Fintech

A look at Latin America’s emerging fintech trends

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Thiago Paiva

Contributor

Thiago is a fintech entrepreneur, investor, and columnist. He is currently a product leader at Oyster, a neobank for SMEs in Latin America.

More posts from Thiago Paiva

Although the 2008 global financial crisis sparked the fintech movement, in Latin America, the rise of ecommerce was responsible for the first wave of fintech startups.

Because digital payments were key to enabling the growth of ecommerce, investors funded companies like Braspag, PagSeguro, PayU, Mercado Pago and Moip in the early 2000s to take advantage of this opportunity.

Payment is still the most relevant segment, with successful cases like Stone and PagSeguro, but after the financial crisis, we started to see the rise of financial technology in lending and neobanking, generating impressive cases like Nubank, Neon, Creditas, Credijusto and Ualá.

As the ecosystem evolves and expands, let’s take a closer look at emerging trends in Latin America that might give us a hint about where to expect its next fintech unicorns.

Financial services for the gig economy

Latin America has seen explosive growth in ride-hailing and food delivery platforms such as Uber, Didi, Rappi and iFood, creating a totally new market opportunity — many gig economy workers can’t access basic financial services such as bank accounts, personal loans and insurance. Even those who have access often struggle with financial products that that don’t suit their needs because they were designed for full-time workers.

Spotting this opportunity, Uber Money launched at Money 2020, focusing on providing drivers with financial services. As 50% of the population in Latin America is unbanked where Uber has more than 1 million drivers, the region is definitely a ripe market. Cabify is going even farther by spinning off Lana, its company that provides financial services, so it can expand its market beyond Cabify drivers to include other gig economy professionals.

Although established players in this sector have a clear advantage, they aren’t the only ones looking to explore this opportunity; Brazilian YC alumni Zippi is offering personal loans to ride-hailing drivers based on their driving earnings. As the gig economy tends to keep growing in the region, I believe we will start to see more solutions for those professionals.

Rethinking insurance

As the banking world has been shaken by fintechs, insurance companies are growing aware that high regulatory barriers won’t protect their industry from disruption.

Insurance penetration in Latin America has been historically low compared to developed markets — 3.1%, compared to 8% — but the insurance market is growing well and tends to close this gap. Adding this to bad services and complex products that insurances provide, insurtech has an immense opportunity to grow.

Because purchasing insurance is historically a complicated and painful experience, the first insurtechs in the region focused on providing a better experience by digitizing the process and using online channels to acquire customers. Those insurtechs worked together with the insurance companies and operating as online broker, but now, we’re starting to see startups providing new insurance products, as well as traditional insurances in different models.

Some are partnering with insurance companies while others are competing directly with them; Think Seg and Miituo partnered with larger players to provide a pay-as-you-go model for car insurance, while Mango Life and Kakau are offering a better purchasing experience. On the other end, Crabi and Pier are rethinking the insurance model from the ground up.

As insurtechs emerge as a potential threat, incumbents are more willing to work with startups that can improve their services to enable them to compete on better grounds, which is exactly what companies such as Bdeo, Lisa, and HelloZum are doing.

Although penetrating the insurance industry is more complicated than other financial services due to high regulatory demands and steep initial operating costs, insurtechs fueled by VC investment will without any doubt try to do it. And, if we’ve learned anything from other fintech segments, it’s that entrepreneurs will find ways to overcome initial challenges.

The emergence of super apps in Latin America

Providing basic financial services to MSMEs

Latin America’s micro-, small- and medium-sized enterprises (MSMEs) are the foundation of the region’s economy, representing 99.5% of all companies that are responsible for 61% of formal work. However, they only generate 25% of GDP, compared to 61% by their European counterparts. As a result, because large corporations are a larger piece of the economy, banks disregard MSMEs.

But where banks see high operational costs and low profitability, fintechs see an opportunity; by leveraging technology to reduce costs, financial services companies are poised to tap into a large addressable market.

As access to credit has been a major problem, many fintechs decided to provide loans at better rates and faster than traditional players. Konfio, Credijusto, Cumplo, and Nexoos are just a few companies offering loans to MSMEs, while OmniBnk, Adianta, and Facturedo are providing factoring services.

Even the traditional corporate account is being challenged by digital newcomers such as Oyster (disclosure: I’m part of the Oyster team), Neon, and Linker.
Most MSMEs in the region have poor access to the most basic financial services, limiting their growth potential. Solving these problems will have a huge impact on the local economy and is a huge business opportunity.

Everyone wants to be a bank

You may have the feeling that every company is trying to be a bank these days, and you’re not that wrong. Not only fintechs are looking to provide financial services, many retailers and technology companies are seeing an opportunity to provide banking services to their large customer base. With the opportunity to become the next Latin American super app, many tech companies and retailers are launching financial services.

This has opened a market opportunity for companies providing banking as a service to those companies as well as to fintechs, not only offering technology but also the regulatory requirements to provide those services. A few examples are Cacao and Evolve in Mexico and Conductor and BBNK in Brazil. Other companies are providing payment and lending infrastructure to make it easier for non-financial institutions to provide these services, such as Prestanómico, Dapp, and iUPay.

Proptech meets fintech

Although real estate is the largest asset class in the world, technology hasn’t much changed how its market operates. However, a new breed of startups is using technology and financial services to rethink how real estate should work.

In Latin America, a lack of market information and trust in the legal system combines with a low-trust culture to huge frictions when it comes to renting or buying real estate. This problem is so big that QuintoAndar recently become a unicorn by facilitating property rental using technology and financial engineering. Homie is trying to follow QuintoAndar’s steps in Mexico, while Loft and Flat are doing the same for buying and selling apartments.

What’s next for the region?

Latin America’s fintech ecosystem has had an amazing year with amazing growth and huge investments, including Nubanks’ $400 million and QuintoAndar’s $250 million rounds.

All this attracts better entrepreneurs and talent that generates more growth and attracts more investment, reinforcing this positive cycle. Even with some political turmoil, we’re not seeing any signs of the market slowing down, therefore, we should expect Latin America to position itself as a global fintech hub.

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