19/5/2020 Coronavirus Accelerates Change in Latin America’s Fintech Sector – BRINK – News and Insights on Global Risk

TECHNOLOGY

Coronavirus Accelerates Change

in Latin America’s Fintech Sector
April 30, 2020

Ximena Aleman
Chief Business Development Officer at Prometeo

In Latin America’s fast-growing but still developing fintech sector, the impact of
COVID-19 is already being felt. Smaller banks are under pressure to digitize,
given the current widespread isolation measures. Many of them are turning to
fintechs for help and may come out of this crisis with better digital offerings than
they had prior.

In addition, smaller institutions such as second- or third-tier financial companies

that don’t operate under a banking license now need to provide services online
that, before, might have only been available in person. Many of these types of
organizations are building partnerships with fintechs so that they can maintain
their service level in the midst of the crisis.

There has also been a surge in demand for fintech loans from small- and mid-
sized enterprise customers, but this doesn’t come without uncertainty over
repayments. Some founders of fintechs that offer business loans are tightening
their credit policy to mitigate this risk.

Confidence Is Still Solid

A month into isolation measures across Latin America (LatAm), it’s still early to
judge the widespread impact of the crisis on the startup ecosystem. While in
some contexts, more opportunities will be created, the wider economic

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19/5/2020 Coronavirus Accelerates Change in Latin America’s Fintech Sector – BRINK – News and Insights on Global Risk

consequences will also manifest themselves — not least in the pressure many
fintech companies are facing with fundraising, cash flow and staff management.

For now, the confidence of startup founders is steady, with 40% saying they feel
more optimistic about their fintech business over the next six months and 26%
saying they think COVID-19 won’t have an effect.

The LatAm market is uniquely primed for innovative financial technology

solutions, as evidenced by the fintech market valuation of more than $150 billion.
The sector has expanded rapidly over the last few years, with fintech startups in
LatAm securing more than $481 million in funding in Q2 of 2019.

Nubank, a Brazilian neobank valued at more than $10 billion, has raised $820
million in funding, while Argentine neobank Ualá raised $150 million in its
Series C round, led by Tencent and SoftBank’s LatAm-focused Innovation Fund.
Mexico and Brazil, as the region’s biggest markets, are leading the way in terms
of fintech innovation, regulation and attracting international investment.

The expansion and further

innovation of fintech in
LatAm is highly likely to
occur over the next few
years, but it is not
inevitable.

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19/5/2020 Coronavirus Accelerates Change in Latin America’s Fintech Sector – BRINK – News and Insights on Global Risk

The Need for Regulation

There’s no doubt that Mexico is leading the way in terms of fintech regulation in
LatAm. Mexico’s 2018 Fintech Law, which is due to take full effect this year, was
ahead of its time in scope. The comprehensive regulatory framework covers
various groups within the sector, including the cutting-edge open banking trend.

The law offers a framework for crucial fintech verticals, including crowdfunding
and electronic payments, while also providing a regulatory sandbox for both
licensed and non-licensed companies. Other LatAm countries are now
experiencing a regulatory spillover effect and are beginning to push toward
creating their own legislation, including Brazil, Colombia, Chile and Peru.

While governments are making an effort to legislate certain sectors of fintech —

namely crowdfunding and digital payments — these countries fall behind in
terms of far-reaching, comprehensive legislation. Brazil is likely the furthest
ahead after Mexico, as it individually legislates crowdfunding and peer-to-peer
lending, while a special congressional commission is working on a broader
legislative strategy.

Not Too Heavy Handed

Fintech regulation is undoubtedly necessary as the sector grows in LatAm, but

regulators must be careful to remain in tune with the capabilities of the fintech
startup community to comply with legislation. Many startups have been forced to
close down due to the high demands of regulatory compliance that came as they
were just starting out. The cost of applying for a license to comply with the
Mexican Fintech Law can be up to $50,000, which, when combined with other
requirements such as hiring a compliance officer, would add another hefty bill to
a startup’s expenses.

Going forward, regulators across the region must take into account the
conditions that startups need to both comply and innovate. In addition,

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19/5/2020 Coronavirus Accelerates Change in Latin America’s Fintech Sector – BRINK – News and Insights on Global Risk

legislation that is similar in scope and nature will facilitate easier scaling for
startups looking to conquer multiple markets.

As more banks open their APIs to third-party developers, digital banking

innovation will be sure to accelerate even further.

How to Succeed in the Present Climate

With all this in mind, how can fintechs looking to thrive in LatAm lay the
foundations for their own success? To succeed in the current climate, fintech
startups must be ready to get creative in finding ways to operate outside of
regulation if possible, so as not to be thwarted by compliance to aggressive
legislation.

For those companies that are entering new markets, maximum contact with the
market before launching their product there will be key. Once launched, fintechs
must quickly test the responsiveness of the market to determine the potential of
their product and be ready to act with agility.

Lastly, resiliency in the LatAm fintech ecosystem will come primarily from being
revenue-driven. While venture capital interest in the region is growing, it is those
revenue-focused, bootstrapped startups that will have the flexibility to be nimble
and adapt according to changes in the landscape — especially under the funding
challenges presented by COVID-19.

The expansion and further innovation of fintech in LatAm is highly likely to occur
over the next few years, but it is not inevitable. Actors from all sides must analyze
carefully the exact conditions that will allow the ecosystem to thrive. Ultimately,
though, it will be the combination of tuned-in regulation and smart-thinking,
agile startups that gives rapid growth the biggest chance of success

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