It is a common misconception to attribute fintech as a phenomenon from the XXI century exclusively. The first technologic implementation regarding the financial world dates back to 1860 when they invented the Pentelegraph, a device developed to verify signatures by banks.
After that, during the first part of the XX century, the telegraph, the transatlantic cables, and the morse code helped rapidly evolve the digitalization of money. The first credit cards appeared during the 50s, and NASDAQ, SWIFT, and e-trade have roots in the 70s and 80s. Peter Thiel went beyond in 1998: he founded PayPal and revolutionized the financial world and the startup ecosystem.
This century, things have accelerated exponentially within the fintech world. Cryptocurrencies appeared alongside giant fintech monsters, including Nubank, Mercadopago, and Ualá in Latam. In Colombia, we have Wompi, Daviplata, Nequi, Addi, Bold, and PayU, among others. Littio and Palomma, for example, were both selected at the YC Combinator batch this 2023.
We invited Diego Tovar from Ubanku and Ewin Zacipa from Latam Fintech Hub, both experienced professionals who deeply understand the fintech world. With the current context of the fallout of the SVB and its chain effect, we spoke with them about this rapidly growing and fast-changing fintech environment and looked at what could happen within the ecosystem during the following years.
According to Edwin, the SVB was a trendy bank among the startup community in the U.S. and Latin America. That was one of those first ‘traditional’ players that opened its doors and opened its infrastructure so that startups that were in some way had barriers to enter the financial system precisely because they have a recent age, their cash flow is still volatile. Many international entities are very restricted for local companies in Latin America, because of money laundering.
"It was a critical enabler for the market, but sadly with a very concentrated exposure in this environment of venture capital reality, it was one of the first to be affected and sadly, by not having that diversification of risks, because at a time of lack of liquidity, it compromised the entire operation and everyone knows the story", said Zacipa.
"In a way, it was a bank that had a strong presence in the startup and fintech community in Latin America, but even so, given the various safeguards put in place by the U.S. government, this did not represent an impact as such on the operation of the Latam fintech, those that had some kind of accounts, had some days of uncertainty about what was going to happen, about those reserves, those deposits that were stored. The government acted quickly but they had some days of uncertainty", he concluded.
Diego complimented by saying, "we are living in an era of such abrupt changes from the perspective that the world economic order is changing us. Globalization and technology that has brought so many improvements in the quality of life to people in the last 70 years have paradoxically increased the equity gap, generating reactions in the world, particularly in the younger generations".
"All of this leads to a change in the business environment that is affecting not only fintech, but if we wanted to talk about sectors, one could say that it is affecting banking in general terms and has generated a whole new financial ecosystem in which we are no longer talking about traditional players such as banks, but rather about the financial sector", Diego said.
"What we call the fintech and the big techs came to play a relevant role because all the big technology companies are also becoming banks in one way or another, generating liquid ecosystems where for the first time, the customer is finally at the center. This creates fragmentation changes in the value chain and generates much more customer-centric financial services".
From Diego's perspective, up to 10 years ago, the traditional financial system had a massive disruption after operating similarly for 200 years. "We are going to generate a second wave of disruption in which I believe that one of the fundamental catalysts is the phenomenon of decentralization and everything we call DeFi or decentralized finance supported by web 3 and the whole metaverse because we have to manage to adapt faster than consumer changes and technology itself."
According to Diego, part of letting flow the Latam fintech ecosystem comes from intelligent regulation, "which means less regulation, but regulating more appropriately. I believe that crypto assets that are not regulated today will end up, in some way, in quotation marks, being regulated, and that will affect the scale of fintech. But I think we will not continue at the same pace of regulating as we did before with conditions that exclude the new players".
Edwin, Latam Fintech Hub founder, has a broader picture of Latam fintech regulation. It is a sensitive issue "because each country has different jurisdictions in developing the fintech issue. Brazil, Mexico, and Colombia are the markets where at the moment, there are regulatory frameworks that in some way enable the development of fintech. For financial innovation, regardless of whether it comes from traditional players or emerging or digital players".
Edwin says that "that's because somehow the regulators, on the one hand, talk to each other, on the other hand, in Latin America. We like to copy each other, so if one country has already done it, surely other countries will do it. But somehow, I can tell you that if we look at all the digital offers that we have today, in many business models, we can see that the digital offer is not the only one. Is a very accessible, easy and useful offer, compared to those years that we did not have it. The trigger or the enabler has been regulation".
"So many countries, for example, already have e-money regulations. We have models. We have fintech laws like Mexico or Chile, now recently, and soon in Ecuador. We have Open Banking, Open Finance, and the three main markets are already creating a regime for financial data sharing, a scheme secured to authorized third parties. There are some business segments where we have not yet made progress, such as we would like to, for example, the crypto issue", he says.
There we still have a debt with the industry in creating a regulatory framework that ensures the roles and responsibilities of data service providers and consumers. And the financial institutions themselves that provide infrastructure for them. But if we upload all these X-rays and compare them with other markets, the scenario is optimistic.
Edwin says there is an essential agenda within fintech right now: Open Finance, Cross-Bullet Payments, Crypto, and Real-Time Payments. Diego affirms there is a hyperspecialization of financial services, allowing greater financial inclusion. In Diego's perspective, this financial inclusion must arrive with a more significant substance of financial education because FinTechs always think about the young person, about putting a credit card or a credit bucket on them. After all, it is the most profitable banking business.
Within the fintech verticals, there are several personalized services according to the needs of different users. There are pay tech companies: whose role is to generate value within the payment chain. There are wallets and payment getaways. Some reg-techs support financial institutions' back, middle, and front offices.
There are credit platforms with their resources and assets, such as Zinobe, Khuski, and Konfio, that help MSMEs better control their finances with electronic invoicing, digital payroll settlement, digital taxes, and electronic invoices with an electronic signature. Then we have the PFN, the Personal Financial Management, and all those farms that help people better control their finances.
There are wealth tech platforms: those who take our savings and invest them in the stock market, such as Littio and Trii. There are platforms dedicated to collaborative financings, such as A2censo, a new one called Bloom, which has come out.
InsurTech is everything that has to do with applications transforming the insurance business. Sura, for example, has a cooperative called WeSura. Finally, last but not least, there are neo banks: 100 % digital banks that work on a cell phone without a contact center, being Nubank the largest neo bank in the world outside China.
The last FinTech segment called the most tech part of the world, is the whole part of DeFi, which includes bitcoin, crypto, blockchain, chainless, silver, crypto wallets, etc., such as Binance and Ripio. There are all colors, flavors, and tastes we want. Ultimately, the most important thing is that they all promote financial innovation.
Where is going Latam fintech industry after all?
According to Diego, "in a world that is much less centralized, making operations more transparent and with technologies that do not require such levels of trust as the ones that we have in the past, we will be able to achieve the same level of confidence that we have in the past".
The above technologies imply that the regulations set specific requirements, and we can make a much more equitable banking system in which people receive much more money in exchange for their assets.
"Decentralized thinking properly articulated with what needs to be articulated from the traditional world is starting to generate financial services that are much less dependent on the institution, and that is where players like us believe we can bring a lot of value in access or in giving people, in our case young people, access to be able to manage their assets and benefit from them without necessarily keeping most of the benefit for the intermediary".
Trusting is the base of Western civilization. "The financial system is based on trust. In the end, all our deposits are in the banks. They are in the financial system", says Edwin. "The financial system has a crucial economic function. We rely on the financial system; in that sense, if one wants to venture into developing a scalable business model within the financial system", he adds.
"How do you demonstrate trust? How do you establish trust? By having a sustainable business model that is reasonable, healthy, robust, and responsible for the consumer, the market, and the industry.
This is very important. Because in this scenario, when faced by many distractions, smoke, scams, and fraud, the consumer is susceptible to falling for many types of offers. Many of them are illegal, not so judicious, or not with good practices, so in that sense, we also have a co-responsibility as consumers to check how reliable a platform is.
Regarding what it takes to be an entrepreneur in fintech, Diego has a clear point of view: "Well, my advice would be to break the rules because what works in Europe or the United States or Asia is not necessarily going to work in Colombia or Latin America. We are on the verge of a second wave of revolution in the financial sector. The first was the fintech phenomenon, and the second, in my opinion, will be the phenomenon of decentralization".
"Let's fall in love with the problems, not the solutions. Let's understand the issues well and, from there, generate ideas for solutions that truly and effectively solve them.
Everybody wants to be a fintech, and all the startups are putting in fintech. Congratulations to the promoters of this ecosystem, but we really have to generate solutions that satisfy the needs of our customers", he assures.
"This is not only done by making wallets but also by being a little more creative, understanding the problems in depth, and understanding that the corrections are not only necessary but can also be made most effectively", he adds.
"It is no longer enough to know the playbook that people read on the YC website, it is no longer enough to know the playbook and go out with a PowerPoint and a relatively valid working team to raise capital and start burning capital, but it seems that the startup world, particularly the fintech world, is starting to resemble the real world where things cannot be so speculative, but we are going to have to demonstrate that companies are sustainable and profitable from relatively early stages, and we have to learn to digest that, and I think that we have to learn finally".
We have accelerated several fintech in our portfolio: BeeCuick, Nido, Kuribank, Finio, and FinZi. We are committed to keeping enhancing the fintech and the Latam startup ecosystem. That's why we have already opened our PY4 Batch Acceleration application. If you are a pre-seed founder looking to accelerate your company to the next level, this acceleration program might suit your actual needs. Apply now.
