How the Fintech Boom Can Spur Latin America’s Economic Growth

Enzo Villani |

Editor's Note: This article by Equities.com's CEO, Enzo Villani, appears in the September 2016 issue of Trading & Risk Magazine, and is featured in the "Risk & Research/Quants View" section. Trading & Risk Magazine is an institutional financial publication geared for the global Risk Management & Trading community.

In recent years, the convergence between new innovations in the technology and financial services industry has fueled robust growth for the Fintech space. With the potential to disrupt legacy industries and redefine massive economic landscapes around the world for generations to come, it’s no wonder why venture capital and large institutional investors have been pouring billions of dollars into these startups.

Digital payment services have seamlessly integrated themselves into the day-to-day lives of consumers. Online lending platforms now connect borrowers and investors like never before, providing an alternative source to achieve their financial goals. Investment research and data companies are altering the perspectives of the financial markets entirely through the lenses of more information and analysis than one could possibly have imagined even just a few short years ago. Investment crowdfunding—or equity crowdfunding—has opened a new segment of the capital market to average investors and startup entrepreneurs, effectively leveling the playing field with unparalleled access. Meanwhile, the emergence of blockchain technology could potentially transform the very foundation in which all transactions are completed.

It’s not just limited to Silicon Valley, either. Rather, capital has been flowing into Fintech companies on a global scale. Many of these emerging industries and growth companies under the Fintech umbrella are only at the early stages of their development. According to the latest figures by KPMG and CBInsights, global investment in the fintech space grew 106% in 2015 to a record $19.1 billion. The industry is already outpacing that rate in 2016, with the first quarter posting another $4.9 billion in capital raised.

But while the Fintech revolution may have been born in the developed economies like Europe and the US, it will truly thrive in the emerging economies like Latin America and Asia. Not only do these markets have higher growth potential than the developed nations, but they also possess the ability to adopt new technologies at a much faster rate due to the leapfrogging effect.

When new technology is introduced into developed economies, it takes time to integrate into the legacy and traditional infrastructure. Emerging economies, however, have the ability to essentially build from scratch, adopting new innovations full sail without being hindered by the burdens of the old way of doing things. It’s akin to emerging economies coming onto the grid for the first time in history now never having to deal with dial-up modems or flip phones.

As a financial news organization covering the front lines of this shift, Equities.com has been monitoring this technological and economic revolution.

The Next Phase of Fintech in Action

The speed in which companies are innovating today is breathtaking. To get a sense of the cutting-edge applications that companies are working on today, Equities.com hosted a panel with many of the leaders in the Fintech space earlier this year, uncovering some very unique applications of technology to the financial arena that had never been thought of before. February’s EQUITIES Emerging Growth and Innovation Forum featured keynote speakers Eli Pakier, MRY VP and Group Strategy Director; Jon Stein, CEO of Betterment; and Jeff Glueck, CEO of Foursquare. There was also a revelatory panel with Stephen Kuhn of Airex Market, Andrew Chang of itBit, AJ DeRosa of Orbital Insight, and Judd Bagley of Overstock.com discussing how new industries are being created as a result of innovation. A second panel on with Jim McCarthy of Goldstar, Craig Dunham of Seismic Software, Dr. Aleksandr Yampolski, Ph.D of SecurityScorecard, and Shaunda Brown of SoFi highlighted examples of how companies are leveraging new concepts and technologies to better serve existing markets.



Foursquare is a good example of a technology company that’s been able to evolve the application of its core product into new markets. The company started out as a simple location check-in service that allowed friends to let each other know where they were at or have been. But now, with over 1 billion check-ins by over 50 million users in 100 countries and counting each month, Foursquare arguably has a better pulse on the “offline” economy than anyone. In his keynote, Glueck explained as an example that the company has the ability to essentially monitor the foot traffic of traditional brick-and-mortar retailers and project how a company may perform in any given quarter or fiscal year before they report their results. In April, he did just that when he predicted Chipotle’s weaker-than-expected Q1 weeks before the company reported earnings. Those that listened to Glueck could have avoided the subsequent selloff the next day.

Betterment is another company revolutionizing the financial markets. As arguably the most recognizable name among the surging robo-advisers space, which are automated investment advisory platforms that streamline and simplify the investing process for everyday people. The company offers its customers a completely hands-off solution to investing in the market, but more importantly, it helps consumers overcome the traditional challenges of getting started in the first place by providing a user-experience that better reflects what they want. While the concept seems incredibly simple, Betterment and its fellow robo-advisers have the potential to overhaul everything we know about Wall Street, from mutual funds to financial advisors.

Foursquare and Betterment, as well as Airex Market, Orbital Insight, Overstock.com, Goldstar, Seismic Software, SecurityScorecard, and SoFi for that matter, are just a few examples of innovative companies disrupting their respective markets through better technologies, smarter applications, and unique strategies.

Latin America’s Leapfrog Advantage

But what does that mean for emerging markets? According to the World Bank, only about 51% of all adults in Latin America have a bank account, and only 14% have actual savings. That means that a sizeable portion of the population—nearly half, in fact—still haven’t been exposed to basic financial services, raising the question of just how large the market opportunity in Latin America really is for Fintech companies? But as low as those figures are it’s actually a drastic improvement from as recently as 2012, when over 60% of didn’t have a bank account. That rate of adoption is immensely encouraging for any industry, especially one that, again, does not have legacy issues to contend with.

Greeting these new customers and investors won’t necessarily be the traditional banks and financial services firms. Fintech companies in Latin America are already preparing for this impending surge of consumers. Meanwhile, enterprising venture capitalists and institutional investors are increasingly looking to troubled and emerging economies like Brazil and Mexico for better value opportunities than the all-too frothy Silicon Valley. In fact, some key players in Latin America have already long been on their radars.

For example, digital finance company Nubank, one of the hottest startups in Latin America, has already raised over $155 million to fund its growth from some of the biggest venture capital names in the industry. Nubank offers a mobile-only credit card service, which allows it to target Brazil’s massive smartphone user base of over 90 million people.

Microfinancing platforms are another popular sectors of the rising Fintech ecosystem in Latin America with companies like Afluenta of Argentina and Kubo Financiero in Mexico gaining real traction. Other notable names include Mexico’s Payclip, also known as Clip, which is a digital payments application that has drawn comparisons to Square in the US. There’s Sr.Pago, which has developed apps and digital payment products geared toward Mexico’s sizeable unbanked population. Bitcoin and other cryptocurrency startups are also gaining steam as Latin Americans seek alternative asset classes to protect their portfolios against the downside risks of their ailing economies. While the valuations aren’t as eye-popping as those found startup hubs like Silicon Valley, London, Singapore, Hong Kong, etc., it’s abundantly clear that Latin America is home to vibrant Fintech ecosystem that’s striving to expand.

Tailwinds and Headwinds of Latin America’s Fintech Boom

While there’s no doubt that Latin America has ample open runway for growth, it’s also no sure thing. But then again, what is? With a massive portion of the population still living in poverty and challenging economic conditions adding high levels of volatility and uncertainty to the equation, Fintech companies—and the investors funding them—are depending on a number of catalysts to drive the industry’s growth. But on the flipside, new innovations can provide more cost-efficiencies and better access to financial resources that can help to break the poverty cycle and improve the quality life for the over 600 million people living in Latin American countries, all the while benefiting the global economy’s growth. Suffice to say, it’s an exciting time and opportunity for this promising industry and this vital portion of the world’s population.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
CMG Chipotle Mexican Grill Inc. 297.09 -8.42 -2.76 1,758,889 Trade
OSTK Overstock.com Inc. 19.45 0.15 0.78 112,066 Trade

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