2021 was a year of dramatic growth in fintech investment in Latin America. Data shows that investment levels reached US$5bn across 120 deals, up from US$2bn and 82 deals in 2020. It’s a stratospheric level of growth that surprised even optimists.
In Mexico, for example, investment levels in 2021 matched what had been projected for the next five years combined. Meanwhile, the continent’s biggest fintech market, Brazil, saw a deal that entered the top ten for the whole of the Americas — the US$1.15bn fundraising by Nubank which now boasts around 40 million customers. Its IPO in December 2021 gave it a value of some US$41bn. Countries such as Argentina, Colombia and Chile are also seeing rising levels of investment and activity. The number of unicorns (companies with a valuation in excess of US$1bn) has trebled to stand at a total of 15 across the region.
Key factors driving growth
There are a number of factors behind these striking numbers. Firstly, the unavoidable impact of the COVID-19 pandemic. It has been estimated that 10.8 million Latin Americans made their first ever online purchase during lockdown(s). Digital banking offerings rocketed. They also became highly fashionable. In Brazil, digital bank C6 — in which JP Morgan has a 40% stake — ran a highly successful advertising campaign fronted by model Giselle Bundchen. Digital banking became an “object of desire”.
Secondly, the growth of fintech has been fueled by regulatory policy. Regulators and central banks alike are determined to increase levels of financial inclusion in a continent where 60% or more of populations may be unbanked. At the same time, fintech regulations have brought more certainty and trust into the system. Other market conditions - increasing interest in SPAC (special purpose acquisition company) mergers and in cryptocurrencies and blockchain — have contributed too.
Thirdly, just as regulators want to increase financial inclusion, so fintechs have more clearly defined the markets they want to reach — and their number one goal has become those under-served by traditional banks. This includes recent graduates and young people starting out on their first job, informal or casual workers, and those who may not have a credit history. Small businesses are also a major target, providing them with the ability to take payments digitally.
The growth of fintech in Latin America is a classic example of ‘leapfrogging’ — fintechs have leveraged the need for financial inclusion amongst large swathes of the population to move straight to a new generation of services.
Head of Financial Services, LATAM
KPMG in Brazil
Optimism for fintech investment globally remains strong, with new subsectors expected to emerge and flourish.
During H2’21, we saw interest in fintech grow to a fever pitch in most regions of the w...
Payments and digital banking dominant
Payment services and digital banking have therefore become the dominant business lines in most countries, followed by lending (such as payday loans in advance of an individual’s next salary payment). In many cases, the rates that fintechs offer on products such as loans and credit cards are significantly more competitive than those from more traditional entities. Fintechs are also democratizing access to financial products and services. In Mexico, Flink allows customers to buy fractions of a stock starting from just a dollar. The cryptocurrency exchange Bitso has been highly successful. There has been growth in Insurtech too, enabling people to take just the cover they need from a flexible menu of options.
This democratization is most advanced in Brazil. With fintech payment and digital banking services relatively mature, the next big wave is likely to be in asset management. There are already a number of large platforms for investments. Wealthtech solutions will make investing and saving for retirement and other long-term needs available to those with lower levels of capital.
The investment pouring into fintechs is largely coming from private equity markets — and much of it is from overseas such as the US.
But the continent’s big incumbent banks are not standing idly by and watching from the sidelines — there are increasing numbers of collaborations and partnerships as the traditional players seek to integrate fintech solutions into their value chains.
As current investments and valuations demonstrate, the market is highly effervescent, deriving from unexpected and unprecedented growth as a consequence of COVID-19. I firmly believe that the next wave of significant growth will be fueled by fintechs and incumbents changing mindsets and recognizing that they are not competitors but powerful allies that must bring the best of two worlds to thrive and drive financial inclusion.
Head of Fintech Advisory
KPMG in Mexico
At the same time, however, in a region notorious for its ‘cash is king’ mantra, some banks are hedging their bets that demand for traditional banking services will stay dominant overall. How this plays out remains to be seen. It’s probably fair to assume that traditional banking and fintech solutions can co-exist side by side. But it seems inevitable that fintech will take a growing slice of the market. This will not least be driven by the ever-increasing penetration of smartphones across Latin America, and will play more and more into the hands of fintechs: according to one study, neobanks offer 42% more features in their mobile apps than traditional banks, and boast two times the login speed. The use of digital wallets is steadily growing.
Open banking on the way
Further impetus for growth is likely to come from open banking-related initiatives. There are challenges across the region in terms of the technological infrastructure needed to create open banking systems with sufficient data storage and security, but there are signs of progress. Brazil is quite far down the road, while Mexico has an ambitious open finance initiative which is expected to oblige organizations with any financial services in their portfolio to open up their data, not just systemic banks.
More to come
The fintech market in Latin America is hot. Growth trends are expected to continue, with deal values to at least double this year. 2022 is going to be a big year for fintech, creating significant value creation potential for those players bold enough to seize the opportunity.
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VC investment soars and M&A makes a big comeback.
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- global and regional analysis with key investment data and insights
- top fintech trends for 2022 and beyond
- interviews with Quantexa and Thought Machine
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To learn more about the analysis and topics raised in this edition, or to discuss your organization's unique fintech agenda and roadmap, please contact your local KPMG advisors or the contributors in this publication.
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