The Boston Consulting Group executive provides his forecasts on the growth of fintech in Latin America and details what strategies these players must follow to gain a place in the market against traditional banks.
It will come to fruition, as long as priorities are set now. This is how we could summarize the projections of the fintech sector , according to the 2024 global report, published by the Boston Consulting Group (BCG). As in 2023, the study confirms that globally, fintech companies will reach US$1.5 trillion in revenue by 2030. However, despite the fact that in Latin America, these emerging players are growing in number and importance, profitability is still the biggest obstacle to overcome in the face of competition from traditional banks.
To discuss in depth the potential of the fintech sector and the keys to the success of its most prominent protagonists, we spoke with Alejandro Tfeli, Managing Director & Partner of BCG in Buenos Aires. From his perspective, the executive points out that by 2021, the year after the COVID-19 outbreak, there was “almost unlimited” access to venture capital funds and private investors that allowed many entrepreneurs in the region to request loans to open new fintech companies. .
“The number of fintechs with good or bad ideas that had access to that capital and could rise with a vision of development in Latin America was gigantic. But today, in the last 18 to 24 months, that access to capital in a context of high interest rates and economic cooling has decreased. The evaluation of fintech companies in terms of multiples, which is a typical view in which the industry is viewed, has also decreased,” Tfeli declared for AméricaEconomía .
Given this panorama, Latin American fintech companies chose to increase the profitability of the capital already raised with the aim of showing that their operating margin improves year after year. “Because in the fintech world, if you stop growing, it is bad news,” says the director. This fixation on growth in all circumstances led to the fact that, according to the BCG report, between 2021 and 2023, global fintech revenue rose 14% (at a compound annual growth rate). On the other hand, both financing and valuations suffered a free fall.
The search for sources of income has led many fintech companies to knock on the door of traditional players such as banks. It is a phenomenon that surprises Tfeli, since four years earlier, it would have been unthinkable for these actors to seek alliances or share investment spaces. But it is a reality that is already seen in Chile, Argentina, Brazil, and Colombia, among other countries.
On the other hand, growth opportunities arise due to other factors: the first is increasingly widespread legal regulation around interoperable systems and open banking . The latter refers to the mechanisms that allow financial services customers to authorize third-party access to their banking information through secure applications.
However, if we ask ourselves what is the key factor that allows fintech companies to compete with traditional banks, it is the possibility of serving those underserved social sectors that do not have access to bank loans.
“These are segments where traditional banks are more cautious in approaching. It should also be noted that in these sectors, a digital proposal is very beneficial, because by definition it is cheaper, but at the same time, fintech companies must demonstrate that they have a sustainable business model. If they are going to take a segment of individuals, who today do not have access to credit, and generate a giant loan portfolio, but have enormous delinquencies or fraud issues, I do not think that investors will later appreciate such a proposal," he warns. Tfeli.
It should be noted that certain fintech companies decide to opt for the freemium model , which provide free services to attract new customers, but then require payments to obtain a more complete experience. According to Tfeli, startups should evaluate whether this model is profitable, even though it guarantees a constant arrival of new customers.
On the other hand, according to the executive, the second segment where fintech can gain ground against banks is the sale of unique experiences. In that sense, saving time through the digitalization of in-person activities is a classic alternative. “The point is to offer a proposal that consists of operating with three clicks, in a very easy to understand way, but with protection and security,” he explains.
To contextualize, Tfeli mentions the Brazilian Nubank as an example that meets both conditions. This fintech introduced as its first product a low-amount credit card with an international flag, which facilitated access to credit for young Brazilians. The cover letter also had something to do with it: the company offered a sophisticated card, which in turn came in an elegant box, which looked like it was made by Apple. Thus, what began as a prototype for 10 people, today exceeds 100 million customers.
"What did you do? They approved a new segment with a simple, but well-made product. Then, they only expanded the credit limit to people who demonstrated good behavior and left the other clients with low limits, mitigating or minimizing losses. This is an example of offering an extraordinary, scalable and profitable experience,” says Tfeli.
According to the BCG spokesperson, another success story is Mercado Pago: a fintech that began with the differential value of offering digital payments in small and micro businesses in various Latin American countries. The novelty was to include the QR code pasted on the business's cashier line, which allowed anyone to pay through the scanner of their cell phone, without the need to go to a bank and be forced to send the credit information of the last two years.
Currently, the Mercado Pago model has been replicated at the regional level and its simplicity even threatens the survival of cash as the main transaction method. This is a model that is very useful in informal economies such as Peru and Bolivia, where banking access is distant for the vast majority.
THE BIG BENEFICIARIES
In this scenario of optimistic long-term forecasts, certain fintechs may prosper more than others. “The first major beneficiaries are those that within financial institutions we call the payments and transactions segment. The second, which is already prominent in countries like Mexico and Brazil, is lending . Everything that involves loans to individuals, businesses and micro businesses is relevant today. But we believe that there will be higher growth going forward,” says Tfeli.
Although the executive does not rule out that in the medium term other sectors will also experience a significant takeoff. This group includes fintech linked to investments, e-commerce , everything related to digital marketing , as well as “promotions and discounts on financial items in particular terms.”
Be that as it may, artificial intelligence will take on a more leading role in fintech . For example, to create images that help better connect with target audiences, as well as store data about the products and services for sale that allows the customer to be convinced of which goods best suit their preferences.
