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3 challenges/opportunities consumer fintech founders are facing right now3 challenges/opportunities consumer fintech founders are facing right now3 challenges/opportunities consumer fintech founders are facing right now

3 challenges/opportunities consumer fintech founders are facing right now

From cash preference to understanding the user, The LatAm Tech Report presents some challenges that B2C Fintechs are already transforming into opportunities

Using financial services is second nature for many of us. Our transactions are seamlessly processed: we use digital or physical cards, invest in stock markets from São Paulo to Tokyo, make instant transfers, and apply for (and receive) loans from our phones. Whether visible or invisible, money is all around us – and only when something goes wrong do we remember how used to it we have become.

But there are also millions of other Latin Americans without as much as a bank account. Some by choice, given years and years of entrenched distrust at play. And some as a consequence of the lack of interest from traditional banks. These people make do with hard cash and informal loans, never accessing the possibilities the formal financial world provides. They are still out of the money wheel and suffer from financial exclusion.

That's the challenge. But that's also the opportunity – and digital inclusion is making it even more significant. 

That's the view of many fintech founders in Latin America. In The LatAm Tech Report, we mapped how big is this hopeful group: LatAm currently has more than 1.000 active fintechs, in segments that range from Digital Banking to Insurtech. Want a sneak peek of some of the challenges/opportunities these founders are facing right now? We've got you covered.

1. LatAm is still cash upfront. But only for now

Remember the people that make do with hard cash? Well… Yeah, cash is still king in LatAm. In 2020, it accounted for 85% of in-person retail spending. The percentage has surprisingly increased in relation to another study shared by AMI in 2018, which points to 81% penetration:

Source: Public domain sources and AMI analysis

You might be thinking: well, the pandemic must have changed that, right? Not quite, since LatAm e-commerces also work a lot with voucher-based cards sold in convenience stores and supermarkets. That's especially true in Colombia and Mexico.

"Ualá’s objective is for everyone to be included in the financial system with, at least, an account. In Latin America, it is not fighting for people to drop another bank. It’s a fight against cash." (Maia Eliscovich, Head of Merchant Acquiring at Ualá, in The LatAm Tech Report)

There was, however, a significant push to digital due to the covid-19 crisis. According to a Mastercard study, during the first half of 2020 the number of cash-only consumers decreased from 45% to 34%, and cash preferrers, from 28% to 16%.  

The need to access covid-19 social benefits programs and e-commerce during quarantines forced a shift in customer behavior, and enabled banks to grow by 40 million people between May and October 2020. Especially neobanks, with lower entry barriers. 

After dipping their toes into digital wallets and neobanks, a further 102 million are now "willing to try" more digital banking products – but they have to be convinced to stay in. That means that there's still plenty of opportunity ahead. Data shows that in Latin America as a whole, bank account penetration is still at 55%, while credit card penetration is at 27% For comparison, they're at 93% and 66% in the US.

The name of this opportunity is digital payments. They are one of the most popular entry points to a customer's life and their very nature blends into other fintech spaces, like lending, investment, and crypto. It's no wonder, then, that the payments & remittance segment has received over US$ 200M in funding in Latin America during 2021.

There are different payment methods around LatAm catering to cultural and regional specificities. But although the methods might differ, B2C Fintech founders should know that people seek ways to do online transactions with the following characteristics:  

  • They are easy and non-bureaucratic;
  • They are free;
  • They have real-time confirmation.

Want some inspiration? There's PIX in Brazil, a state-led initiative of immediate P2P money transfer which has been hugely successful and has moved US$ 700B in a year. And then there's Yape and PLIN in Peru, both private-led P2P payment solutions with 4-5 million users each.

2. People can't get into banks, much less love them. Open Banking brings a new hope

Can you imagine having to travel to another city to pay a bill at a bank? People in Latin America can. Now you understand these people that don't use banks because they don't trust them.

Despite traditional banks having a stronghold due to a historical lack of competition, with 70-85% of banking business in Brazil, Colombia, and Mexico going through these incumbents, they are not kindly seen in Latin America.

But traditional banks' historical flaws can become opportunities for B2C players. Here are some of them:

  • Extensive and bureaucratic processes;
  • Traditional credit scoring;
  • High rates for loans and credit in general;
  • Poor customer service and related infrastructure (such as convenient communication channels).

These opportunities have always been there, but movements such as Open Banking (i.e. financial and transactional data sharing regulated by the government) pave the way for B2C Fintechs to multiply their potential market. Some fintechs already leveraging this trend are Belvo and Pomelo.

Open Banking allows fintechs to integrate their products and services with traditional banks (the irony!), other fintechs, and even non-financial players. 

This last case is known as embedded finance: challenging the historical logic of financial interactions, in which only banks can deal with them, banking-as-a-service (BaaS) fintechs helps non-financial companies to offer financial products to their customers through APIs. 

That means people excluded from traditional banks can now be eligible for credit cards, loans, digital accounts, and loyalty programs via their favorite store, for example. There's an appetite for it: according to EY research, 68% of customers are willing to consider financial services from non-financial service companies.

That's why we see B2C Fintechs as a valuable way to bring financial and social inclusion to the table. Debit cards, credit cards, digital wallets, new forms of making payments, savings and investment accounts, financial education… They can all help people have better access and understanding of the banking system, leveraging it to improve their lives.

3. The focus needs to be on the customer. Finally, it is

Recent years have seen Latin Americans becoming less distrustful of the whole online money thing, especially when they get to compare the digital alternatives to the frankly unloved incumbent banks. 

Why is that? Because B2C Fintechs bring to the table precisely the customer-centric approach incumbents didn't apply – and that way, they can actually make financial inclusion stick. 

"There’s a lack of trust. Customers are four times more likely to trust you if you’re not a traditional financial institution. So how to communicate with them? Show that you are not like the incumbents." (Maia Eliscovich, Head of Merchant Acquiring at Ualá, in The LatAm Tech Report)

Here are some of the key questions B2C fintechs ask to have a customer-centric approach:

What does the future hold for B2C Fintechs?

Demand for financial inclusion has been latent in Latin America for a long time – and fintechs have become an integral part of that solution. For Sergio Furio, Creditas' founder, a revolution is inevitable now that the building blocks are set. 

"We're planting the seed of something unique in the world. Ten years from now, it's going to be amazing", Furio said at a panel about the fintech revolution in Latin America, our last Vamos Latam Summit.

Now that you know some challenges/opportunities B2C Fintechs are facing right now in Latin America, want to discover the trends per segment and more opportunities for B2C Fintechs in the medium to long term? Download The LatAm Tech Report.

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