This is an excerpt from The Future of Fintech in Latin America 2023 report.

Latin American is one of the biggest growth markets for fintech. According to the IMF, digital payments across Latin America grew from $89 billion in 2017 to $215 billion in 2021; the number of digital payment services exceeded 300 million in 2021; and alternative finance lending, expanded from $0.7 billion in 2017 to $6 billion in 2020.

While this growth slowed down in the past few years, there is still opportunity for fintech to make more of an impact on this market. Further opening up the access to data within the Latin American market could help with this growth. Fintech growth in Latin America has already helped to reach parts of the population who were unbanked or underbanked. Detailed data for the population can aid in financial inclusion and also creating increased analysis capabilities as fintechs continue to grow within this region.

Financial inclusion, although a pending issue, is a business opportunity

When it comes to financial inclusion in Latin America, Daniel Jones, head of client solutions advanced analytics in BBVA Mexico argues that “financial inclusion is still a pending issue in Latin America, and also a huge business opportunity for incumbent banks and fintechs.”

Greater data access has been shown to help financial institutions reach the needs of the unbanked and underbanked.

From a Brazilian perspective, Alexandre Magnani, CEO of PagBank PagSeguro says that “access to better data can help improve financial inclusion payments by enabling fintechs in Brazil to make more informed decisions. Better access to data can allow fintechs to understand customer needs and preferences, and can help to identify potential customers, as well as potential areas of growth and opportunities.”

However, when it comes to accessing this data, Krishna Venkatraman, chief data officer at Kueski, notes that often banks have a lot of data on the people who are already well represented within the financial world. “In any country with an underbanked population, access to better and more data will create more inclusion. Often, the customers who do not need access to data are the ones that have the most of it – i.e., those who have already built credit and had access to financial services. But, for the underbanked communities who have no credit or an uneven history, this data is harder to get and also harder to use.”

Many fintechs in Latin America are already leveraging alternative data in order to reach these customers and overcome the barriers faced by lower levels of data now allowing them to access credit options.

Jones adds that “credit risk scoring systems are quickly evolving in order to include new alternative data sources. We believe that some neobanks have nailed it when it comes to credit scoring by means of alternative data sources, while others are struggling with high NPL ratios while they continue testing ways to improve predictive capacities for the unbanked segment. It is clear that more testing will eventually lead to better results. Large traditional banks are somewhat more conservative with their risk models, but we believe that most of them are already moving on to more sophisticated modes.”

An example of this use of alternative data usage is Mercado Credito. This fintech claims to use 2,400 behavioural variables to determine the credit supply and rate for each person.

Jones continues: “The type of alternative data that is being leveraged mainly includes digital footprint data, we think this is already mainstream. The most advanced players are also trying social media behavioural data. In the near future we might see more lenders moving in this direction.” Using alternative data offers an opportunity to expand financial inclusion in Latin America, but also more generally to build better fintechs by specialising their services and understanding their customers.

Magnani’s view on this is that “with better access to data, fintechs can also develop more accurate and personalised services, as well as develop better fraud detection and risk management systems. Additionally, access to better data can help fintechs to develop more efficient and secure payment systems.”

Venkatraman summarises this and explains that “large institutions have been using very standardised data sources, and they are skewed toward people who are already well served. When fintechs are able to use alternative sources of data to make decisions about offering financial services, it allows them to include sources that a traditional institution wouldn’t include but that help showcase an underbanked customer’s credibility.

“For example, do they pay the cell phone bill on time, what is their banking history, do they pay rent on time? Outside of traditional credit, there are many metrics fintechs can look at – with quick access to the right data – to create greater access to financial services.”

Open banking can help increase data sharing in Latin America

Open banking is another area which can help increase data sharing to aid financial inclusion. Latin America is well on its way to open banking, with many countries in the region already making major investments in this area.

Brazil is one country in the region which has greatly embraced open finance. It has opened the country up to the new PIX payment method, which has become the most popular instant payment system in Brazil.

Magnani argues that “the greater adoption of open banking could significantly alter the Brazil financing landscape by increasing access to financial services and improving customer experiences. Open banking allows individuals and businesses to access a wider range of financial services, and can help to reduce costs and improve the speed and security of payments. The Brazilian government is investing in initiatives to promote open banking, such as providing incentives for businesses to adopt open banking technologies.”

When it comes to customer data, this is not the only benefit. Venkatraman points to open banking putting customers in control of their own data: “They get to easily decide who gets access to their data and for what duration and purpose. It is no longer the financial institution that gates the control to this information. This allows customers to use the information that is helpful to them when they are seeking credit or access to financial products. Open banking also helps foster standardization for data exchange that can often be a friction point. This means it is now in a more consumable format and can be more easily used by a wide variety of financial services and fintech institutions.”

Jones, on the other hand, points to some of the innovation opportunities offered by open finance: “Greater adoption of open banking is giving space to more aggregation services available in the market. The different aggregation services will be increasingly competing among themselves towards a winnertakes-all system. These data aggregators might serve new business models that will try to offer financial services that will give them control over the customer experience, by owning the customer interfaces and the data that is transacted through them.”

Furthermore, Jones argues that “non-financial players will want to enhance their offerings or boost their sales by including embedded finance experiences (loans, insurances, etc.). The long term financial sustainability of banks will depend on their ability to keep owning and orchestrating a relevant piece of the customer experience, in order to have sufficient data for personalising customer interactions in a delightful way, and monetising such experiences.”

Internet connectivity remains a roadblock to data penetration in Latin America

While steps are being made to improve data penetration within the region, a remaining roadblock is consistent internet connectivity.

Mobile banking and payments are key areas of growth within Latin America and making sure secure internet connections is a part of the development of the digital economy is of paramount importance. Additionally, this can also be vital in gathering data on the population’s financial activities. The graphs below show how popular different mobile banking platforms are used in Latin America.

Digital banking is proving to be vital in improving financial inclusion in the region. Jones argues that “improved connectivity will give access to financial services to many remote communities that nowadays are financially isolated for not having a bank branch nearby. Due to the social architecture of most Latin American countries, there are huge metropolises where banking branches are numerous, and there are also a lot of remote rural regions that don’t have access to basic services. Offering cheap, high quality, democratic and cashless financial services in those regions is a priority for the development of such communities.”

Venkatraman notes the importance of good connectivity for security: “One of the challenges financial services businesses often face is fraud. One way to prevent fraud is to have additional protections in place such as sending a token or twofactor authentication. These create more security around any interaction with the customer. However, when the internet fails at a crucial point in this data exchange with a customer, that second layer of authentication turns into a bad customer experience. A region’s access to reliable internet that is always there improves the reliability of a product and allows companies to improve their features and create a much richer product experience for customers.”