Digital banking is booming in Latin America, disrupting the industry and improving service delivery | Knowledge
The importance of fintechs – neobanks and digital wallets – in Latin America is growing. Recent research from Bank of America demonstrates that in Brazil alone, in 2021, fintechs such as Nubank, PagBank, Mercado Pago, Ame Digital and Banco Pan had over 95 million monthly active users, surpassing banks traditional Brazilian companies, such as Caixa, Itaú, Bradesco and Santander, by more than 15 million monthly active users.
In Brazil, fintechs, such as the companies mentioned above as well as PicPay, C6 and Inter, reached more than 21 million downloads per month in 2021, a growth of around 33% compared to 2020.
Notably, however, traditional banks are also engaging in this new digital approach to banking and finance. The digital divisions of traditional banks, which normally operate as a subsidiary or joint venture – among them Bradesco’s Bitz and Next, Itau’s iti and Santander’s Superdigital – were responsible for at least 19% of visits to banks’ websites in 2021.
Fintechs can be considered as companies that use technology (software, algorithms and applications for mobile or computing structures) to support banking and financial services, such as online banking or payment applications.
In this direction, neobanks, sometimes called “challenge banks”, can be defined as fintechs that offer a platform, application, software, algorithm or technological process that allows their users to benefit from online banking services without having a single physical branch. . Neobanks do not have a banking charter. They can only operate within the limits and restrictions of their legal structure, depending on their jurisdiction.
Digital Wallets, on the other hand, are online services that enable electronic transactions for individuals or businesses by storing their payment information in order to log into the payment system and complete a purchase or transfer. Thus, the term “digital bank” encompasses all of the above definitions and will be used as a general definition for the purposes of this article.
Overall, these digital banks (neobanks, digital wallets and fintechs in general) focus on innovative banking and financial services by improving user experience (UX) and banking-as-a-service (BaaS) solutions, in which technology enables a bank to offer its customers an integrated range of banking services under the aegis of a single brand.
The Most Valuable Bank in Latin America
Nubank’s initial public offering on NASDAQ in December 2021 demonstrated that digital banks can be, and are, disruptive on their own. In the aftermath of the IPO, Nubank was valued at US$41.5 billion – that is, it was considered the most valuable bank in Latin America, surpassing even Banco Itaú, with its vast market share and huge annual profit.
Nubank is just one example of how digital banks are changing the banking industry. In Argentina, Brubank – a 100% digital bank already licensed to operate by the Argentine Central Bank – had already reached more than 1.5 million users in 2021. It is currently planning expansion into Colombia and Peru. In August 20211, Ualá became one of Argentina’s first unicorns, valued at US$2.45 billion. Argentina, Colombia and Peru also have digital banks, such as Ligo, a Peruvian digital wallet; B89, one of the first Peruvian fintechs; Rappi, a Colombian superapp with several services, including banking; and Nequi, the first digital-only bank in Colombia.
Other Latin American countries, including Uruguay and Chile, are following the same path, and some companies, predictably, are looking to innovate in this market. Mach in Chile and Prex in Uruguay are two examples.
Among Latin American countries, Brazil and Mexico are considered the countries with the largest number of fintechs, digital banks and similar institutions, and with the most competitive digital banking markets. Cuenca, Albo, Klar, Fondeadora and several other Mexican fintechs are particularly relevant in the Mexican banking market as they strive to continuously innovate in the Mexican banking space.
Even if these innovations are generally considered positive, there are risks associated with them. These include the potential for fraud and even Ponzi schemes that take advantage of consumers; bankruptcy is another risk.
Countries are striving to regulate and set limits and restrictions for fintechs and digital banks, to protect money, customer data and, therefore, their national economies. However, as often happens in times of rapid change, businesses are constantly innovating and regulations may not keep pace.
Learn more about the implications of this rapidly growing financial services industry by contacting the authors or your usual DLA Piper relationship attorney.