Programmers in Latin America are starting to get serious about Fintechs, the startup industry that has for years been stirring up the traditional banking model in the developed world.

Fintechs, or financial technology startups, have been developing alternative banking services for everything from portfolio management, small business loans or mortgages, forcing traditional banks to rethink their operations. In the U.S., the industry has grown almost eightfold since 2011, (https://www.cbinsights.com/research-pulse-of-fintech-2015) a process that some have called “unbundling the banks.” (https://www.cbinsights.com/blog/disrupting-banking-fintech-startups/)

Fintechs have been slow to start in Latin America, but have been steadily growing since 2014, according to a new joint study by the International Development Bank and Finnovista, an organization that supports Fintechs in the developing world. (http://www.iadb.org/es/noticias/comunicados-de-prensa/2017-05-22/fintechs-en-america-latina,11811.html). Investors are more and more seeing the opportunities in the region, and the need for innovation.

The biggest Fintech surges have been in Brazil and Mexico, but Colombia, Argentina and Chile haven’t been far behind. These five countries make up 90% of all Fintech activity in the region, says the study.

One of the biggest opportunities here lies in the fact that over half of the population (51%) do not have a bank account, but they do have access to smart phones. Even those with basic bank accounts still don’t have access to additional financial services such as credit cards, or personal and small business loans. According to the IDB study, 41.3% of Fintech developers say it is their mission to serve these people who have been left out of the traditional financial sector, mainly individuals and small businesses.

“Technology and startups can come in and compete in those areas that are basically virgin territory,” said Fernando Rivera, co-founder of Buen Trip Hub (http://www.buentriphub.com/), a co-working and mentoring space for tech entrepreneurs in Quito, Ecuador. “The opportunity is huge, and the impact is potentially huge,” he added.

Earlier this month, Buen Trip Hub co-hosted a special pitch night with FinnoVista in Quito, to highlight the innovation happening in the small South American country. Six promising local Fintechs presented their work to a panel of experts and a room full of potential investors. The projects ranged from mobile transactions (PayPhone, Credipy), alternative invoicing (Facturera Movil), crowd funding (Catapultados, Haz Vaca), and client chat services (Mensajes Chatbots).

According to the night’s keynote speaker Bailey Klinger, Executive Chairman and co-founder of EFL Global (https://www.eflglobal.com/), there was nothing at Quito’s pitch night that he hadn’t seen before in other countries, but that’s not a bad thing. Rather, this is an opportunity for Ecuadorian startups, being able to see what’s already been done and worked well in other countries and then adapting that for their local market.

Rivera was particularly interested in Facturero Móvil (https://factureromovil.com/), which offers electronic invoicing services, but not for big companies in the major cities. Instead, they target small businesses in second tier cities that have no access to credit cards, and sell them invoicing services based on pre-paid credit. So, instead of selling a monthly subscription to the service, charged through a credit card, as is traditionally done in more developed markets, they sell a prepaid service that you repurchase when needed. Customers pay through a bank wire or direct deposit, a perfect model for Latin America where most small businesses and self-employed professionals have access to a bank, but not to credit cards. By targeting second tier cities, Facturero Móvil is also reaching a much larger and traditionally underserved market, while it lets its competitors duke it out chasing after a smaller and wealthier market.

EFL Global, a company that helps people with little or no credit history get loans by using alternative psychometric data to calculate risk, has been operating out of Peru for almost a decade. In that time, Klinger said he has seen the local banking ecosystem undergo major changes. Not only are banks more open to working with Fintechs, but researchers are also more willing to work for startup companies instead of big banks. This is the first time he’s seen researchers in Lima prioritizing social enterprise and innovation over stability and a large office, he said.

“Its something very new and really exciting and something that’s not been the case here for decades. Probably ever,” said Klinger via Skype from his office in Lima after the presentation in Quito.

This shift in the banking culture has been beneficial for EFL Global, which is considered a local Fintech success story. Several banks now use their alternative credit rating tool to make billions of dollars of loans they otherwise would not have made, said Klinger, helping small businesses across the region.

There are still some drawbacks for investors looking to Latin American Fintechs, namely the relatively small market size of most Latin American countries and the lack of regulation around this new industry. But according to investors who have long been in the region (https://techcrunch.com/2017/05/19/a-new-era-for-startup-investing-in-latin-america/), momentum is building and these challenges present more opportunities than risks.

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