Latin America emerges as VC-backed fintech hub

South America is among the fastest growing regions for venture capital funding of fintechs.

A study from investment research firm CBInsights found that VC-backed fintech funding grew 167% in South America last year, ahead of North America (43%) and Europe (24%). Australia (396%), Africa (376%) and Asia (265%) saw the strongest growth.

As the number of global fintech startups doubled to 1,463 last year from 745 in 2014, the markets incubating them have shifted, CBInsights said. In 2014, 73% of those fintechs were headquartered in the traditional hotspots of China, the UK and the US. In 2018, that figure was down to 61%.

Meanwhile, fintechs are popping up across urban areas Latin America's urban centers. A report from the IDB and Finnovista mapped 1,166 fintech ventures in 18 Latin American countries last year, up from 703 in 15 countries in 2017. It credits the growth to "dynamic" venture capital investment.

"The fintech opportunity is now being closely examined by major international investors, including ones from Asia, and we have the first governments adopting specific regulatory frameworks for Fintech companies," Andrés Fontao, managing partner of Finnovista, said in the report.

In absolute fintech numbers, activity is led by Brazil, where IDB and Finnovista listed 380 active fintechs. It is followed by Mexico, with 273; Colombia (148), Argentina (116) and Chile (84).

Brazilian fintech association ABFintechs reported having 350 members in June 2018, a figure it said represented 85% of market players. Fellow startup association ABstartups said that 3.5% of the country's 10,183 startups last year operated in the financial services segment.

But Chile leads the region in number of fintechs relative to its population, with five fintechs per 1 million residents, according to its local association FinteChile. The group says there are 100 financial services startups in the country, and it expects the number to grow to 120 by end of year. Opportunities to provide financial services to the unbanked or underserved, and technological innovation in the local banking sector, are seen as competitive advantages for Chile's fintech ecosystem.

Much further north, Fintech Mexico lists 56 financial services startups as members, while investment promotion agency ProMexico estimates that Mexico had over 300 active fintechs by the end of 2018.

OPEN BANKING

In a report carried out in partnership with Bancomext, ProMexico says that open banking – allowing users to share their banking data with third parties – is the next frontier for fintechs.

"Collaboration is very important because, beyond open banking, the future of the financial industry points to an interconnection and convergence between banks and fintechs through APIs or other systems," FinteChile's executive director, Ángel Sierra, told BNamericas recently.

Meanwhile, Brazil's central bank is working to create an environment for open banking.

"Fintechs are always one step ahead of regulators, which is healthy in innovation environments. We see that entities such as the Central Bank and the Brazilian Securities and Exchange Commission (CVM) are open to dialogue, focusing on the security of operations and market opening, and attentive to international regulatory models," said José Luiz Rodrigues, a regulatory specialist at JL Rodrigues, Carlos Attila & Consultores Associados.

NOT ALL FINTECHS ARE STARTUPS

Some of the companies venturing into the fintech space are far from being startups. One of the largest software companies in Latin America, with 30,000 clients, Brazil's Totvs recently created a fintech unit through which it plans to offer loans and payment solutions.

The goal is to leverage partnerships with more than 40 startups through the company's innovation institute iDEXO.

"We are structuring ourselves to create innovative solutions that combine Totvs' technology with the technology of partners to simplify and lower costs for customers to access credit and financial services in general," said the unit's executive director, Eduardo Neubern.