This is an excerpt from The Future of Fintech in Latin America 2023 report.
All signs point toward a bright future for the fintech sector in the very fragmented market that is Latin America. There is potential to serve nearly 700 million individuals; however, there are disparities across the market shown by the region being “dominated
by a plethora of tiny businesses, which absorb several times more employment than in the US and Europe and exhibit a much lower relative productivity, while its upper tail exhibits higher market concentration,” according to the UNDP.
The UNDP continued: “34% of the distance in the 50/10 personal income gap between Latin America and the US is explained by a higher concentration of workers in the categories with poorer relative income and productivity: self-employment and employment in
micro establishments. In the right tail of the income distribution, the larger 90/50 personal income gap in the region compared to the US is fully explained by the larger relative income of business owners of large firms with high relative markups.
“It shows that market concentration in the region is large and tied to small labor shares. It is also closely tied to the extreme dispersion of productivity and the prevalence of low productivity businesses. The central message is that high inequality in
the region is deeply rooted in the productivity problem.” Banking as a Service can help resolve this problem.
What does the future hold for fintechs in Latin America?
In the past year, fintech firms have emerged to build bridges over socioeconomics, resolve issues around the economic realities and facilitate not only financial inclusion, but also technology inclusion – offering a different way for consumers to interact
with their preferred service providers. The Latin American fintech market continues to flourish, and while many companies have been in the space for over a decade, newcomers have been entering at an exponential rate for the past five years.
As reported by Mordor Intelligence, VC investment in fintech startups in Latin America has grown by 690% over the past five years, representing a total of $2.1 billion in 2019. Further, there has been a lot of investment into the sector from both within
the region and from global funds. The money pouring into Latin America has catalysed a fintech movement that is challenging not only the incumbents, but also solving critical problems in different areas of fintech. Whether that is depository services, data,
lending, wealth management, insurance, or cryptocurrency.
While all this innovation and investor confidence signals a promising outlook for Latin America, there’s one core problem to solve: renovating Latin America’s dated financial and payments infrastructure. Banking as a Service companies like ours will be vital
in this effort.
How does the BaaS partnership model work in Latin America?
Banking as a Service (BaaS) has become an increasingly in-demand business model in Latin America. As the region has continued to prioritise the digitisation of financial services, BaaS has enabled any company that wants to offer banking products and services
to do so for its customers in an efficient and secure manner, without needing to alter its operations or infrastructure, or request a license.
At NovoPayment, we have been able to translate local nuances into one single platform that covers 15+ markets in Latin America and the US, because we have collaborated with incumbents and supported emerging fintechs that want to interact with them.
Players like us can sit in the middle of new models of collaboration between merchants, fintechs and banks. We play the role of the connector and complement their respective tech stacks so companies can operate with compliance in mind and gain credibility
in front of their bank partners. The partners that would typically provide licensing, sponsorship, and access to domestic payment rails.
Under this BaaS partnership model, neobanks and fintech companies no longer need to become a licensed bank to offer financial services. By partnering with banking infrastructure providers through the use of APIs, organisations are able to embed financial
and payment services into their existing user experience. APIs also permit fintech firms to be flexible and agile in their data exchange between their customers and their partners.
With BaaS, deployment of innovation is accelerated from the start, and firms have 100% certainty of the total cost of ownership when a product is launched. On the other side of the spectrum, banks are realising more and more that they are expending too many
resources on maintaining legacy infrastructure. Today, it is more cost effective to partner with infrastructure players that have proven they can operate across different verticals as a fintech firm, neobank or challenger bank.
Alongside this, infrastructure players have a critical role to play in reducing risk without compromising security and compliance, and this can be done by prioritising data privacy, data security and business continuity. One of the benefits of BaaS is that
when you’re launching a new initiative, you can manoeuvre faster without compromising any aspect of financial service delivery.
Challenger banks, neobanks and fintech companies are also now viable partners for financial institutions and non-bank businesses. In this postCovid era, companies from a range of different industries are leveraging this partnership model to improve digital
transformation, avoid disruption by new entrants and allow B2B businesses to scale their offerings based on their customers’ needs.
BaaS is also entering the cash management space, as having full visibility of cash flow is critical for any organisation. It is all about the measured movement of cash into or out of a business, the liquidity and ensuring positive margins to successfully
operate the company. From a product delivery perspective, the infrastructure provider is the lever to initiate payments, build different types of accounts with the right architecture and connect processes with their ERP systems.
On the consumer side, wallets are rapidly increasing in popularity in the region. Consumers are still more likely to go to a traditional financial service provider, but there is now a blurred line between a provider and a merchant aggregator that embeds
wallets into the offering. It is important to remember that banks not only provide depository services, but also provide loans, credit cards, and serve merchants through payment gateways and revenue financing. What banks and non-banks are now trying to do
is aggregate and expose services within a super app.
In Latin America in particular, banks are often part of financial conglomerates and economic groups that could include brands such as cinemas, supermarkets, pharmacies, insurance companies and travel agencies.
Therefore, there is a huge opportunity from the financial service perspective and the unfunded incumbent side to enrich those wallets that are now becoming financial super apps. For example, now a consumer can do their own onboarding and create their account,
in addition to being able to instantly receive a Visa or Mastercard credential to facilitate a contactless payment with the app, and receive and request real-time payments.
The beauty of BaaS is that it can create new value with pre-existing assets for everyone involved. Through API technology, we are able to capture and process distributed and stored data, bringing greater visibility to any sized business while learning how
to best interact with customers. Not only can BaaS support and deploy financial services, but it is also driving how these technologies are being built today.