Economy

As payments go digital, Latin American fintechs hit fertile ground: BIS

Low banking penetration and underutilization of formal financial services drove the surge and development of fintech firms in the region

Customer paying bill through smartphone using NFC technology. Photo: Shutterstock
  • Cash is still king in some regions, but payments are increasingly shifting to digital instruments globally;
  • Central Banks over the world are pushing instant payment alternatives, such as CoDi in Mexico and PIX in Brazil.

The digital revolution is reshaping payments worldwide. It is what the Bank for International Settlements (BIS) said based on data from the Committee on Payments and Market Infrastructures (CPMI) Red Book statistics. This is also impacting emerging countries in Latin America, where the fintech boom is a striking pay-dirt.

Low banking penetration and underutilization of formal financial services drove the surge and development of fintech firms in the region, according to a paper released on Thursday by the organization, called The dawn of fintech in Latin America: landscape, prospects and challenges, and signed by Carlos Cantú and Bárbara Ulloa from the Monetary and Economic Department of BIS.

READ ALSO: Fintechs that are not afraid to get their hands dirty: Why is the industry in Colombia living its greatest moment?

The paper shows that in 2019 the share of fintech investment and the number of deals in Latin America were, respectively, 1% and 4% of the global total. Still, from 2017 to 2019 fintech investment grew more than 100% while the number of deals increased by 28% in Latin America.

It also says that the market for alternative finance like fintech credit and equity crowdfunding in Latin America were, in 2018, respectively, 1% and 0.5% of the global total. But growth has been exponential, and from 2013 to 2018 the average annual growth rate was 147% for total alternative finance and 183% for fintech credit in the region.

Powered by Central Banks

BIS Annual Economic Report 2020 highlighted the role of Central banks’ direct provision and operation of public infrastructures to promote
competition, reduce rents, and support high standards of safety and risk
management. As an example, currently, 55 jurisdictions offer fast (or near-instant) retail payments worldwide. Central banks run or play a key
operational role in such systems, such as TARGET Instant Payment Settlement (TIPS) in the euro area, the Faster Payment System (FPS) in Hong Kong SAR, Cobro Digital (CoDi) in Mexico, and, now, PIX in Brazil.

The SUERF Policy Note Inclusive payments for the post-pandemic world published in September recalls that Brazil has used its existing allowance program for poor families to disburse the Bolsa Família (cash transfer) aid payments as well as starting a COVID-19 emergency aid program through a partnership with state-owned banks to reach 54 million financially vulnerable citizens (today this is number is at 67.7 million people).

As beneficiaries of all these social programs were required to open a digital bank account via a mobile wallet with their national ID number, Brazil is likely to have started the greatest financial inclusion process in the world.

READ ALSO: Brazilian e-commerce will never be the same after PIX

Brazil dominates VC investment in digital banks and payments firms

Venture capital investment also increased substantially in the region. It more than doubled every year from 2016 and reached $4 billion in 2019. Of these investments, 30% were joint venture deals that involved at least one local and one global investor, reported BIS based on numbers by the Latin American Venture Capital Association (LAVCA) and PitchBook Data.

Last year, Argentina, Brazil, Chile, Colombia, Mexico, and Peru dominated the fintech landscape in the region. Brazil was the largest fintech market in the region in terms of investment, volume of alternative finance, and number of deals. The majority of fintech investment in Brazil was in digital banks and payment services firms, the report says.

Colombia had the second-highest volume of investment while Mexico had the second-highest number of deals. Chile held second place in the volume of alternative finance.

READ ALSO: Investment in Brazilian fintechs exceeds US$ 1 billion, according to Distrito

According to the report, major deals in 2019 included the $1 billion investment in Colombia’s Rappi (logistics and distribution), the $725 million investment in Argentina’s Prisma Medios de Pago (payments), the $400 million investment in Brazil’s Nubank (payments institution), and the $100 million investment in Mexico’s Konfio (lending), according to data by KPMG and LAVCA.

READ ALSO: Contactless payment triples in Brazil with COVID-19 pandemic, says Visa

Digital payments are growing

Globally, the shift to digital goes beyond debit and credit card payments. In 2019, payments with contactless cards, and remote payments (without the need of a physical card) became more popular, according to BIS.

In countries such as the United States, Sweden, and Australia, where e-commerce revenue is more than 1.5% of GDP, residents make more than 75 online payments per person annually.

On the other side are residents in places such as South Africa and Mexico, with fewer than five online payments per year (according to data from 2019 gathered by BIS).

However, numbers may change with the release of 2020 Red Book data, since the COVID-19 pandemic is accelerating the current trends towards digital payments, as public concerns about the viral transmission from cash and the surge in e-commerce activity are speeding up the use of digital payments.