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Financial inclusion in Latin America: The scenario and opportunities for fintechs

Published on Mar 28 2023. 13 minutes reading

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Latin America was the region with the highest growth in the number of people with bank accounts between 2017 and 2021, according to the World Bank's Global Findex 2021 study . Despite this, opportunities for greater use of digital payments still exist. After all, 150 million adults with bank accounts made payments in cash at commercial establishments, including more than 50 million in Brazil and 16 million in Colombia.

To comment on this scenario and, mainly, the performance of fintechs in the context of Financial inclusion in Latin America, we spoke with Bruno Diniz, specialist in innovation in the financial market, co-founder of Spiralem, South America Director at FDATA (Financial Data & Technology Association), professor at Fundação Dom Cabral and MBA at USP and author of the book “The Fintech Phenomenon”.

The role fintechs play in financial inclusion is a common topic in the industry today. But how can we effectively contextualize that role?

Fintechs have had a critical role in the entire process for driving advances in the financial industry, not only in Brazil but also across Latin America and other regions.

Considering the reality in Brazil, alternatives were limited when it came to managing one’ financial life 10 years ago. And those have grown since the regulator paved the way for fintechs. That process is also ongoing in different countries in Latin America, which are working on their own regulatory foundation to accommodate new business models.

We are starting to see new players in the market who are better able to understand specific types of audiences that traditional banks often weren't considering. This opens up a range of possibilities for different groups to access financial services. So, without a doubt, the fintech phenomenon we have witnessed in recent years has revolutionized how financial services are delivered and how people access them.

How does this fintech phenomenon has progressed in Latin America? What countries are advancing more or less quickly in that direction?

It’s important to stress that regulation is crucial for that advance. However, there are several countries where a system is developed according to existing devices in terms of regulatory foundation.

Among the countries we observed in Latin America, Brazil is the most advanced. Mexico made progress with the creation of the Fintech Law, although we have reports that things are not flowing as smoothly as initially imagined. Colombia has attracted foreign capital as it regulates different elements that make up a digital economy. Uruguay and Peru have also made significant progress.

O Chile recently approved a regulation that is a little clearer about several blind spots within their financial market, in addition to advancing on the part of the Open Finance, a very important structure in developed economies around the world.

Argentina has seen macroeconomic and conjectural issues. And when you have such an intense issue, it’s more difficult for a regulator to pay proper attention to other elements. Also due to an economic issue, Bolivia and Venezuela are falling behind in the process as a whole.

What are the challenges in expanding that role fintechs play in Latin American financial inclusion in terms of product innovation, number of users and other variables?

I’ll mention again the regulatory process as a big challenge. That makes all the difference so that the rules of the game are clear. Once they are, it is easier for those working locally to employ them and for those investing to put their money on the line—so it basically makes it easier for the ecosystem to develop.

In some countries, we also have challenges involving the move from a more basic structure to a digital one—such as the network coverage for smartphones—which are elements that can bottleneck the process.

Another challenge we’re experiencing now involves the global economical issue and the decrease in attracted investments: resources targeted to the segment have decreased, and many countries have seen a huge decrease in valuation. That’s a real test for some business models that had a longer maturation horizon and now will have to answer their investor more quickly.

We’ve recently started adjusting that route, but the past few years have been euphoric. Latin America got in the map for investors, and there’s much to be done here. Entrepreneurs have a lot on their plate.

Embedded Finance can be a model less vulnerable to investors’ appetite for evolving financial inclusion in Latin America?

Embedded Finance emerges as a very interesting possibility, a natural evolution of the opportunities generated by fintechs. The context of crisis can, in some cases, shelve projects. We've seen large retail chains , for example, that had the idea of launching a financial services division and then slowed down given the economic situation.

Today, we can more clearly demonstrate the advantages in Embedded Finance: there’s increased urgency for major conglomerates to embark in the world of embedded finance.

In this context, we also have the providers of Banking as a Service that take advantage of this market timing and end up alleviating this more acute crisis in the fintech sector. This is because they are providing for companies that do not need an investment to offer financial services, they just need to know if it is the ideal time or not.

When adopted by major retailers, can Embedded Finance also be a way out for infrastructure challenges?

We need to understand the context we’re in. Mexico, for instance, has an instant payment system, CoDI, but that didn't catch like the Pix got it here in Brazil. So there we saw, a very popular chain of convenience stores, offering financial products digital and grow absurdly.

Thus, in countries that have deficiencies in terms of infrastructure, as in the case of instant payments, retailers play a very important role in using embedded finance. As there is already a formed network, the stores become a fundamental point of cash in/cash out, since the population depends a lot on cash.

That’s what happens in Brazil for Bemol, a retailer operating in the Amazon region. Although Brazil has Pix working nationwide, we need to consider specific cases in the country.

You mentioned that entrepreneurs have a lot on their plate in Latin America. What are the opportunities in the horizon for financial inclusion?

I see that we have many opportunities for entrepreneurship and financial inclusion in Latin America because there are many gaps in terms of access. Analyzing the region, Brazil is still one of the countries that does better in this regard. In Mexico, the unbanked rate is around 50%. Peru and other areas also have high unbanked indexes unbanked indexes.

This proves that there is still much to be done in terms of basic financial inclusion. But there are also other steps, such as access to credit, microcredit, and the ease of contracting services like insurance, and so on. There is even the challenge of basic financial education , which translates into a very large opportunity for those who come to do business here.

It is a scenario that is different from more developed countries, such as the United States, where competition is fierce and people are more informed on the basic concepts governing a financial life. It all means more opportunities.

The product and service range for fintechs is enormous. How do you see this expanded service range? What is interesting in new trends?

In the past, it used to be easier to pick elements from the traditional financial industry and reimagine them in a fintech version. We’ve come up with alternative investments, loans, insurance plans, and so on so forth. I believe that we’ve now reached a moment in the industry where we pay more attention to infrastructure.

Banking as a Service is a consequence of that, and there’s no parallel to it. It is a new service, which has already existed in different formats for a while, but it is done now in a brand new way.

It's a model that has very successfully combined current regulatory and technological aspects to deliver solutions, but it will soon have to incorporate new elements – perhaps based on what is being brought by the crypto economy and Web 3 – to deliver even more modern services.

Specifically regarding financial inclusion, what initiatives would you like to highlight in terms of access to different audiences?

Born in a favela in Rio de Janeiro, Banco Maré is an interesting initiative in Brazil. It is an example of filling in the gap for the residents of those communities who have specific needs and aspects and don’t have access to financial services.

There’s also PicPay, which made agreements with the Sao Paulo State Government during the pandemic for distributing financial aid. This fintech initially focused more on a young audience than on inclusion, but in the end it’s become quite connected to classes C, D and E.

When it comes to Embedded Finance, we have a project for including the community of alumni waste pickers, which Dock itself has enabled. And another example I’d like to bring up is banQi, by Via Varejo group, which is a major retailer targeting the masses.

How does retail contribute to financial inclusion in Latin America and transforms customer experience at stores? Learn about the VUON case:

And what is your advice for fintechs on a mission to contribute to financial inclusion in Latin America?

My understanding is that is takes a lot of clarity on the audience you’re targeting—also because there are a lot of marginalized groups in terms of access to financial services. It is necessary to understand who that audience is. The more specific the fintech is at that initial stage, the better they can deliver something that makes sense.

Furthermore, in times of Embedded Finance, a digital account it's something you find everywhere. So it's also about how you deliver the experience of this product, whether because the user has a lesser understanding of the mechanics of the financial market or difficulties with text interpretation. It is necessary to create ways for the person to really understand that that product makes sense.

It's like in the case of conscious credit. For a person who has difficulty understanding the financial market, the credit card products it's a razor. You have to work on the binomial access and financial education in relation to the product offered.

Financial inclusion in Latin America: Takeaways from this article

Fintechs have had a critical role in the entire process for driving advances in the financial industry, not only in Brazil but also across Latin America, making possibilities available so that different groups can access financial services.
The regulatory foundation is critical for countries to advance in financial inclusion by counting on fintechs. Also, some countries face challenges involving the move from a more basic structure to a digital one.
Embedded Finance can be an option in a less vulnerable format for fintechs facing a challenge when it comes to attracting investments.
When adopted by major retailers, embedded finance can also solve eventual infrastructure issues.
There are a lot of opportunities for fintechs that are on a mission to contribute to financial inclusion in Latin America, and learning about their target audience is key to offer a product that makes sense.