Bogotá — Fintech companies “may not be fully equipped” to handle market volatility, which could cause “losses to their clients”, and in an environment of higher interest rates it remains to be seen how credit quality will be maintained by fintechs in Latin America, a report by the International Monetary Fund (IMF) states.
In this environment, “it is also unclear to what extent digital banks would be vulnerable to liquidity crises in an environment of increased market volatility,” The Rise and Impact of Fintech in Latin America report states.
And for analysts, technology that facilitates instant bank transfers and withdrawals “may also increase the speed of bank runs.”
This warning comes following the crisis that engulfed Silicon Valley Bank (SVB), which generated fear not only in the world of startups, that bank’s main target group, but also among other investors around the world due to the risk that a domino effect could be unleashed in international banking.
For the authors of the report, “fintech companies often collaborate and share information with other financial institutions, which could extend the impact of any failure or disruption. If they operate on a large scale, their failure could cause widespread disruption to the financial system”.
It is estimated that more than 300 million users use digital payments in Latin America and that neobanks already have more than 30 million customers, most of which are currently concentrated in Brazil and Mexico.
The report illustrates that “over the past decade, fintechs have shaken up the financial sector” in the region and that the line between traditional financial firms “has begun to blur”.
“The combination of increased use of cell phones and the Internet and traditional payment systems, which were expensive and not very widespread, paved the way for the rise of digital payments,” the report highlights.
In particular, the report highlights cases of low-value (or retail) payment systems in Brazil (Pix), Mexico (CoDi) and Costa Rica (SINPE Móvil) that “improved access to retail payments”.
In the IMF’s view, this is remarkable given that “a higher level of fintech adoption is associated with lower income inequality” and “a reduction in credit spreads”.
According to IMF figures, all Latin American fintech sectors have grown exponentially since 2017.
In fact, the report shows that digital payments in the region went from $89 billion in 2017 to $215 billion in 2021, consequently reflected in the number of users.
Meanwhile, the volume of transactions in digital banks increased over the same period from US$17 billion in 2017 to US$123 billion in 2021.
The report shows that alternative finance and insurtech (insurance technologies) are not yet as large as the other segments, but are growing rapidly nonetheless.
While alternative finance lending expanded to $6 billion in 2020 amid the pandemic-related crisis, the number of insurtech companies operating in the region reached 352 in 2021.
By segment, by that year 25% of the region’s fintech startups were focused on digital payments and remittances, 18% on lending, 15% offered services related to business technologies for financial institutions, including scoring, identity services and fraud detection.
“The proportion of digital banks among startups is now relatively small, as several digital banks have become very large. In terms of assets, digital banks have experienced the fastest growth among fintech startups between 2017 and 2021″, says the IMF report.
Specifically regarding neobanks, it notes that these have expanded significantly and there are now an estimated 60 digital banks, up from 10 in 2017.
Of that number, 55 of which are in Mexico and Brazil.
Around three-quarters of digital bank customers are unbanked and underbanked consumers and small and medium-sized companies.