Fintech firms born and bred in Latin America have survived and thrived in markets in which political and economic uncertainty requires new players to be agile and flexible.
At Money 20/20 USA 2019, industry leaders discuss how LATAM fintechs that are successful are now taking aim at the US in order to scale and how this is impacting the global traditional banking sector.
Flexible success
Moderating the panel, Fintech Americas co-founder and CEO Ray Ruga explores how solving the financial inclusion problem is a challenge in Latin America. “Banks are doing well because of high interest rates but this means that there is a giant population left outside of it. With a wave of innovation, can technology solution providers create something that brings the consumers in?” Ruga says.
Despite there being 160 million millennials in Latin America, 16 countries is a lot of countries and a one-size-fits-all model could be difficult to scale.
German Pugliese Bassi, co-founder, CMO & alliances at Technisys, says that his company has succeeded in providing a platform that is flexible enough to serve all customers, considering all 16 countries, 16 regulations and 16 currencies.
Therefore, “Technisys is in the best position to serve digital transformation in the US as we can deal with flexibility, which is what banks are seeking with digital transformation.” Pugliese Bassi continues to say that while the US market has been dominated by incumbent players for decades, the reception Technisys has received has been positive, “mainly because we are bringing something US vendors lack.”
“Big Tech is leading the change in technical behaviour for all and banks need to adapt to these new changes at a faster pace. Banks, especially smaller ones, are locked into vendors and old legacy technology that doesn’t allow them to be flexible and also keep up with new regulations across states.”
Maturity and development
Later, during a panel on the emergence of Latin American fintech, Arnoldo Reyes, vice president & head of digital partnerships, finTech & ventures - Latin America Region at Visa, Inc. reveals that he has paid attention to three factors.
Reyes explores how he has seen the development of companies “from toddler stage to teenage stage” and business models are starting to address banking issues, so there is evidence of maturity here. Secondly, as a result of that, foreign investors have taken an interest in the region. In addition to this, the public and private sectors are working closely together.
“Fintech is not a hobby any more, it is transformative,” Reyes says before Eric Rosenthal, managing director/VP-Americas at Rapyd points out that a number of things actually haven’t changed in recent years. Rosenthal explores how “we are still seeing companies going to Series A and then no one is there to support them through to the next level.
Fabrice Serfati, partner, Ignia Partners, LLC, adds that with mobile penetration continuing to increase in Latin America, this is also laying the groundwork for financial platforms, but again it does not solve the problem of financial inclusion.
End of the battle with banks
Reyes says that while it is exciting that new challenger banks and new wallets are entering the market, how many of these companies are able to scale? He believes that we will start to see companies that solve other problems and payments will be a “natural extension. The providers will become popular by design or by default.”
He goes on to say that in the past, fintech firms were battling with banks, but “the reality is that banks still have a valuable position in the ecosystem and can provide stack that other providers do not have. Banks are opening up and are wanting to partner with emerging companies, which is something we did not see five or six years ago.”
Rosenthal also says that the banks that are the most innovative and are “aggressive in changing and partnering” will be the true winners and he reveals that local banks in the US would be the best at this. “Local banks that don’t have the baggage of coordinating processes understand the process of ‘if we don’t do something, we won’t survive. There are thousands of banks in the US, most that none of us have ever heard of.”
Reyes provides a retort and returns to the topic of financial inclusion. “The opportunity is in the acquisition. It is not about competing, it is about complimenting, and banks can be an interesting exit strategy for fintech firms. If a fintech builds up a nice base of customers that is complementary to a bank that does not have good user experience, it makes sense for thebank to buy that fintech.”
Comments from the Money 20/20 community
Finextra spoke to Rosenthal ahead of his panel discussion participation about how regulation is rapidly evolving to create conditions for development and, at the same time, protecting customer information in the Latin American region.
“More and more countries in Latin America are developing and implementing new regulations that allow new companies to enter into the financial industry. We can now see examples like new regulations in Mexico where tech companies, retailers, neobanks, gig economy platforms, and other entities can use their vast customer existing base to promote financial services either directly or in partnering with traditional banks.
Another example is in Colombia, where through Sedpes (Sociedades especializadas de deposito electrocnico) financial services are offered with focus on the based of the pyramid. In Brazil, under Payment Institution regulations, new companies can offer financial services.
“Overall, regulation is evolving to accompany the demands of the rapid evolving digital economy and allowing for fintech players, challenger banks, and other entities to enter the financial industry and offer a vast portfolio of services to address local needs and preferences,” Rosenthal explains.
On expansion to the US market, Rosenthal adds that whether or not fintech firms have been successful in Latin America, “it is important that they take steps to understand the mechanisms by which new commerce contenders can enter the US market through fintech laws.
“Regulatory barriers in the United States are significant. Challenger banks such as N26, Revolut, and other fintech facilitators of financial services products are relying on existing regulations that in a sense are a setback for providing similar growth as seen in Latin America.
“Working closely with existing financial institutions, having a deep understanding of how to build a partnership with these institutions, having the experience of participating in these merchant-ecosystems in Latin America, and being able to identify their niche in the US will be critical steps for fintechs to expand into the US market.”
Michael Magrath, director of global regulations & standards at OneSpan says that fintech companies that wish to enter the US market “can serve as aggregators of information” but may find it difficult to obtain banking charters from the Office of the Comptroller of the Currency (OCC) as the OCC lost a court case versus the New York Department of Financial Services on 21 October 2019.
Henrik Nilsmo, chief commercial officer, EBANX also tells Finextra that expansion to the US must be considered on day one. “We knew that democratising payments for Latin American consumers would not only disrupt the market and provide global commerce access for these consumers, but that it would generate potential market share for US businesses looking to expand.
“Additionally, LATAM startups need to think outside the box when they are planning their expansion. It’s important to look beyond markets such as Europe and Asia or the US, which already have a certain level of saturation.
“Companies should keep the pulse on markets that are growing quickly and show room for continued growth. Above all, companies need to think about how their products and services fit into - and need to adapt to - the market they are trying to expand into,” Nilsmo concludes.
Omar Arab, VP of corporate development for VeriTran, also believes that "those looking to break through should leverage their experience in Latin America to help financial institutions in the US evolve based on what’s worked.
"Those that can help financial institutions keep up with the advances in online banking - helping traditional banks create digital applications without the costly overhaul of existing legacy systems - will come out on top."