In the past, the Latin America (LatAm) region has struggled to enter the digital economy, sticking to cash as the primary payment method. Cash has a firm grip on transactions and still accounts for 58% of retail spending, with around 70% of the region’s population unbanked or underbanked.
But a technological transformation is underway, and with digital devices becoming more accessible every day, the digital economy is becoming increasingly prominent for the region. This trend became evident when 13 million people across LatAm made an online transaction for the first time at the beginning of the pandemic.
The Latin American population’s newly acquired access to digital payments led to a 36.7% increase in e-commerce in the region ($85 billion). Since this rise, online commerce has grown in importance – transforming digital marketplaces in Latin America and, in turn, changing the culture’s relationship to money and spending.
Financial technology (FinTech) companies that combine disruptive technology and business strategies to reform the financial industry in LatAm have made this paradigm shift possible. Let’s look at why FinTech is so important to the Latin American region and how companies in this area are helping the region enter the global digital economy.
Build a stable foundation
Latin America is still defined as an emerging market, meaning it has none of the economic fundamentals of developed countries. One of the biggest problems in the region is that a large part of the population is either directly affected by poverty or at risk of poverty. Because these populations are often unbanked or underbanked, they cannot access savings, credit or the digital economy. This in turn exacerbates their vulnerability in times of crisis, such as globally rising inflation.
Now, after observing their country’s problems, fintech companies have turned lemons into lemonade and helped patch up significant economic disparities with technological innovation. In fact, according to an article by Forbes titled “FinTech Driving Financial Inclusion In Latin America,” access to credit and e-commerce infrastructure are two critical drivers for expanding financial access to underserved populations in LatAm.
With internet access essential to economic mobility in a digital world, getting the population on the digital interface is an undeniable first step. In LatAm, this movement is well underway thanks to high-speed smartphone adoption across the region. Smartphone connections in the region reached 500 million by the end of 2021, with a staggering 74% adoption rate. This trend is also projected to continue consistently, with an additional 100 million smartphone connections expected to occur over the next four years.
Accessibility to the online world creates new markets where companies can offer solutions through digital devices. Mobile payments and compromising payment tools such as digital wallets were found to positively impact GDP growth and employment. Furthermore, digital investment contributed to GDP growth, while digital banking accelerated employment growth.
FinTech startups in particular can work to help populations use their new connectivity as a means of securing their finances in the modern age, which in turn helps build more stable economies in developing regions.
Financial resilience
Innovation in FinTech is important for the region as things change rapidly and people begin to expand the ways they participate in their local and international economies. With FinTech companies doubling in LatAm in three years, it’s clear that the industry has a big role to play in fostering new connections between people, technology and their money.
One way in which new financial relationships in LatAm are established is through traditional banks that collaborate with FinTechs – and build paths from conventional means of money to more modern, inclusive and digital ones.
A shining example is Mexico’s Clip, which draws many comparisons to Square in the US, and has developed a card reader that enables users to accept credit card payments via smartphones and tablets. Another is RecargaPay, Brazil’s leading mobile payment platform for everyday purchases. This application allows users to top up phone credit via mobile, pay utility bills and send money to friends and family, removing the hassle of standing in line to make these transfers in person.
Open banking is another way to achieve financial inclusion in LatAm. As more banks open their APIs to third-party developers, digital banking innovation is accelerating and the public is embracing the change. Experiments with CBDCs (Central Bank Digital Currencies) and crypto payments are being adopted across different LatAm countries, with acceptance of web3 and cryptocurrencies relatively higher in the region than in other areas of the world.
It is clear that FinTech is having a particularly positive impact on Latin America as it looks to gain a foothold in the international digital economy. In fact, a new study that looked at 86 economies worldwide to evaluate the impact of FinTech ecosystems on economic resilience proves that.
Using GDP growth and unemployment as measures of economic resilience, the study found that regions with more advanced FinTech development experienced a faster decline in GDP growth and recorded stronger employment growth during the pandemic or in times of crisis (such as the current global inflation).
Tap into a promising market
With FinTech companies finding ways to better help underserved populations, new business opportunities are opening up in the LatAm market.
The region’s startup scene boasts nearly 50 unicorns as of 2022, with many of these businesses only born in recent years. Digital spending has also increased tenfold, with two of the region’s largest and fastest growing economies, Colombia and Brazil, showing huge gains in online shopping. In Brazil, post-pandemic e-commerce spending was estimated at 60%, while in Colombia it accounted for 57% of all retail purchases.
Funding has followed this business growth, as, according to World of Finance in 2021, “venture capital investment in Latin American technology has grown steadily over the past five years, doubling annually since 2016.” This has made investment movement within the region’s VC landscape promising, despite the current funding slowdown.
As startups spring up across the continent and investment continues, important steps will need to be taken to ensure the region maintains sustainable growth. LatAm’s spirit for innovation is excellent fuel, but for startups to survive these nuanced times – more than will will be needed.
“Startups must show the way to profitability,” says Diego Noriega, Managing Partner at Newtopia VC, a venture capital firm based in Argentina. “It doesn’t always have to be immediate, but investors prefer startups that have done their homework to make the company robust and know how to scale.”
Newtopia is a hands-on VC firm that helps connect startups from either side of the growth spectrum. One of the most active venture capital firms in LatAm, the company seeks to assist entrepreneurs as they build their ideas into ventures – crucial in the region’s rapidly evolving conditions. Newtopia offers a hands-on mentorship model that guides startups through the initial vulnerable stages, helping them scale confidently.
“Early growth is essential. Without this, it is impossible to achieve growth in later phases, says Noriega. “At Newtopia, we aim to help build startup-to-startup relationships to create healthier local, and thus regional, ecosystems.”
FinTech for the future
The more LatAm startups can continue to build bridges across the socio-economic fault lines, the more they can catalyze economic freedom, which by proxy strengthens the digital economy – local or international. This makes VC stakeholders critical to ensure that these young companies can hit the ground running to provide new ways for the region to participate in the market.
Each semester, Newtopia accepts 10-15 startups for a 10-week program that helps incubate their growth – filled with content and advice to help the teams take their startups to the next level. The program aims to share knowledge, channel smart money and improve experiences for early-stage startups. Afterwards, the founders get an opportunity to attend a Limited Partner (LP) Day, where they pitch to Newtopia’s team, LPs and investors from top VCs in the US.
The VC’s current focus is helping startups in their portfolio reach Series A. Out of the 52 startups in their portfolio, they support startups across industries such as Crypto, web3, Fintechs, Agtech, Foodtech, HealthTech, SaaS and other technology (Sports, HR, advertising, marketplaces, e-commerce, logistics).
Despite turbulent times and conflicting local political climates, one thing can be said for sure: LatAm and its business sector have an extreme capacity for resilience. VCs like Newtopia investing in the region’s FinTech sphere have shown that by working together to address existing disparities, the region can not only be part of the global digital economy, but is in a strategic position to lead the digital the banking revolution for the future.
Disclosure: This article mentions a client of an Espacio portfolio company.
