These emerging companies' adherence to stricter regulatory frameworks will limit further cost incentives and opportunities and expose them to implementation risks as they expand their operations, Moody's Ratings indicates in its analysis.
Financial technology firms (fintechs) and neobanks in Latin America have redoubled their efforts to expand their customer bases, creating a new level of competition with traditional banks.
The gradual change of fintechs to stable and low-cost sources of financing – by encouraging their clients to make deposits in the banking system – is the starting point of their change of course.
This is what Moody's ratings firm maintains this Friday, in its study 'Scaled-up fintechs test their competitive edge as they shift into banking'
The report notes that this is a trend that started in Brazil (Ba2 positive) and is now attracting a lot of attention in Mexico (Baa2 stable).
"While fintechs' flexible business models give them certain advantages over traditional local banks, their rapidly expanding customer base will increase operational and regulatory costs due to rising rates in the region," says the study by Ceres. Lisbon, Rodrigo Marimon and Anita Meyer.
Among the challenges, it is indicated that these startups' adherence to stricter regulatory frameworks will limit greater cost and opportunity incentives and expose them to implementation risks as they expand their operations.
Increasing competition with banks carries risks that will affect the next phase of fintechs. Fintechs need to effectively expand their strategies and business models, in addition to strengthening funding to maintain business sustainability and growing competition with banks.
In many cases, this gives them access to the main source of resources of traditional banks. Increasing complexity, scale and regulations pose significant risks that will slow the next phase of fintechs in the region.
The strict regulatory oversight that accompanies growth and diversification will also present challenges, as it will require a balance between adjusting financial strategies and preserving the competitive advantages that have driven the expansion of fintechs.
Fintechs at different stages of development put significant pressure on traditional banks.
In Mexico, new entrants compete for deposits in traditionally underserved segments. The innovation centers of the Mexican financial system must reduce the high costs linked to
conventional banking operations.
If successful, they could disrupt the long dominance of U.S. interest rates.
existing banks.
This approach reflects the strategies implemented by Brazilian fintechs. Having attracted millions of customers with introductory products, these fintechs are now focused on strengthening their access to retail funding, with the aim of maintaining their competitiveness against established banks, which have significant and stable market shares in deposits.
low-cost granular.
For their part, large universal banks are making a more pronounced shift toward digital products in Brazil, which allows them to serve segments of underserved and mobile customers, but is also generating important improvements—such as a reduction in operating costs—in their traditional product base, which affects its profitability.
In Chile, Colombia and Peru, traditional banks have left little room for new entrants by
developing internal digital platforms and partnerships that retain customers in niche markets, which also increases startups' entry costs and further consolidates their position.
MEXICO, THE NEXT HUB
Moody's analysis highlights that, as competition accelerates, Mexico is positioned as the next regional center of fintech innovation
Fintechs' low-cost structures and flexible business models are key advantages within Mexico's entrenched traditional financial system and its low-penetration credit market. Deposit-taking branchless fintechs are challenging previous assumptions that physical branches and nationwide presence were necessary to sustain a major deposit franchise model in the country.
In addition to lending, these fully online operations now offer a new product in Mexico: deposit accounts guaranteed by the Institute for the Protection of Bank Savings (IPAB, Baa2 stable). An interest-paying deposit account guaranteed by the IPAB has proven attractive to consumers, as it is often their first exposure to a banking-type product.
In addition to debit or credit cards, this means that customers now have a much more tangible experience with fintechs than they have had before with traditional banking.
