The sudden explosion of fintech activity amid the covid-19 pandemic has set in motion a digital transformation in Latin America. Until recently, legacy players such as Brazil’s Itaú Unibanco and Mexico’s Grupo Financiero BBVA have enjoyed a lack of competition.
Colombia has only 25 banks, compared to the thousands of banks in the United States. In Brazil, almost 70% of deposits are in the country’s top three banks –– there is evidently a lack of incentive to innovate given the monopoly.
Consequently, Latin American banks have some of the strongest margins among all financial institutions across the world. In Mexico and Brazil, the return on equity lingers around 18%, almost twice that of U.S. banks. Such profit pools are telling of the opportunity for fintechs to provide better financial products for both the banked and unbanked.
Only four years ago, fintech startups in Latin America were fed a meagre $236 million in venture capital. Last year, that number increased five-fold to over $1.3 billion. As fintech startups scale up operations and secure generous funds from venture capitalists, established banks are being forced to redefine their processes and create financial products to compete.
Such growth in venture capital financing has been propelled by the adoption of digital tools among Latin American consumers during the pandemic: over 40 million people in the region were added to the banking ecosystem over only five months during 2020.
However, Latin American economies do not come without contradictions – Brazil has one of the most profitable banking industries in the world, but conceals a truth behind the sophistication of its financial transactions: outrageous fees, ghastly customer service and the exclusion of the many. With no competition in sight, interest rates in Brazil for corporate loans were set at 52%, for consumer loans, it was 120% and for credit card indebtedness, it was 272%. As a result, there is a heavy demand from customers who have historically been barred from the financial system by incumbent financial institutions.
We believe this is just the beginning of the fintech revolution in Latin America as an increasing number of players venture into the ecosystem to create new financial products for unbanked consumers and revamp the financial services sector. Here, we unfold the structural shift in market dynamics and the opportunities we see for companies to thrive in the region.