In Latin America, the opportunity to bring fintech services to a previously ignored segment of the market is huge but while fintech startups in Latin America are plentiful, many are still struggling to gain traction.
In Brazil, in particular, there is a dearth of banking services for a significant segment of the population. Up to 40% of people are unbanked. This is despite 85% of the population living in cities, with smartphone penetration in the country constantly on the rise. It continues to be one of the world’s fastest growing mobile markets.
Founded in 2013, Nubank provides a MasterCard credit service that is managed solely through a smartphone app. In theory it addresses the unbanked. For many people in Brazil (and in most places), the traditional process of getting a credit card is long and laborious, involving physically applying for the card in a branch. Not to mention high interest rates.
Nubank, in its efforts to stand out, charges lower rates and claims that these rates could fall even further in the future if its user numbers continue to grow. Though it may sound utopian, Nubank’s ultimate goal is to see users shut down their traditional bank accounts and go mobile only.
According to a spokesperson for Nubank, it has received more than five million applications for cards with 400,000 on a waitlist. It has raised over $170 million over several funding rounds from notable investors like Tiger Global Management and Silicon Valley stalwart Sequoia Capital.
Unlike the US or Europe, where mobile-only or mobile-first banking startups are more common, Brazil and the wider Latin American market doesn’t have the same level of competition. This provided Nubank with the valuable opportunity of becoming one of the de facto fintech companies early on.
“Before Nubank, there were virtually no fintechs in Brazil, today there are over 200,” says David Vélez, CEO of Nubank.
The Brazilian market has certainly grown and garnered more attention from North American and other international investors and suitors. For example, ZeroPaper, a cloud-based accounting management platform for small businesses, was acquired in 2015 by Intuit.
Since then there has been a wave of new fintech startups in the country, with some notable players covering everything from payments, like Pismo, to invoicing and SME financial tools, like Moneto.
In February, Pismo raised a Series A round, though the sum was undisclosed. Until that point it had received little or no outside investment. CTO Daniela Binatti explains that its founders all had previous experience in business, which allowed them to bootstrap an MVP before seeking funding.
“During the fundraising period, the most difficult challenge we faced was selling our business model,” says Binati, explaining that it lacked reference points to convey their ideas to investors unfamiliar with fintech.
Mexico’s AirTM, a solution for transferring and withdrawing money in different currencies, secured investment in late January from Mexican VC firm IGNIA. The company and the financial technology filed presents an “enormous opportunity” to bring these kinds of services global, says Alvaro Rodriguez, managing partner at IGNIA.
A recurring theme
Latin America’s regulations need to be updated in several jurisdictions to make things clearer for fintech startups on what they can and cannot do. This is a recurring theme in different markets. Policy typically doesn’t keep pace with technology.
Banking regulators have to walk the tightrope of opening up the industry to innovation while also protecting consumers and businesses alike. “We don’t want to stop innovation but at the same time, we have to do our job,” said one Chilean official at the World Economic Forum last year.
Argentina’s Afluenta is a P2P loan platform and has weathered a lot of regulations in order to survive. Alejandro J. Cosentino, CEO, explains that the company engaged with regulators in different markets at an early stage and “crafted our legal framework correctly” so it was able to avoid major issues.
“While laws are quite similar across Latin America, different interpretation of those [laws] and supervision capabilities from authorities trigger different challenges.”
These sorts of regulatory challenges are normal and to be expected for fintech companies, he adds, and shouldn’t be a deterrent for a would-be fintech entrepreneur.
Having said that, fintech companies across the region should be ready and prepared for new laws in the future. Fintech has captured governments’ attention more than ever.
“We see efforts from all the governments to understand this new industry and adapt their regulatory frameworks to embrace new companies to join their countries,” says Cosentino.
One major change he would like to see introduced is new rules to oversee how traditional banks partner with startups.
“Sometime oligopoly practices from traditional players create obstacles for fintech companies. There’s a clear conflict of interest,” he says. “Banks are holding licenses granted by governments to operate. [So] if fintech companies are not regulated, banks cannot play as a regulator in the shadow, with non-competitive practices to [deliberately] prevent new fintech companies from growing.”
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