B2B: 3 Opportunities for Fintech in Latin America
Latin America’s Fintech industry is booming, with more than 1,166 Fintech startups creating more inclusive financial systems and boosting economic growth in the region. According to the recently published report Fintech in Latin America 2018: Growth and Consolidation, by the Inter-American Development Bank and Finnovista, the number of fintech startups in the region rose 66% from 2017 to 2018.
There are a number of factors driving Latin America’s Fintech growth. For one, the region is one of the fastest-growing in the world for mobile usage. With an increase in smart devices also comes an increase in mobile Internet usage, which has led to a demand for more mobile financial services. An estimated 70% of consumers in Latin America are unbanked or underbanked, having been excluded from traditional financial services because they could not provide the appropriate documents or information to open an account or obtain credit.
But it’s not only consumers who face these challenges in Latin America. The region’s small and medium-sized enterprises (SMEs) are notoriously underserved when it comes to financial services as well. SMEs represent approximately 90% of all businesses in Latin America and the Caribbean and are the leading creators of new jobs in the region. Widespread Internet penetration is making it easier for more and more people to start their own businesses; however, traditional financial institutions have not kept up with the demand for digital solutions that fit the needs of today’s SMEs. As a result, many Fintechs in Latin America are now filling this gap, providing lending, credit, and financial management solutions that help the region’s SMEs save time and reduce costs.
While consumer-focused Fintech companies are still attracting the lion’s share of investments, here’s a look at why the next wave of Fintech innovation in Latin America will focus on solutions for SMEs.
Demand for alternative lending options
SMEs create approximately nine out of every ten new jobs in emerging markets. However, these businesses face a number of roadblocks when it comes to securing capital to grow and sustain their operations. The resulting SME funding gap is estimated to be around $5.2 trillion globally.
In emerging markets around the world, it’s difficult for SMEs to secure credit from a traditional financial institution or bank. Depending on the size and formality of the business, the company may be unable to produce the necessary credit ratings or assets to qualify for a loan. When a bank cannot verify the creditworthiness of the business, they often determine it too risky for their investors.
Fintechs are rising up in the lending space to solve this problem in Latin America. According to the Inter American Development Bank (IADB) and Finnovista 2018 report, lending solutions represent 60% of the total business models of Fintech startups in the region, whether they are balance sheet or peer-to-peer, crowdfunding solutions (30% of the total), or factoring solutions (10%). And while consumers are still the primary target market for these lending solutions (68% currently focus on consumers and 32% on businesses), it’s clear there are still plenty of opportunities to seize. Fintech startups are using advanced analytics and machine learning to analyze a wide range of data and other factors to determine a business’ creditworthiness.
A need for cross-border payment solutions
Traditionally, the only way to perform cross-border transactions was through banks. However, a lack of transparency surrounding currency conversion costs and transaction fees are just a few of the many challenges SMEs face when using these traditional services. Today, there are numerous solutions to execute cross-border payments within seconds. Fintechs are helping businesses ensure the best exchange rates and removing innumerable barriers to transact, track, and settle cross-border payments in real-time.
MercadoLibre, for example, is an online marketplace based in Latin America with more than 166 million active e-commerce users. The company is leading Latin America’s digital payments revolution with its focus on innovative, mobile-first financial services that not only help its millions of sellers obtain credit but also help them process cross-border payments painlessly. PayPal recently invested $750 million into the company, confirming the tremendous opportunities for digital payments solutions that help businesses in Latin America buy and sell across borders.
Mandatory electronic invoicing
Latin America has long been a global leader in electronic invoicing, accounting for 15 billion of the world’s 36 billion e-invoices created in 2017. E-invoicing has many advantages for both governments and businesses. For one, governments can track and tax transactions more appropriately when all invoices are filed electronically. Meanwhile, businesses can tackle the tax process more efficiently when they have all their invoices accounted for and organized in one place.
Several countries in Latin America are now making e-invoicing mandatory, which is creating many opportunities for Fintechs building products or services based on the accessibility of this data. More data to analyze means less risk for lending startups and lower interest rates for the businesses they are serving.
Fintech’s next wave in Latin America
Going up against the traditional financial institutions in Latin America is not without its challenges. Dealing with frequent political and economic instability, slow regulatory systems, and complex markets in each country is a significant undertaking for any Fintech targeting its solutions to the region’s SMEs. Still, the current lack of solutions on offer presents a great opportunity for those up to the task. SMEs are the backbone of the economy in Latin America, and they are increasingly looking for digital solutions to help them operate and optimize their businesses.