Why UK fintechs should consider expanding into Latin America

For many UK companies Latin America is most likely not the first port of call for international expansion. Yet this booming sector has shaken up local markets and boosted competition and inclusion.[1] Whilst many FinTechs in Europe and North America have focused on decentralising protocols and Web 3. FinTechs in Latin America (LATAM) have focused on three basic areas: digital payments, fintech as a service such as broadening banking options for the unbanked and access to credit.[2] Furthermore, the GSMA asserts that in 2023 80% of people in LATAM have a smartphone with 65% having access to mobile internet[3] and The World Bank data states that 68% of the population in Latin America and The Caribbean (442 million) is between 15-64 years old, growing from 62% in 2000.[4]  This significant and young segment of the population can be characterised as having an openness to changing tech and with a proficiency for using apps.  Together these factors make the principal markets of Brazil, Mexico, Colombia, Argentina and Chile ripe for Scottish FinTech development and growth.

At the Department for Business and Trade (DBT), complementing the work of Scottish Development International (SDI), we are keen to highlight to FinTech Scotland members the landscape and possibilities in three markets: Brazil, Mexico and Argentina.

Brazil

In Brazil, the Fintech industry experienced rapid growth in recent years, driven by a large unbanked population, a complex traditional banking system and a strong entrepreneurial spirit. Payment solutions played a significant role in the early stages of the Brazilian FinTech landscape. Companies like PagSeguro offered digital payment alternatives, enabling small business and individuals to accept payments efficiently. Brazilian FinTechs expended their offerings to include digital banking, lending platforms and investment solutions. Nubank, one of Brazil’s most successful FinTechs revolutionised the banking industry with its mobile-centric approach and user-friendly experience. The company is now the fourth largest bank in Brazil with 85million customers.[5]

The Brazilian government has taken steps to foster FinTech growth. Initiatives like PIX, an instant payment system, has created a more favourable environment for FinTech innovation and competition. The Central Bank of Brazil has also introduced regulations to facilitate FinTech operations while maintaining consumer protection and financial stability.

Open Banking/Finance in Brazil:

The successful adoption of Open Banking in UK led to other jurisdictions around the world to examine its potential and possibilities for localisation. In Brazil, the Central Bank opened a public consultation in 2019 to hear proposals from associations, financial institutions and other entities on the regulation of Brazilian Open Banking.  After receiving more than 500 suggestions, in 2020, the Central Bank published Joint Resolution No. 1. In 2021, the implementation of Open Banking in Brazil, now called Open Finance for its broader approach, began in four phases. They are:

• Phase 1: sharing public data from participating institutions;
• Phase 2: sharing of information by customers, such as transactional and registration data;
• Phase 3: sharing services, such as offering credit and initiating payments;
• Phase 4: sharing other data, such as insurance, pensions, and investments.

Currently, there are already possibilities to initiate payments through PIX, since Phase 3 started in October 2021. The challenge for 2023 is Phase 4. Specialists expect that Brazil can overtake the UK in its implementation, as the largest Latin American country it has a much bigger scope for data than the British counterpart. The approach of Open Finance, instead of the original Open Banking that started in the UK, brings more possibilities such as credit card data and other services that can place Brazil as a world leader for this technology.

Brazil’s political and regulatory context:

Since starting his presidency in January 2023; Lula has made climate a major focus and understands that serious action on climate can increase Brazil’s influence on the world stage and bring international investment. This is well aligned with some of the UK’s regulators priorities, such as the LSEG initiative to fund innovative projects related to carbon, and the FCA starting a sandbox related to Green Finance. It is also worth mentioning that FCA is yet to decide about carbon assets, but the Brazilian FCA equivalent (CVM- Comissão de Valores Mobilíarios) has already regulated for the trade of carbon tokens when used in a security market. Altogether, this makes Brazil a sophisticated and receptive market for Scottish FinTechs.

Mexico

The second largest country in LATAM with one of the world’s largest populations and a high urban density. According to the IDB[6], 21% of LATAM FinTechs are based in Mexico, and unlike Brazil where most FinTechs are concentrated in São Paulo, Mexico has the benefit of three main tech hubs- Mexico City; Guadalajara and Monterrey. These hubs offer a closer proximity to the North American market, as well as a base for a huge domestic market, a talented, well educated, young (and often cheaper) workforce than its northern neighbour or other LATAM countries. The same IDB report counts 27 digital banks in Mexico, demonstrating appetite for FinTechs- primarily with a consumer audience (often with payment or remittances requirements). Furthermore, Mexico is one of the largest LATAM markets of under and unbanked populations such as women or those in rural areas. Initiatives like Jefa: a Mexican start-up aiming to empower women by creating banking solutions for women by women have great potential. If Scottish companies can contribute to closing these financial gaps they stand an advantage within the regulatory environment as well as competitively.

Mexican FinTech Law and a Sandbox Model

Back in 2018, the Mexican Congress was one of the first LATAM countries to enact legislation to regulate FinTechs (Ley para Regular las Instituciones de Tecnología Financiera). This law is known informally as the “Fintech Law”. To summarise, the Fintech Law regulates: crowdfunding; e-wallets; cryptocurrencies; Open Banking. However, five years in tech terms is an age and the Law requires some updates. In particular, regulations regarding cybersecurity and Open Banking are expected to be published in the mid-term. Interestingly, the current legislation allows for a regulatory sandbox.

Chambers and Partners in their online guide deftly describes the sandbox model as,

“The Fintech Law provides for an authorisation process under a “sandbox model” for companies seeking to engage in new and innovative technological activities or otherwise rendering services that differ from the ones that are already regulated. In particular, the Fintech Law defines an “innovative model” as a model which uses tools or technological means to provide financial services and which has different modalities to those of others in the existing market. In this context, companies – or other financial or regulated entities – may request temporary authorisation to carry out, through an innovative model, an activity otherwise requiring fully fledged authorisation under the FinTech Law. This works as an exemption that allows companies to test out new models and alternatives to provide financial services in a controlled environment.”[7]

Two sandbox challenges have previously taken place, both of which The British Embassy in Mexico City has supported and sponsored. DBT in Mexico works closely with the Mexican regulator to facilitate dialogue and to represent UK interest - including supporting UK companies to secure licences and to better understand policy changes and how these will affect them. Mexico’s regulatory environment as well as the country’s demographic and geographic position make it an excellent market to consider for novel and experimental products and services.

Argentina

Argentina on the surface appears to be closed market: notoriously protectionist and with sensational headlines of over 100% inflation in recent times. This seems like a hostile environment for disruptive tech yet in reality this is where solutions are needed and the basis of why FinTech has been one of the main sectors of economic growth. According to a recent Argentinian press article 60% of the money circulating in the formal economy uses a FinTech account as the origin or destination of the financial transaction. [8] The same article states that credit awarded by FinTech platforms grew 62% in 2022 with a total number of 4.5million of approved credit transactions illustrating the proclivity and demand for this service.

Globally, Argentina is one of the leaders in Crypto Assets in their usage and in the number of accounts.  As the country has a restrictive FX system, people and companies use cryptocurrencies as an alternative means to acquire foreign currency and transfer it abroad.

Furthermore, Argentina has a strong history of talent and innovation. It is the home of LATAM’s first unicorn MercadoLibre, followed by ten other companies: Globant, Despegar, OLX, Uala, Tiendanube, Bitfarms, AuthO, Vercel, Mural and Satellogic. According to the Argentinian FinTech Association https://camarafintech.org/ [in Spanish only] the industry has created more than 30,000 jobs domestically (up to 2023) and the Association prides itself on facilitating a robust trading environment of which DBT Argentina is a key contributor. Working closely with 240 of 330 FinTechs established locally as well as the country’s main regulators: Central Bank (BCRA), National Stock Exchange (CNV) and Financial Information Entity (UIF).

Take your next step

These three different and dynamic markets provide opportunities for ambitious and aligned Scottish FinTechs. Hopefully these snapshots have whetted your appetite for learning more and enabled you to appreciate the vast opportunity in LATAM. Local DBT support can help better understand local nuances, keep updated on regulation changes as well as making vital introductions to regional associations and partners. Reach out to the DBT Latin America and The Caribbean, International Market Team: exportsupport.latac@fcdo.gov.uk to help support your company’s next step into LATAM.

[1] The Rise and Impact of Fintech in Latin America, IMF, Published March 2023. Accessed 21/08/2023 https://www.imf.org/en/Publications/fintech-notes/Issues/2023/03/28/The-Rise-and-Impact-of-Fintech-in-Latin-America-531055

[2] Latin America FinTechs: We Have Lift Off. Findexable. Published May 2022. Accessed 21/08/23. https://findexable.com/2022-latin-america-fintech-rankings-report/

[3] GSMA The Mobile Economy Latin America 2022. Published 29 November 2022. Accessed 21/08/23 https://www.gsma.com/latinamerica/resources/the-mobile-economy-latin-america-2021-2/

[4] https://data.worldbank.org/indicator/SP.POP.1564.TO.ZS?end=2022&locations=ZJ&start=1960&view=chart accessed 21/08/2023

[5] https://blog.nubank.com.br/resultados-nubank-2o-trimestre-2023/ Published August 2023. Accessed 21/08/2023

[6] FinTech in Latin America and The Caribbean: A Consolidated Ecosystem for Recovery, IDB & Finnovista, Published July 2022. Accessed 18/07/23

[7] Fintech 2023: Mexico. Chambers and Partners. Published March 2023 https://practiceguides.chambers.com/practice-guides/fintech-2023/mexico/trends-and-developments Accessed 21/08/23

[8] https://www.ambito.com/finanzas/oficial-el-60-las-transferencias-son-realizadas-traves-una-cuenta-fintech-n5783377 ámbito. Published July 2023.  Accessed 21/08/2023

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