The Rise and Impact of Fintech in Latin America

TheRiseandImpactofFintechinLatinAmerica BasB.Bakker,BeatrizGarcia-Nunes,WeichengLian,YangLiu,CamilaPerezMarulanda,AdamSiddiq,MariuszSumlinski,DmitryVasilyev,andYuanchenYang NOTE/2023/003 FINTECHNOTE TheRiseandImpactofFintechinLatinAmerica PreparedbyBasB.Bakker,BeatrizGarcia-Nunes,WeichengLian,YangLiu,CamilaPerezMarulanda,AdamSiddiq,MariuszSumlinski,DmitryVasilyev,andYuanchenYang March2023 ©2023InternationalMonetaryFund TheRiseandImpactofFintechinLatinAmerica Note2023/003 PreparedbyBasB.Bakker,BeatrizGarcia-Nunes,WeichengLian,YangLiu,CamilaPerezMarulanda,AdamSiddiq,MariuszSumlinski,DmitryVasilyev,andYuanchenYang* DISCLAIMER:FintechNotesofferpracticaladvicefromIMFstaffmemberstopolicymakersonimportantissues.TheviewsexpressedinFintechNotesarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. RECOMMENDEDCITATION:BasB.Bakker,BeatrizGarcia-Nunes,WeichengLian,YangLiu,CamilaPerezMarulanda,AdamSiddiq,MariuszSumlinski,DmitryVasilyev,andYuanchenYang,2023.“TheRiseandImpactofFintechinLatinAmerica.”IMFFintechNote2023,InternationalMonetaryFund,Washington,DC. ISBN: 979-8-40023-547-4(Paper)979-8-40023-698-3(ePub)979-8-40023-702-7(PDF) JELClassificationNumbers:G23,O16,O54Keywords: Fintech;financialinclusion;financialdevelopment;financialrisks;financialregulation;LatinAmerica Authors’emailaddresses: BBakker@imf.org;BNunes@imf.org;WLian@imf.org;YLiu10@imf.orgCPerezMarulanda@imf.org;MSumlinski@imf.org;DVasilyev@imf.org;YYang6@imf.org Abstract Inthepastdecade,fintechhasshakenupthefinancialsectorinLatinAmericaprovidinginnovationsinlending,payments,insurance,andregulationandcompliance.Thispaperexaminesthisdevelopmentbyfocusingonbothfintechservicesandregulation.Exploringfintech’smacro-criticalimpactusingcountry-andbank-leveldata,wefindthatboomingfinancialtechnologiesinLatinAmericahavehelpedboostcompetitioninthebankingsectorandinclusion.Additionally,wedemonstratethatfintechfirmsinLatinAmericaexperiencedrobustgrowthevenduringthepandemicsupportedbyexternalfunding.Finally,wediscusshowregulatorsareaddressingtherisksassociatedwithfinancialtechnologiesandhowtheyareleveragingfintechtoolsintheirsupervisoryactivities. *WethankPatriciaAlonso-Gamoforherguidance,aswellasMaximilianoAppendino,ParmaBains,GermanVillegas-Bauer,MarianneBechara,KeChen,MartinCihak,GabrielaConde,DimitrisDrakopoulos,EnderEmre,TakujiKomatsuzaki,JimMorsink,MustafaSaiyid,MariaSoledadMartinezPeria,MauricioVillafuerte,andCentralBanksofBrazilandCostaRicafortheirvaluablecomments.WealsothanktheCambridgeCentreforAlternativeFinanceforsomeimportantdiscussionsintherun-uptothisproject. Contents Glossary4 IntroductionandExecutiveSummary6 I.FintechVerticals:TrendsandFunding8 MainFintechVerticals10 DigitalPayments10 DigitalBanks12 AlternativeFinancebyFintech14 Insurtech16 Bigtech19 FundingofFintech19 II.CausesandImpactoftheFintechBoom21 FactorsFuelingtheFintechBoom21 Fintech’sMacro-CriticalImpact22 III.WeatheringShocks:COVID-1924 RegulatoryResponsetothePandemic24 DidFintechHelpWeathertheCOVID-19Shock?25 Fintech’sAccesstoFunding26 IV.GoodPolicies:ControllingRisksandEnablingGrowth27 ApproachestoFintechRegulationintheRegion28 BroaderRegulatoryIssues28 NonbankPaymentServiceProviders28 OpenBankingandOpenFinance29 Crowdfunding30 Bigtech30 MakingRegulationWork31 UsingTechnologyforManagingRegulatoryCompliance31 CollectionandProcessingofData32 InnovationHubsandRegulatorySandboxes32 AnnexI.FintechandCompetitionAmongBanks35 AnnexII.FintechandInclusion:EvidencefromLatinAmerica38 AnnexIII.HowWereVentureCapitalandPrivateEquityFundingofFintechintheWesternHemisphereAffectedbytheCOVID-19Pandemic?AFirm-LevelAnalysis40 FinancingBoomduringtheCOVID-19Pandemic40 AMachineLearningAnalysis43 Data,Sample,andVariableDefinitions43 EmpiricalMethodology43 TreatmentoftheSample44 TuningofHyperparameters44 QuantitativeResults45 AnnexIV.ViewsofFintechCompaniesofRegulation49 AnnexV.RecentRegulatoryChangesinBrazilandColombia51 Brazil51 Colombia52 References53 FIGURES 1.LAC:NumberofFintechUsersbySegment,2021(Inmillions)8 2.FintechStartups9 3.FintechFirmsFoundedinaGivenYear(Numberoffirms)9 4.DigitalPayments10 5.DigitalRemittancesintheCaribbeanandCentralAmerica12 6.DigitalBanksinLAC13 7.MostValuedIndependentDigitalBanks,2021(InbillionsofUSD)14 8.LACAlternativeFinance:NumberofFirmsandCountryShares15 9.LACAlternativeFinance:ValueandTransactions16 10.LAC’sInsurtechs17 11.LatinAmerica:SourcesofFundsforFintech,2018versus2020(Percentoftotalfunding)19 12.LAC:VentureCapitalandPrivateEquityFundingRaisedforFintech(InmillionsofUSD)19 13.FinancialDevelopmentIndex:WorldRankings(Indexfrom0to1)20 14.InternetUseandSecureServerCount20 15.LAC:FinancialInclusionIsProgressing21 16.LAC:InterestRateSpread,2016and2020(Lendingratelessdepositrate;percent)22 17:TheImpactofthePandemic23 18.LA6:AlternativeFinancevs.BankLoans25 19.FintechTree26 20.ImpactofthePandemiconFintechRisks26 AnnexFigure1.1.NetInterestMargins34 AnnexFigure3.1.LAC:MonthlyVentureCapitalandPrivateEquityAmountRaisedf