markets, which increases competition and provides greater access. The combined effects will lead to a reduction in predatory interest rates and credit products that are cheaper for a larger part of the population.
Progress on the trading infrastructure side is still in the early stages. Over the next ten years, you can expect big e-commerce giants, like Amazon
Although much work remains to be done, LatAm countries not only fully embrace this digital transformation, but take advantage of the opportunity it offers for further financial inclusion in the region. With the important support of local authorities, and the capital and resources of financial partners, LatAm fintech companies have an opportunity to both scale and make real, meaningful change in the region. There is an exciting future ahead that will increase access to fintech services for the unbanked and underserved population who need them most, and ultimately improve financial well-being across the board.
Allen Millera principal at Oak HC / FT, contributed to this article.
