What’s Driving The Digital Banking Boom In Latin America

Illustration of smartphone with money attached. [Dom Guzman]

Diego Caicedo is the Co-Founder and CEO of OmniBnk, a neobank that provides financial services to SMEs in Latin America.

The availability of financial services is improving rapidly in emerging markets around the world. Driving this change is the widespread usage of mobile devices. Among the 1.7 billion unbanked adults worldwide, it’s estimated that over one billion now have access to a mobile device.

In Latin America, the percentage of the region’s population that used a smartphone in 2018 reached 64%, and that number is expected to reach 78% by 2025. What’s more, it’s predicted that 90% of all Internet connections in Latin America will be made through mobile devices by 2022.

Latin America has one of the highest adoption rates of smartphones globally, after North America and Europe, which is creating numerous opportunities for financial institutions to reach more consumers—an important step forward in a region notorious for transacting in cash. Approximately 70% of the Latin American population is unbanked or underbanked, and fintech startups are introducing innovative solutions to bring this informal economy online.

Latin America’s Digital Banking Leaders

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According to Visual Capitalists, the business opportunity that the unbanked sector represents in Latin America is estimated at $34 billion. Fintechs are making significant strides to tap into this opportunity, most notably Brazil’s Nubank.

Nubank is a digital bank that found an innovative way to tap into Brazil’s large, young consumer base (where the average age is 32 years old) with mobile-first banking services. With more than 8.5 million customers, Nubank is now the largest digital bank outside of Asia. It’s also the highest-valued, private digital bank in the world, recently raising a mega-round of funding ($400 million) from U.S. investment firm TCV. The digital banking giant plans to use its latest funding to fuel its expansion across the region.

There are approximately 224 fintech startups in Brazil, but it isn’t the only country where innovative banking solutions are emerging. In fact, this year’s funding in fintechs across the region has already surpassed the total funding raised in Latin America in all of 2018.

Mexico and Argentina are two other burgeoning fintech ecosystems. The countries both have largely unbanked populations and favorable conditions for digital banking services to thrive. Digital banks albo and Ualá are growing quickly in these markets and attracting global attention for their successes.

As mobile-first solutions continue to gain traction and expand across the region, there are some key trends that stand out and will continue to influence where Latin America is headed:

Increased Focus On Small Business Banking

Mobile banking is an efficient and cost-effective way for small- and medium-sized businesses (SMBs) to manage their finances. In Latin America, mobile banking can help reach SMBs in rural areas, or simply provide them with a better way to access financial services without the need to queue up at a physical bank. Access to credit is another major pain point for SMEs in Latin America, and digital banks are able to use technologies such as machine learning to evaluate a business’ creditworthiness faster and more efficiently.

Regulatory Pushes In The Right Direction

Many countries in Latin America have introduced or are in the process of introducing new regulations that level the playing field between traditional financial institutions and new fintech players. For example, Mexico recently introduced a new fintech law which provides a detailed framework outlining how financial services served through digital platforms are regulated. Regulatory initiatives are in the works in other countries, such as Chile and Brazil, as well.

More Bank-Fintech Collaborations

There are clear benefits for banks to partner with fintechs, but there is still not widespread collaboration between the two entities in Latin America. However, this may change as open banking continues to garner traction. In Chile, for example, efforts to educate lawmakers on the benefits of open banking—or allowing bank customers to share their transaction data safely with third parties—are well underway by the fintech association FinteChile. As more banks open their APIs to third-party developers, there’s no doubt it will accelerate digital banking innovation in Latin America.

China’s Growing Influence

China is arguably the world’s fintech leader, particularly in mobile payments technology. But the country is also a leading example for what the future of banking will look like, and many Latin American fintechs are finding inspiration from China’s mobile-first successes. Banking services such as Tencent’s Webank, China’s first private and digital-only bank, and Alibaba’s Alipay both champion financial inclusion for small businesses, not unlike a majority of the fintechs in Latin America.

Latin America’s Race To Lead Digital Banking

Latin America is well-positioned to become a global leader in digital banking. The opportunities to attract new customers who have been unbanked or underbanked up until now and bring them into the system via mobile-first services are still limitless. There are certainly challenges when it comes to achieving this goal, however, an increasingly friendly regulatory environment, increased investments, and mobile-first successes in other emerging markets around the world are enough to prove that financial inclusion can be a reality in Latin America and the region will certainly lead the digital banking revolution over the years to come.

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