Bruno Diniz
Thanks to regulatory changes, new technologies and an emphasis on putting consumers at the center of products and services, Latin America’s financial sector is undergoing a transformation. Continued growth will depend on strengthening regional integration, infrastructure and investment.
For a long time, much of the international community viewed Latin America as an impoverished region, where even basic necessities such as consumer goods, education, healthcare and banking were hard to come by.
However, over the past two decades, this perception has been changing. Infrastructural improvements, particularly in telecommunications, have helped connect people and businesses within the region. This has paved the way for digital innovation, spurred by the rise of startups, and has accelerated a transformation of the financial sector through fintechs.
Entrepreneurs in Latin America are addressing long-standing issues that have plagued the population while fostering prosperity. Large digital platforms like Argentina’s Mercado Libre and Tiendanube, Colombia’s Rappi, and Brazil’s Loggi and Vtex have bolstered e-commerce merchants and the gig economy. Meanwhile, innovators such as Mexico’s Clip and Brazilian firms Nubank, Pagseguro, Creditas and Cloudwalk have transformed how individuals and businesses manage their financial lives.
Latin America is experiencing a remarkable moment in financial services innovation. This new era has been driven by recent technological advancements, regulatory changes and shifts in customer behavior, sped up by the COVID-19 pandemic. These factors have catalyzed the region’s now-flourishing fintech scene. International investors are recognizing the opportunities in Latin America, helping the ecosystem become more mature. Even with the decline in venture capital activity since 2021, the prospects for growth and problem-solving remain abundant.
Despite a downturn in startup investment activity in the region, with a total of $3.9 billion in 2023 — nearly the same as the $4 billion invested in 2018 and far below the peak of $20 billion in 2021, according to Dealroom — fintech has remained the leading subsector. In 2023, fintechs secured $1.6 billion in investment, accounting for 40% of all venture capital activity in Latin America. This continues a five-year trend of fintechs consistently leading in funding. We can expect renewed interest and new funding rounds going forward, albeit with revised valuation premises given changes in the international landscape.
Latin America is a fertile ground for financial innovation, especially with its 600-plus million residents and some $6 trillion in combined gross domestic product (GDP). Recent advancements in financial infrastructure (particularly in Brazil, with initiatives like Open Finance), instant payments and central bank digital currencies (CBDCs) are making the region a global leader. Developments there are now influencing financial innovations around the world, presenting a playbook for overcoming challenges in diverse environments and emerging economies.
Three pillars of change
Fintech is driving a major transformation in the region, reshaping customer habits and the very nature of finance in people’s daily lives. According to the International Monetary Fund (IMF), a number of fintech verticals have grown rapidly in recent years.
Thedigital payments space surged from $89 billion in 2017 to $215 billion in 2021, with the user base exceeding 300 million that year. In the six largest Latin American economies (Argentina, Brazil, Chile, Colombia, Mexico and Peru), the transaction volume of fully online digital banks grew from $17 billion in 2017 to $123 billion in 2021. Digital banks had amassed more than 30 million users in 2021, primarily in Brazil and Mexico; by 2024, Nubank — the most successful neobank in the West — reached the benchmark of 100 million customers. Alternative lending also expanded significantly, from $0.7 billion in 2017 to $6 billion in 2020. InsurTechs have been able to grow their penetration in a highly competitive market, with 352 companies operating in the region by 2021.
I believe three pillars were essential in making this revolution possible: the growing customer-focused approach in financial services and products, the incorporation of technologies presenting solutions to old problems, and regulatory changes. These elements, combined with improved infrastructure and support systems, paved the way for the sector.
Traditionally, banking solutions were primarily product-oriented. Companies often focused on their offerings without sufficiently considering customer needs or market demand. In contrast, a customer-focused approach places customers at the center, aiming to create solutions that satisfy their needs. The bureaucratic and overly complex products and services offered by financial institutions of the past have given way to improved, modernized user experiences — often mobile-only, bypassing the need for physical banking branches. As customers saw superior digital solutions in other sectors, regional players such as Nubank capitalized on this shift, delivering better consumer experiences and raising the bar for the entire sector.
Second, in terms of technology, advancements in internet speed, cloud computing, mobile devices and API connectivity have expanded the possibilities for reach, distribution and user experience. This has brought more people and businesses into the space, reinventing how solutions are delivered and consumed. Technology remains a means to an end — particularly for a customer-focused approach. It provides the building blocks needed to overcome the various challenges faced locally.
Finally, serving one of the most-regulated industries has historically created a significant innovation bottleneck in financial technology. Regulation plays a crucial role in the evolution of fintech, determining whether new players and technologies can enter the market and how quickly new ideas can materialize. A well-crafted regulatory framework can be decisive in this process.
Mexico was one of the first countries in Latin America to establish comprehensive fintech regulation in 2018, setting the stage for financial innovation to grow in a structured way. Although progress later stalled somewhat, this initial step was essential for future developments. Other markets, like Brazil, took a different approach by creating various laws to separately address specific areas such as lending, crowdfunding, cryptocurrencies and payments. Country differences reflect local specificities, particularly regarding how the legal systems operate, the relative priority given to financial innovation and the various regulatory bodies involved. On this score, Brazil stands out as a leader in Latin America, particularly due to well-structured laws and models that often draw from global best practices.
The Brazilian example
Indeed, the story of Latin America’s advances in fintech is exemplified with the case of Brazil. The country’s fintech sector has advanced in multiple directions since 2011 and is now a beacon for the region and beyond.
Brazil dealt with hyperinflation from the 1980s until the mid-1990s, forcing financial institutions to develop more robust systems and improve internal and interbank efficiency. In the early 2000s, a few years after the creation of the Brazilian Real currency and the subsequent control of inflation, the Brazilian Payments System (SPB) was implemented. This established an infrastructure in which all communications and data processing occurred in real time, and where bank reserves were monitored online. On top of that infrastructure, the Central Bank developed the TED (Transferencia Eletronica Disponivel) banking transfer standard in 2002 to speed up transactions for customers. For the first time, TED allowed funds transferred before 5 PM to be available the same day (during business days), with transfers made in the evening arriving in a recipient’s account the next day.
Over the following decade, Brazil saw multiple regulatory changes that paved the way for the first wave of fintechs in the country. It began with the opening of the payment card acquiring market in 2010, which had previously been restricted to just two players that were exclusively linked to Visa or Mastercard. This was followed by new rules for payment institutions in 2013, enabling the creation of numerous neobanks and other fintechs (including Nubank). In 2016, another shift allowed for the opening and closing of accounts entirely online, and in 2017, equity crowdfunding became regulated. Online lending regulations were introduced in 2018, establishing rules for balance sheet lenders and peer-to-peer lenders. That same year, local data protection laws, modeled after Europe’s General Data Protection Regulation (GDPR), were also established.
Globally, the year 2020 was marked by the COVID-19 pandemic, which ended up accelerating the adoption of digital finance adoption generally and causing a turning point for the sector’s infrastructure and legal framework in Brazil. Open Finance rules were enacted, involving major banks and fintechs in standardizing open APIs within the financial system. All three relevant regulators — the Central Bank, the Securities and Exchange Commission (CVM) and the insurance regulator SUSEP — announced their own regulatory sandboxes to foster innovative business models. In November 2020, Pix, a local instant payments system created by the Central Bank, began operating 24/7. Pix offers better transaction speed, the immediate availability of funds, reduced costs for users compared to other payment methods, and ease of use, with user access via banking and financial institution apps.
Brazilian regulators have prioritized financial innovation. Their focus on modernizing the market has fostered competitiveness, inclusion, education, sustainability and transparency in the ecosystem, benefiting both institutions and citizens. Importantly, they have also developed the necessary infrastructure to make these goals possible.
By 2024, the Brazilian fintech ecosystem comprised approximately 1,481 players across various sub-segments, according to the sector’s trade association, ABFintechs. Pix has become a huge success locally and is the fastest-growing instant payments system in the world. Recent reports from the Central Bank of Brazil indicate that the system now includes nearly 150 million individuals and 14.3 million businesses. Developed at a cost of just $4 million, Pix is now open source for other countries interested in their own implementations. Its roadmap includes payment initiation (via integration with Open Finance), variable recurring payments, sweeping accounts, embedded “Buy Now, Pay Later” (BNPL) capabilities, offline payments and international payments.
Looking ahead, the next major infrastructure development from the central bank is Drex, Brazil’s CBDC platform, which is currently under testing and expected to be operational by early 2025. Drex aims to facilitate the tokenization of the economy, transforming local financial markets. It plans to enable the integration of smart contracts, bridge traditional finance with Decentralized Finance, and expand real-time capabilities to virtually all types of products and services, beyond just payments. New rules for digital asset providers, such as crypto exchanges and other related players, are also in the works. Finally, generative artificial intelligence is another ongoing priority for the Brazilian central bank, with the regulator studying the risks and impacts of its use by financial institutions.
Possibilities for the region and beyond
Where will these developments lead the region? In a recent publication on the concept of the “Finternet” — a global vision of interconnected, digital-first financial ecosystems — the Bank for International Settlements cited Brazil’s Pix and Drex as prime examples. The report emphasized the importance of placing users of financial services “firmly at the center,” giving them access to a wider range of financial services and assets and greater flexibility in managing their financial needs.
In Latin America, the Central Bank of Brazil is already in discussions with regulators from countries such as Uruguay, Colombia, Chile, and Ecuador about internationalizing Pix. Brazil’s Open Finance model is also serving as an inspiration for other economies in the region and beyond. Recent studies by the Inter-American Development Bank highlight the importance of focusing on regional interoperability from the outset. The region can continue to grow and transform by adopting examples from similar contexts and cultures.
Although this is not an easy task, given the unique complexities of each market, it is crucial for integrating fintech in Latin America. Such an approach would foster cross-border initiatives and strengthen regional infrastructure, attracting more investments and entrepreneurial activity. Bringing this into a population of early adopters, an open and inclusive ecosystem and the initiatives being developed by various companies will continue to transform the local landscape and better people’s lives.
Bruno Diniz
Bruno Diniz is Managing Partner at Spiralem Innovation Consulting and a professor at the University of Sao Paulo (USP), where he teaches on financial innovation. Regarded as a leading fintech influencer in Latin America, Mr. Diniz is also an international speaker and the author of three books on financial innovation.