f fintech is meant to solve problems at the intersection of technology and finance, Latin America is a perfect place to look at. The continent is still struggling with a "financial long COVID", and despite a rate cuts cycle interest rates remain alarmignly high (over 13% in Brazil and Columbia). Add a substantial underbanked population and vast rural areas, and you have a fertile ground for innovation in sending, storing, and investing money.

It is little surprise, then, that fintech in Latin America is red hot. According to a recent Mckinsey report, retail banking is the largest engine for growth for banks, as "micro-loans, deposits, and retail payments are the fastest-growing submarkets."

This trend is undoubtedly evident for banks' peers and competitors in the startup space. Talking with several industry participants highlights the main areas fintechs work on and provides a fairly positive outlook for local startups and global actors alike.

Expanding Financial Inclusion

This is probably the most significant aspect of any fintech working in the continent. With over 100 million without a bank account across Latin America, innovative solutions that bypass the legacy financial system are much needed.

"Despite cash remaining relevant, other payment methods emerge in response to Latin Americans' interest in digital products and services," explains Christina Hutchinson, VP of Sales and BD, Head of LATAM, and General Manager of Brazil at Nium. One example she cites is PIX, an instant-payment system accounting for over 70% of all transactions in Brazil.

One obvious solution to such difficulties is cryptocurrency, as the continent is responsible for 9% of the global market share.

But while the adoption rate is relatively high, residents should enjoy "better on- and off-ramps to ease friction and give them the confidence that they can access their money whenever and however they need it," according to Zé Atalaya, Geo Expansion and Token/Chain Integration Manager at Ramp.

Until unified payments railroads are built, crypto firms are integrating with local ones like PIX in Brazil or CoDi in Mexico.

Regulation for growth

Another area where cross-continent collaboration is required to foster the sector's growth is regulation. Several fintechs have recently offered a joint regulatory framework to make the continent's eco-system more efficient, but there is more to be done.

Regulators should be providing "definite and unambiguous" rules in a host of areas, says Sidhant Rastogi, Managing Partner at Zinnov, a global management consultancy firm, and lists "financial stability and integrity, consumer privacy and data protection, data sharing, data portability, and data interoperability." Coupled with the active creation of innovation hubs, the government can reshape the landscape and increase consumers' options.

But even today, regulators seem open to working closely with startups and provide not only clarity but also active guidance. Hutchinson points to local fintech laws in Chile, Brazil, and Mexico, which "established guidelines on licensing, registrations and other requirements that drive business growth."

And such developments have a spill effect that goes beyond the legal perspective. "This has created a much more startup-friendly environment," shares Ramp's Atalaya. "VCs are more inclined to dip into their pockets if they have reasonable certainty that a business will still be a going concern five years down the line."

Cybersecurity Concerns

As the fintech sector grows, so does the risk of cyber threats. "Fraud is a key concern that continues to stifle business growth," says Hutchinson. Indeed, according to Jumio, Latin America is the world's second-highest region in revenue loss to fraud, as every fifth transaction is rejected.

Fintech startups have risen to the challenge by leveraging technologies like AI and blockchain to enhance security.

Companies like Nium have developed biometric authentication and real-time transaction monitoring to safeguard financial transactions, and Zinnov's Rastogi cites Unico and Cloudwalk as notable incumbents, providing facial recognition and digital identification technologies. Both a challenge and an opportunity, then, the cybersecurity sector in Latin America is expected to grow to almost $3 billion by 2028.

Going glocal

International players keen on tapping into LATAM's burgeoning fintech market are presented with ample opportunities.

The opportunities for international players are plenty, and the market signals confirm it," says Rastogi, alluding to VISA's recent acquisition of local provider Pismo and PIX's growing adoption. "PIX-based lending, cards, SME financing, and insurance offer the next phase of opportunity for international players."

Brazilian Startups by Industry

EdTech - 14.5%
FinTech - 9.1%
Healthcare - 8.9%
Software - 6.7%
Retail - 5.1%
Human Resources - 4.8%
Marketing - 4.2%
AgTech - 4.1% pic.twitter.com/6J6daTfEsf

— Patrick Flood, CFA (@LatamStocks) July 18, 2023

Hutchinson also sees the potential for global B2B players who can support personal and micro-finance offerings brought upon by accelerated digital adoption. But she adds an important caveat: "As each country has its own unique cultural, economic, and regulatory considerations, international players need to work in partnership with players who can support merchants in the complexity of working on a global scale."

And if you opt for more unchartered waters, crypto might provide more market niches. "There's still a shortfall of Latin American-focused apps for DeFi, payments, savings, and other consumer-facing use cases," observes Atalya. "Forward-thinking companies that seize this opportunity and create crypto-powered apps that solve real-world problems have an opportunity to dominate what is a large and lucrative market."