Has Latin America’s Fintech Boom Reached a Tipping Point?

The fintech sector boomed in 2021, seeing record investments and surpassing prominent players in the traditional sector. The region’s largest economies, Mexico and Brazil, are now competing to host the largest number of leading fintech companies in the region. However, experts recommend to consumer fintechs in Latin America to postpone their Initial Public Offerings (IPOs) until the current unfavorable market conditions calm down, as rising inflation and interest rates are reducing investment prospects.

According to PwC, the number of fintechs in Mexico grew by 16 percent in 2021 to 512 startups. In 2019, the country had 394 fintechs and by 2020, the number had risen to 441. In Brazil, the number of fintechs increased from 474 to 1,174 between 2015 and 2021, representing the largest market in Latin America in this segment. However, these big numbers also come with challenges. With rising inflation and interest rates, consumer fintech was one of the most affected verticals in the fundraising landscape. Overall, fintech funding in Latin America saw a decline of 29 percent in the first half of 2022, compared with 2021’s average. As funding hits the brakes, startups may face more scrutiny and setbacks in entering the final fundraising stages, according to Latitud’s “LatAm Tech” report. 

Despite the difficulties, the market remains large. Brazil alone has 60 million unbanked people out of its 214 million inhabitants. These areas where “cash remains king” continue to open up possibilities for local firms. Latitud mentions that during the pandemic, Fintechs have provided support to access government bonds. Additionally, in Latin America, smartphones are more affordable and numerous than desktop computers and, in some countries, even more, widespread than bank accounts. Finally, the region seems to be embracing cryptocurrencies for several reasons such as the lack of trust in governments, instabilities, high inflation rates, low financial inclusion and high reliance on international transfers. 

The challenges standing in the way of the fintech sector include Latin America’s regulatory environment, which lags behind those of developed countries, a scarce talent pool for data analysts, lack of access to credit, insufficient banking infrastructure, high inflation rates, concerns about fraud and reluctance to pay high fees for electronic transactions. Fierce competition across the region and rising inflation and interest rates are starting to severely impact digital banks and lenders as default rates are growing at alarming rates. 

Despite the challenges, the region will continue to grow and produce new financial solutions as Latin America continues to offer great opportunities. Other blooming areas are proptech, healthtec, climate tech, e-commerce, B2C and B2B fintech.