Disrupting Fintech in LatAm: Alternative Approach

Alisa Tkach

Is Latin America the next biggest fintech hub?

Is Latin America the next biggest fintech hub?

Latin America is becoming the new area of focus for rapidly developing fintech startups. Brazil is home to one of the world’s largest neobanks, NuBank boasting over 40 million users. From Tencent to Tiger Global, global companies and venture capitals are generously injecting funds in LatAm, expecting it to be a better bargain than the US. 

With a whopping percentage of the unbanked population and businesses lacking proper technological solutions, Latin America is rapidly catching up, designing new products to serve those in need. While cryptocurrency adoption is still a few steps away, some positive trends promise to get things moving.

Three Reasons Behind Fintech Evolution in LatAm

The first half of 2021 unveiled the magnitude of investors’ intentions: $6.2 billion in venture capital has been raised in LatAm. Likewise, the first quarter was strong for fintech investment – $1.14 billion, double the same period last year. And even though local payment systems still heavily depend on cash, the wind of change is coming. 

Large Market

>With a population of over 660 million, LatAm market promises a lot of opportunities. There are 225 million digital commerce buyers already, which tends to increase to 268 million in 2025. The forecast for fintech users by the same year is more than 380 million.

Besides, it used to be a cash-only territory until recently when bank transfers came along. People still use cash to top up their digital wallets or purchase vouchers that can be redeemed later. The demand for efficient and convenient solutions is acute, and fintech solutions are coming just in time.

The proximity of the US plays its role: a lot of LatAm projects are working from the states. Generally, a Latin American startup would have more chances to establish connections and attract funds from the US. 

Dullness of Traditional Finance

Brazil, the region leader, is known for some of the heftiest bank profit margins worldwide. Unsurprisingly, traditional banking is taking advantage of this situation and is not in a rush to develop alternative solutions to help small and medium-sized enterprises that require substantial support and better offers. 

Taking a loan for both businesses and individuals is expensive and often unavailable. The numbers speak for themselves: in Mexico, more than half of the population does not have access to banking, and even if some do, not all the products are available for them. On top of that, loan services are only available for 31% of Mexicans.

The void, however, is being quickly filled by fintech that caters for SMEs and individuals left behind by traditional financial institutions. Also, mobile money providers take their share – from 2019 to 2020, the value of transactions increased by 20%.

Regulators Are Catching Up

Inspired by the European open banking model, Latin American countries are actively developing new regulations intended to shake the existing monopoly-based model. The region’s largest countries are issuing new fintech-friendly rules that will make it easier for startups to take off. 

With the rising number of fintech firms, it becomes evident that a fair regulatory framework is a necessity. Governments also understand the importance of transitioning from cash to a digital economy and developing relevant solutions. Mexican “Ley Fintech” is one of the signs the change is coming. It is meant to control and encourage mobile payments, digital wallets, and even cryptocurrencies. 

Cryptocurrency in LatAm

The demand for cryptocurrency among Latin Americans is widespread, especially in countries with volatile local currencies. It is common for locals to buy digital assets, not for the sake of profit but to save the value of their funds, and stablecoins do this job perfectly. 

Unfortunately, because of the high level of corruption in the region and the slow speed of regulatory changes, crypto companies have a hard time entering this market. Uncertainty with the regulatory framework discourages banks from dealing with crypto businesses. 

However, nothing is impossible. As for Mercuryo, we’ve decided to stick to our standard strategy in LatAm, which means opening a company in the prospective region (currently, we’re actively developing the Brazilian market), getting the necessary licenses and establishing partnerships with payment providers and banks. As of now, we’ve already secured a permit to process direct bank transfers related to buying cryptocurrency in Argentina, Mexico, and Chile.  

“Latin America is different from European or American markets, and you cannot use the same approach in this region,” says Daniil Monchar, business developer at Mercuryo. “Normally, we would start looking for crypto-friendly card processing opportunities, but that is not the case for LatAm. This market is raw and challenging, so thorough research and alternative solutions should be your best bet.”

And yet, regulations are soon to be developed. With many LatAm countries testing out new laws in regulatory sandboxes and top government officials promoting cryptocurrency, it’s only a matter of time before things start moving forward. 

The Bottom Line 

Despite an uncertain regulatory framework, Latin America is an ideal breeding ground for all kinds of fintech firms. Volatile local currencies, a whopping percentage of the unbanked population, high costs of banking services, and sheer necessity in shifting from the cash-based payment system can no longer be ignored. Substantial venture capital funding in LatAm fintech companies is yet another sign of upcoming reforms. Those with the right approach will make headway.

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