Last month, CI covered the Cambridge Centre for Alternative Finance (CCAF) Americas Report. Overall, alternative finance grew 26% with the US dominating the sector as the largest market in the region. But digging into Latin America and the Caribbean (LAC), this market grew by a huge 94% going from $342 million in 2016 to $663 million in 2017 – a sizeable increase. While the US pumped the brakes a bit rising just 24%, LAC showed displayed more sector strength.
While LAC is a small percentage of alternative finance in the Americas – it is still very important. The countries that contributed the largest to the volume were Brazil, Mexico, Chile, Colombia, Argentina, and Peru. The rest of LAC countries and territories contributed $35 million to total volume. CCAF reports that more than a dozen new LAC based platforms participated in the Americas survey.
CCAF states that while the US is more consumer-driven, LAC is all about business:
“Just over 85% of all volume came from debt, equity, and non-investment-based activities to businesses across the [LAC] region. Business lending in LAC grew by 142% between 2016 and 2017, amounting to $565.7 million in 2017. Debt-based models made up the largest share of business finance, accounting for 92% of volume ($522 million), followed by 7% from equity-based models ($39.4 million) and just shy of 1% from noninvestment models ($3.8 million).”
CI reached out to Diego Herrera, Financial Markets Lead Specialist at the Inter American Development Bank, for his unique perspective. The IDB has been a long time partner of CCAF and Herrera has worked closely with Cambridge’s research team.
Our discussion on the growth of alternative finance and Fintech is shared below.
According to CCAF, LATAM and the Caribbean experienced a growth rate of 94% in 2017. In your opinion, what was the biggest driver of this growth?
Diego Herrera: Before answering, let us say that the Fintech ecosystem in Latin America and the Caribbean (LAC) has been increasing steadily during the last 5 years. For instance, a recent study from us at the Inter-American Development Bank (IDB), showed how the Fintech industry in LAC grew up more than 66% in the number of platforms in 2017, up to 1,166 from 703 in the previous year.
These firms are distributed along 11 different segments but concentrated in three of them: lending and crowdfunding (25%); payments and transfers (24%), enterprise and individual financial management (15%), totaling almost two-thirds of the industry.
In fact, crowdfunding/alternative finance has not only grown in the number of platforms but in the monetary value of originations, from $324 million in 2016 to $663 million in 2017, as the study from CCAF and IDB showed. For the case of this vertical, the main driver is the increasing demand for financing alternatives on the side of businesses. In fact, 85% of all alternative finance activity relates to business-specific fundraising. In 2017, business-focused alternative finance rose to $565.7 million from a variety of lending, equity and non-investment fintech models. More importantly, the study results hint that crowdfunding platforms, mainly those from the lending space, can be used as a suitable instrument to finance productive development in the region. In fact, more than two-thirds of this specific segment (92%) are explained by debt platforms.
Brazil took the lead (for the first time), followed by Mexico and Chile. Is it all about SME access to capital?
Diego Herrera: These three countries have different particularities in terms of the alternative finance market.
To begin with, Brazil explains 33% (US$216 million) of the regional market and it is concentrated in consumer lending, either through marketplaces or balance-sheet lenders (more than US$111 million), followed by business lending (US$50 million).
Mexico follows Brazil in size with US$151 million and shows a rather balanced market where the shares of consumer and enterprise lending are changing fast in the favor of the latter. As of now, consumer lending takes 59% while the rest is essentially directed to enterprises.
Finally, Chile’s size is similar to Mexico in absolute value (US$150 million) but larger if controlled by measures such as the Gross Domestic Product (GDP).
This market is particularly concentrated in business lending, either through invoice trading platforms (US$118 million) or marketplaces (US$24 million).
So, for Chile, it is all about SME access to capital. Yet, when adjusted to review the main fundraising purpose, the results highlight that 85% of all alternative finance in LAC activity relates to business-specific fundraising. So, individuals are using funds for their businesses.
What about the regulatory environment in LATAM. Is there a clear standout? Are policymakers supportive of Fintech?
Diego Herrera: Governments all across the region are supporting Fintech through specific public policies.
For instance, in 2018 LAC had a very active year in terms of regulations: In Mexico, the National Banking and Securities Commission (CNBV) and the Ministry of Finance and Public Credit of Mexico, among other public institutions, pushed for the issuance of a Fintech Law. By April, the law was enacted and a series of rules are being issued since the last quarter of last year. This comprehensive Law, perhaps one of the most holistic around the world, includes crowdfunding as one of four regulated Fintech types of businesses.
On the other hand, the National Securities Commission (CNV) in Argentina issued a General Resolution on crowdfunding within the framework of the Law on Production.
Similar regulations were published by Brazil and Colombia, with the specific intention of creating rules for alternative finance.
Finally, Chile has recently announced the intention of regulating the crowdfunding ecosystem, given its relative size, but also with the intention of creating a regulatory sandbox. To the latter extent, Brazil and Mexico are on the way of kicking off their regulatory sandboxes, while Colombia has a sandbox where traditional financial institution can test their products. More to come from other jurisdictions this year…
How is the IDB engaged in the alternative finance sector? How are you fostering change?
Diego Herrera: IDB Group (IDBG) is an active participant in the Fintech Ecosystem across Latin America and the Caribbean.
To begin with, our public sector has been supporting Governments in the issuance of Fintech regulations and other public policies.
During the past couple of years, we supported the governments of Mexico, Brazil, Chile, Argentina, Peru, Paraguay, and the Dominican Republic directly with their public policies using technical assistance.
We also supported the Pacific Alliance countries (Chile, Colombia, Mexico and Peru) in the issuance of a set of principles for their fintech regulation.
Currently, we are on the way of using a regional instrument to support policies and regulations across the region for 15 countries, including assistance to regulators and Fintech associations and chambers.
We have also worked with partners such as CCAF and Finnovista in the creation of data to deconstruct the Fintech ecosystem and its verticals. To complement such efforts, we were the first international organization in publishing regulatory recommendations on how to regulate crowdfunding in 2016 in the region, and then on regulatory sandboxes.
There is much more to come.
On the other hand, our private sector branch, IDB Invest, has been investing in Fintech platforms in Argentina, Brazil, and Mexico, among other countries. Last but not least, our IDB Lab, our innovation lab, has supported Fintech entrepreneurs for many years, among many other interesting initiatives. So, in short, IDB Group has done a lot.
What about providing access to services for the underbanked or unbanked?
Diego Herrera: To give you a little context, there are more than 45 million Micro, Small, and Medium Enterprises -MSMEs- in the region, with a financing gap that reaches 23% of total GDP. To that extent, many of our programs are devoted to the provision of financial services to underbanked or unbanked populations, mainly MSMEs.
The IDB Group is aware of the importance of improving access to finance for the productive sector in Latin America and the Caribbean, as a way to boost productivity in the region. In fact, the relevance of access to finance and development of financial systems as a key determinant of productivity has been widely documented and, we are acting on it.
For instance, as a total of 410,000 MSMEs received financial support from IDBG-financed projects, only in 2017, showing the relevance for IDBG in this topic and how we are generating financial inclusion through our operations.
What about blockchain? Is there any real traction?
Blockchain seems to have potential for asset and agricultural traceability, green certification, property records, medical history, and many other uses.
However, much more knowledge and actual applications at scale of such a technological enabler are still to be seen in the region, as in the rest of the world.
IDBG is leading some initiatives with global partners to explore the uses of blockchain and its potential impact in the region.
On the other hand, cryptocurrencies are rapidly evolving in some jurisdictions such as Mexico, Brazil, Argentina, and Chile. In fact, Mexico included “virtual assets” as one of the types of Fintech activities to be regulated and it is expected to create some momentum for the exchange segment, mainly.
What are your predictions for the alternative finance sector in LATAM for 2019?
Diego Herrera: We expect that alternative finance will keep on growing in the region for the following years. However, we are predicting two major trends.
First, the internationalization of firms is unavoidable in the sense that with few exceptions, individual country markets are still small to reach scale. As a matter of fact, many of the most established platforms are moving across borders in and outside of the region. Mexico and Brazil seem to be two of the favorite destinations for entrepreneurs, mainly because of the size of the potential market but also because of regulatory certainty.
Secondly, we are predicting a transition from mono-product to multi-product platforms as another way to create scale and to reach broader markets. This comes accompanied by alliances and mergers with traditional financial institutions or the transition to open banking, depending on the markets.
The challenge is larger for regulators and policymakers under this scenario but IDBG is there to accompany the ecosystem. Finally, I would like to mention the coming of BigTech companies as competitors in the financial system, they might enter through payments, but having such data would enable them to enter the financing space for MSMEs and individuals.
Where do you see the most opportunity?
Diego Herrera: As mentioned before, there is a HUGE opportunity in creating products and services for MSMEs. A gap of over US$1 trillion needs to be filled, and as a study on Mexico and Chile that we jointly developed with CCAF showed, alternative finance platforms are a very viable alternative to provide financial services for MSMEs.
That means not only financing, but also opportunities for alternative credit scoring, identity, business management, and many other types of platforms.
Fintech should be in the agendas of regulators and policymakers as it is a relevant tool for financial inclusion.