Microfinance revolutionized the financial services sector in Latin America over 40 years ago. Millions of individuals who were excluded from traditional financial institutions obtained access to a variety of financial products and services for the first time. Inevitably, there were gaps in coverage. In recent years, various players have been looking beyond microfinance to find ways to fill those gaps. Their main weapon has been the disruptive force of new technology.
Across the region, evolving government policy on digital finance and the digitization of information, coupled with the falling costs of mobile services, has spurred more competition, thus improving the quality and speed of financial product offerings. However, it is not just banking institutions that are driving this change; many of these new technologies and business models are being designed and piloted by financial technology (fintech) startups.
Meanwhile, regulators have had a hard time keeping up with the pace of innovation in areas such as big data, crypto-currencies and electronic money.
Currently, Brazil and Peru are leaders in allowing non-banking institutions to issue e-money.1 In late 2014, Peru introduced Modelo Perú, an initiative that creates a level playing field for banks, telecoms and third-party providers by establishing a mobile payment ecosystem based on a shared e-money platform.2 To meet this opportunity, Peruvian banks have banded together to provide a unified offering through the Asociación de Bancos del Perú (Peruvian Bank Association—ASBANC) headed by Peru’s former minister of development and social inclusion, Carolina Trivelli.3
In countries where Bitcoin is gaining popularity, however, governments have taken a different approach. Regulators in Argentina, Bolivia, Colombia, and Ecuador have restricted or banned Bitcoin operations.4 Other Latin American countries are more open to learning about harnessing the power of the back end of Bitcoin, or the blockchain (a public ledger of all transactions in the Bitcoin network), to make banking and government more efficient. Both the Bank of Mexico and Colombia’s Central Bank, for example, issued a cautionary warning last year regarding the use of Bitcoin, but stopped short of regulating it, declaring they would maintain a close watch on how the virtual currency network developed.5
On the telecom front, the increased involvement of financial services has created both tension and opportunity for startups. Brazil may have been the initial regional leader in branchless banking, but the trend is now slowly spreading throughout Latin America. According to the World Bank, 98 percent of the region’s population has a mobile cell signal, while 84 percent subscribes to some kind of mobile service, making mobile banking feasible on a large scale.6
How can the power of this ubiquitous connectivity be harnessed? It’s a question that many countries outside of Latin America are asking themselves as well.
Kenya may have cracked the code early on. More than 70 percent of its population now uses mobile money—but that success has not translated directly to other African countries. However, Latin America is catching up. The region had the second-largest number of planned deployments of mobile financial services in the world in 2013, after sub-Saharan Africa. The models range from those that are similar to the African model, in which the mobile operator assumes most of the functions in the value chain (e.g. Tigo Money), to more divergent models, in which banks acquire mobile virtual network operators (MVNOs) to offer mobile financial services independently of mobile operators (e.g. Bancolombia’s Ahorro a la Mano).7
The changes in the mobile landscape offer huge opportunities for governments to reduce corruption and establish systems that maximize transparency, control and audit capabilities, while also vastly reducing costs. But they also present serious challenges. Rules and regulations outlining the roles of the various actors are more necessary than ever. In particular, concerns about data privacy underscore the need for new policies that can empower individuals to access and benefit from the use of their own information to secure capital.
Finally, the trend toward digitization of key information has changed financial reporting across the region. Numerous Latin American countries have implemented mandatory e-invoicing, allowing local tax authorities to better track the activity of buyers and sellers. Using an e-invoice system pioneered by Chile a decade ago, countries like Brazil and Mexico are processing transactions in cyberspace.8 This has provided an exciting opportunity for startups to enter the value chain, and for small businesses to gain access to alternative forms of financing—such as real-time receivables lending and e-invoice discounting. The processes allow companies to use receivables as collateral in agreements with financial institutions and to draw money against sales invoices before the customer has actually paid. This type of financing was typically reserved for medium or large enterprises, but due to the digitization of these documents—and the possibility for instant verification via electronic invoicing that this provides—there are much lower costs and fewer barriers for financial institutions to evaluate small and microenterprises.
Lean LATAM Startups
Startups have been a key component in the development of new financial technologies. The combination of an outside perspective, a lean, nimble operating model and a can-do attitude allows them to see opportunities and act on them more quickly than traditional institutions. Many of the innovations emerging in Latin America stem from regional and sectorwide changes in micro-, small- and medium-size enterprise (MSME) lending, remittances and alternative data.
Lending to MSMEs in Latin America has often been difficult and expensive—the costs associated with assessing creditworthiness are high compared to the rate of return. But that is changing with the proliferation of e-invoices and online business data in the region. Companies like Konfío—which has the ability to analyze thousands of data points and verify and disperse credit lines in less than 72 hours—are lending to MSMEs in Mexico at better rates than traditional lenders.
Others, like MR Presta—available in Argentina, Brazil and Mexico—analyze data from the e-commerce site Mercado Libre to assess credit payment capacity. They then integrate those findings with their online stores for easy repayment. Meanwhile, in Brazil, Intoo is creating an online marketplace where existing buyers of small enterprise e-invoices (funds known as FIDCs) can aggregate their demand and build a custom portfolio of investments.
Remittances have long been a focus of attention in Latin America. The competition among players has not, however, translated into lowered transaction costs for consumers. That is, until now. The remittance space is one of the most exciting areas we see being transformed by technology.
Some of the companies that are making it easier and cheaper to send money to Mexico, the fifth largest remittance destination in the world, are the following.
Xoom, a digital money transfer company, allows users to transfer money online. Xoom charges a flat fee of $5 to $6 per transaction. Most remittances are deposited in cash and withdrawn as cash, but Xoom has managed to persuade the majority of its customers to make their transfers from bank accounts.
Boom (formerly m-Via), a mobile application founded in 2008, allows users to send remittances to Haiti, Mexico and the United States. Members can load cash at one of 15,000 Boom partners and send money via text message
from their Boom account.
Volabit, a mobile e-wallet, allows individuals to transfer money across borders (in pesos or bitcoins), opens access to e-commerce offerings and, importantly, offers affordable online financial services to customers that do not have a formal bank account.
Quippi, an international gift card, enables U.S. residents to send cards to Mexico without fees for senders or recipients.
Finally, with the ever-increasing amount of data that is being collected on individuals in Latin America, companies like Chile-based Destacame are harnessing the power of alternative data, such as records of utility payments and mobile phone usage, to enable financial institutions to lend to underserved clients—those with little or no credit history. This online platform allows individuals to use their payment, credit history and digital footprint to gain better access to financial products, while also helping financial institutions expand their client base and reduce default rates.
This is hardly a complete list of the hundreds of startups we have seen operating in Latin America, but it’s certainly enough to get excited about. Realizing the promise of financial inclusion is not easy, and the adoption and implementation of these new technologies and services that disrupt traditional forms of banking takes time. But judging by the record thus far, it seems likely that Latin America will continue to benefit from its extraordinarily innovative—and expanding—group of fintech entrepreneurs.