Visa, EBANX and Cielo are promoting an initiative for costumers to buy from the small enterprises of their neighborhood. Photo: Shutterstock

The Potential for Fintechs in Latin America – Takeaways from Visa’s State of Innovation Report

Traditional financial institutions could outsource innovation to fintechs, which are attracting millions in investment.

In Latin America, companies’ adoption of technology and innovation initiatives is picking up speed. Conglomerates like Japan’s Softbank are taking note and investing in the region’s top disruptors and innovators. This year, Softbank pledged a $5 billion fund dedicated to Latin American startups — four times larger than the venture capital contributions made to regional startups in 2017.

One requirement for those that want to get their hands on some capital: they have to be using artificial intelligence (AI) and data to improve their business. Startups partnering with financial institutions could be a starting point for Marcelo Claure, the chief operating officer of Softbank to begin his search. Visa’s new report, The State of Innovation in Latin America, highlights how financial institutions are one of the sectors leading in their use of data analytics and AI, as well as one of the sectors partnering the most with startups.

According to the report, traditional financial institutions in the region are just in the early stages of exploring and adopting new tech and data models, still using only a fraction of the data they can glean from their customer base. That makes them ripe for the opportunity to partner with startups as a way to outsource innovation. Where financial institutions could use the most help from third party companies is fraud prevention, integration of APIs, and switching from a product-focused business model to one focused on the customer’s experience. Adopting SaaS—short for “software as a service”—solutions is one way to address each of these areas and update how a traditional institution functions on a day-to-day basis. Not only does SaaS reduce the typical costs associated with hardware, it facilitates both business-to-business and business-to-client transactions taking place on the go and remotely through “the cloud”——an indispensable feature that is already standard in so many industries.

The SaaS industry is projected to reach $185.8 billion by 2024 worldwide, according to KBV, and Mexico and Brazil are Latin America’s market leaders. In Brazil, horizontal SaaS products are used for financial systems more than any other department within companies. It’s no surprise then that the country is attracting a majority of fintech investments, with Brazilian companies raising close to 90 percent—or $513 million—of the capital invested in 2017 across the region’s top ten fintech deals. In fact, Brazil was one of Claure’s first stops after the Softbank announcement, visiting innovation hubs like the Cube as well as meeting with Economy Minister Paulo Guedes.

Fintechs have much to offer Brazil and the region’s overall appetite for e-commerce, which is growing at about 25 to 35 percent a year, according to Americas Market Intelligence, which helped produce the Visa report. When it comes to e-commerce, fintechs are facilitating new payment methods, from digital wallets to contactless cards, helping both online marketplaces and brick-and-mortar stores increase their online sales which make up an average 40 percent of all sales. There’s also ample room for fintechs developing blockchain technologies, which is practically unheard of across Latin America.

Given their digital nature, fintechs are also better positioned to expand into neighboring markets. These startups are laying the groundwork for cross-border trade, expertly managing legal hurdles and differences between countries by, for example, enabling customers to pay with local debit and credit cards, given the middling penetration of international credit cards which still only account for half of e-commerce sales. “There is also a growing trend toward internationalization,” said Juan Antonio Ketterer, division chief of the connectivity, markets, and finance at the Inter-American Development Bank (IDB). “This shows the opportunities that entrepreneurs are seeing but also the importance of strengthening dialogue and harmonization at the regional level.”

An IDB report published earlier this year highlights Latin America’s boom in fintech, which went from 703 startups across 15 countries in 2017, to 1,166 startups across 18 countries in 2018.

Clearly, the region is ready for you, Softbank.