“I always tell the tale of having to go to a banking branch to open a bank account, which was one of the most painful experiences I’ve ever had,” says Colombia-born Nubank CEO and co-founder David Vélez on a chat show by CNBC. “I had to go to one of these bulletproof branches with a lot of security arms. It took me about an hour to acquire a simple bank account, a credit card, and I began researching the market and was amazed at how concentrated it was. Five banks held 80-90 percent of all assets, investments, credit, lending in Brazil, Mexico, and Colombia, and it appeared to me like a very significant opportunity for disruption,” he said.
Most Latin American nations have poor levels of financial inclusion. Traditional banks are unsuitable for serving Latin America’s young and connected middle class. There is a clear market vacuum for products that serve customers who do not have access to a bank account or credit card, say analysts.
Overview of Latin American Market
The Covid-19 outbreak threw severe doubt on the Latin American market’s stability, with the UN announcing that the area’s GDP shrank by 7.7 percent, but it surprisingly functioned as a stimulus for the region, putting it in a favorable position to support future economic growth.
High economic potential due to inequality in society – According to the Economic Commission for Latin America and the Caribbean (ECLAC), 30.5 percent of the population, or 187 million people, were poor in 2019, with 70 million living in extreme poverty (11.3 percent of the population). The region’s population was largely unbanked until recently due to poor infrastructure in rural areas. Despite this, many millions of Latin Americans continue to lack access to financial services.
Young Latin Americans are catalysts for innovation – In comparison to other economies such as Europe or North America, Latin America and the Caribbean have a relatively larger young population of over 650 million people. 67% of the region’s population is between the ages of 15 and 64, according to a survey by Statista. According to the GSMA, 70 percent of the population had access to a smartphone at the end of last year. Internet adoption has risen to nearly 72 percent, compared to the global average of 60 percent.
Digital Banking Landscape
Over the last few years, Latin America has seen explosive growth in digital banking. Financial services developments and innovations have been accelerated across the region because of changing customer needs and evolving regulatory standards.
Regulatory Environment – Neobanks’ expansion in Latin America can be attributed in part to positive regulatory interventions. Brazil is set to launch one of the world’s most ambitious open banking frameworks. Mexico’s Fintech Law and Colombia’s new regulatory sandbox are other approaches to foster competition and lower barriers to entry in the region.
Digital Banking Adoption in Latin America – Over 90% of all neo bank customers in Latin America are served by the top ten digital banks. Players from larger countries, such as Brazil and Mexico, are expanding into smaller countries. Nubank, which has developed strategically tailored solutions, shows that with the right proposition, Latin America represents a sizable market opportunity.
As Latin America represents a formidable playing field for both start-ups and corporates seeking to capture significant market share through new digital services, the number of neo banks in the region has steadily increased over the last decade, from 6 in 2012 to 52 in 2021.
Opportunities in Latin America and Key Success Factors
Serving the underbanked and underserved population – Large parts of Latin American economies are not formally served by financial institutions. High account-related charges, a lack of and discomfort with bank branches are among the underlying causes of customer non-adoption of financial products. The key motivator for their utilization will be the creation of meaningful and value-added use cases that solve one or more of these difficulties.
Affordable and efficient cross-border services – Fintechs could help to reduce the need for migrant workers to rely on expensive remittance services with significant wait periods. Digital cross-border accounts, for example, enable migrant employees to transmit money directly and instantly to recipients in their home country via person-to-person transfers.
Bettering possibilities for SMEs and small merchants – Banks in Latin America are not transparent enough about loan terms and risk assessments, and decision making. SMEs require affordable finance and accessible payment solutions. Traditional finance solutions include high interest rates and slow application response times. With new credit scoring methods, digital banking providers now have more alternatives.
Low-cost solutions to get customers away from cash – High cost of transferring funds between bank accounts is a barrier to speedier adoption of the digital model in Latin America. With a major portion of Latin America’s population living in poverty, digital banks are required to provide low-cost solutions. There is a demand for more lean and cost-effective solutions to be delivered through an integrated ecosystem.
Optimize and leverage technology capabilities – Cloud-native, modular, and API-based design with an emphasis on automation and data insights is essential. Cybersecurity is critical to developing customer trust and confidence in your bank’s products and services. New digital banks have several alternatives for designing or buying a modern technology stack.
Launching a new digital bank or to digitize banking services is quite a task. The Bank in a Digital Box (BiDB) solution enables financial institutions to embrace digitization while diminishing interruptions. It is a one-stop digital banking solution that eliminates the need to source different providers for development and integration. BiDB employs a Minimum Viable Product (MVP) and add-on methodology.
Latin America has a strong chance of becoming a worldwide leader in digital banking. There will undoubtedly be challenges in achieving this goal. However, an increasingly friendly regulatory environment and increased investments are sufficient to demonstrate that financial inclusion can be a reality in Latin America. The region will undoubtedly lead the digital banking revolution in years to come.