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Explaining the hype for venture capital in the LatAm fintech industry: What’s next?

The fintech market in Latin America has been dominating headlines for some time now. From digital payments to credit lending to blockchain technology – the most popular startups in the region are fintech. In Brazil alone, there are 504 active fintech companies right now.

And the growth continues: despite the current trend of lower investment figures, fintech companies in Venezuela, Mexico, Brazil, and the greater region are still receiving an outstanding share of investment.

And there’s more good news: The growing supply of solutions is far from meeting demand. Some 70% of the Latin American population remains unbanked or underbanked, and 58% of point-of-sale purchases are still paid for in cash. In addition, the enablement of crypto payments adoption offered by startups such as Agrotoken for agricultural industries, as well as embedded banking technologies, are gaining momentum. In addition to crypto, startups like INI are solving the challenge of delivering payments in areas with limited or zero internet coverage.

Combined, these are excellent factors for investing in venture capital in Latin America. But where exactly should investors look to identify long-term growth in the markets? Let’s see what happens next for fintech markets in Latin America.

What’s driving demand for fintech in LatAm?

The exorbitant demand in Latin American fintech markets is driven by several socioeconomic factors. On the one hand, many people in the region have been underserved and excluded from financial freedom for years. In Mexico, for instance, only 10% of households have a credit card. 

For this reason, many LatAm companies and small businesses, especially in the e-commerce sector, experience problems with reliable and secure payments. Small business owners or family entrepreneurs have traditionally been a part of the Southern economies, providing 66% of jobs in the region. But they mainly sell their handicrafts, food, and other goods through cash. 

However, post-pandemic demand for digital commerce is growing at an accelerated pace in the entire continent. And the increasing mobile adoption (smartphone adoption will reach 81% by 2025), and spreading 5G reach in LatAm are massive enablers for new payment systems as well.

A good example of new payment systems facilitating digitized commerce is the Brazilian central bank’s payment system Pix, which has helped boost the digital market in a region where almost half the population didn’t have a bank account. The instant payment system paved the way for more than 150 million people to shop online for the first time during the pandemic. 

On top of all, embedded finance, which is already widely popular in the USA and Europe, is still in its infancy in South America. These bank-like services enable companies, regardless of their size, region, or industry, to offer financial services such as digital accounts and cards to their customers. So far, provided only by giants like Rappi, ifood, and Mercadolibre, embedded finance represents significant potential for future innovation and venture capital investments in LatAm.

Regulations enabling fintech innovation in LatAm

With growing investment and demand for fintech in the region, governments and local regulators are revising their laws to keep pace with innovation. Mexico, for example, has successfully passed a “Fintech Law” that creates a framework for fintech companies to offer new services within the Mexican regulatory system legally.

Brazil recently introduced the “Regulatory Sandbox,” which allows for more reliable growth. The new regulations are designed to help fintech companies make smarter financial decisions and hedge against losses. This, in turn, helps regulate the market and gives investors more certainty. 

In Argentina, cryptocurrency startups and leaders from the industry have recently met at the national crypto summit. At the event, the industry stakeholders discussed where the industry is headed to, and explained the insatiable hunger for blockchain technology in the region.

The LatAm population is also excited to see central banks in the region experimenting with CBDCs (Central Bank Digital Currencies) and legalizing crypto payments. Indeed, the adoption of web3 and cryptocurrencies is comparatively higher in Latin and South America than in other regions of the world. 

Why? One important reason is that Latin American countries are used to high inflation and unstable economies. People are very interested in discovering alternatives to their national currencies.  

An example of a startup that made headlines in Argentina, where inflation has been causing tremendous financial insecurity for more than a decade, is Belo. The startup provides a digital cryptocurrency exchange where Argentineans can buy and sell cryptocurrencies, save money and get cashback on every payment.

What’s next for venture capital in LatAm?

Looking at trends in the startup ecosystem, fintech in Latin America is not yet at its peak. It’s just at its beginning. 

The adoption of intelligent payment methods, access to credit for the underserved and underbanked, the use of web3 technologies, and the overall advancement of digital payments will only increase in the coming years. Moreover, as cell phone penetration and 5G reach continue to increase in the region, they will become more popular, opening an enormous market to tap into.

To summarize, fintech represents a unique opportunity with long-term potential for investment in venture capital in LatAm because:

  • Startups are turning traditional financial systems on their heads
  • A new generation of consumers looking to invest 
  • Populations are keen to grow their savings via alternative saving models
  • Central banks across the region encourage fintech innovation.

While financial markets worldwide have been an efficient avenue for investors, the current recommendation by investment managers is shifting to emerging markets. With that in mind, one of the most promising venture capital investments in fintech destinations is definitely Latin America.

Are you ready to invest in LatAm’s next unicorn? Let’s get to know our portfolio at Netwopia.VC.