Lindsay Lehr
Head of Payments Practice
Americas Market Intelligence
After 30 or so months of digital acceleration and record levels of financial inclusion in Latin America following March 2020, the second half of 2022 finally started to bring some discouraging headlines to the region’s fintech sector. Throughout 2022, Crunchbase reports that over 100,000 tech jobs were eliminated, as companies battled with rising inflation, volatile stock market and stagnating VC investment.[1] This trend hit Latin America in Q2 and Q3, as LatAm tech firms VTEX, Bitso, Buenbit, EBANX, QuintoAndar, Loft, Facily, Lemon Cash, among others, announced layoffs. In Q4, LatAm start-ups slashed over 1,000 jobs in December.[2]
The crypto industry, which was rapidly ramping up in Latin America, also experienced a downturn with the bankruptcy of crypto exchange FTX and the following accusations of fraud and money laundering. While consumer interest in crypto seems to remain strong, investment in crypto innovation from traditional players (i.e., banks, processors, acquirers) is mostly on hold, waiting for the dust to settle and for regulators to provide much-needed certainty.
Finally, the global and local macroeconomic context has not been encouraging, with inflation soaring in multiple markets, declining GDP growth (the EIU projects 0.9% growth in 2023 compared to 3.5% in 2023) and a looming recession in the US.
In the first two weeks of 2023, these circumstances have led clients to ask me:
- “Will 2023 be a year of consolidation?”
- “Will companies continue to invest in innovation?”
- “Will crypto projects die?”
- “Can the impressive growth we’ve seen in digital payments be sustained in this climate?”
While I don’t know all the answers to these questions, and despite the news headlines, we can be sure that there are still many reasons to be optimistic about payments in fintech in Latin America in 2023. Below I outline a few:
1. Digital Payment Growth Is Not Slowing
While the rest of the economy is expected to limp along at <1% in 2023, digital payment growth does not show signs of slowing, even if consumer spending slows. Digital payments and e-commerce have successfully penetrated “essential goods”—those that are recession-proof—including grocery, pharmacy, and utilities, as well as budget brands like Walmart, Chedraui and low-cost airlines. While brick-and-mortar retail is growing at only 5%, AMI projects e-commerce to continue growing at 25% annually. It will be boosted by massive investments that retailers will make in their e-commerce operations, the incorporation of small businesses into marketplaces, cross-border e-commerce, and Pix, which is making online transactions in Brazil more accessible, faster and easier.
A 2021 study shows that instant payments increased GDP by US$78 billion in 30 world markets.
Within face-to-face retail, contactless cards, tap on/to phone technology, and QR codes are working to displace cash. At the end of 2022, AMI estimated that cash represented 37% of all formal retail payments in its top six markets, a tremendous decline from the pre-pandemic era when cash represented ~70% of formal retail payments. This trend is set to continue as digital payments continue to become easier, cheaper, and faster.
2. Payments Are Getting Faster
In Brazil, 31% of electronic transactions[3] were instantaneous in 2022—but these all represent Pix transactions. In fact, before Pix was launched, virtually 0% of electronic transactions in Brazil were instantaneous, clearly showing the powerful impact of this platform. Despite already high adoption among Brazilians, Pix transactions are continuing to expand, growing 6% monthly in the second half of 2022. And with only 25% of all merchants (including informal sellers) having accepted a Pix transaction and new functionalities being rolled out, such as credit, we can expect Pix to continue its growth curve in 2023.
In 2022, cash represented 37% of all formal retail payments in LatAm’s top six markets, a tremendous decline from the pre-pandemic era when cash represented around 70% of retail payments.
Other countries are taking note, with the governments of Colombia and Peru specifically making plans to replicate Pix and more than 30 instant payment schemes (both private and public) in development across the region. Visa and Mastercard are also being bullish about instant payments with the implementation of Visa Direct and Mastercard Send—both of which use technology that leverages debit card rails to make instant payments—in Brazil, Peru, Guatemala and elsewhere. In our annual Latin America E-commerce Blueprint study, AMI projected that across the region, instant bank transfers will grow more than 40% annually through 2026, while digital payments overall will grow at a rate of 20%.
Faster payments are good news for the payments industry and the economy. A report by ACI suggests that instant payments increased GDP by $78 billion in a survey of 30 world markets in 2021.[4] Instant money transfers boost financial inclusion, reduce costs, empower fintechs, enable open banking, promote digital commerce, increase cashflow and make more innovation, competition and growth possible. With faster payments, Latin America will continue to grow in dynamism and resiliency and fintech innovation overall.
3. Banks will Increase Their Consumption of SaaS and Outsourced Development
Venture capital funds for fintech are not as free flowing as they once were, causing more fintechs to have to support themselves financially. This may cause many local LatAm fintechs and neobanks to close their doors—or spur international fintechs to divest from the region. This opens the door to banks—who are already on a digitization mission—to fill the gap that the exiting fintechs may leave. Many banks—especially Tier 2 and institutions and smaller—are finally understanding that they are not technology companies and need the support of specialized vendors to build their products.
This is happening simultaneously with increasing investment in Latin America from both local and international providers of financial product development and innovative core processing from companies like Mambú, Veritran, and Geopagos. We can expect increased partnerships between banks and digital service providers, and as a result, increased digital development from banks, including rewards marketplaces, P2P payments, accessible savings and investment tools, digitized credit, digital small business services, and integration with third parties like retailers and gaming and digital goods companies. This will promote a more digital financial services landscape and push banks toward embracing open banking.
In 2022 in Brazil, 31% of electronic transactions were instantaneous—and there were all transactions done with Pix.
4. Innovative Credit Shows No Signs of Slowing
Globally, Buy Now Pay Later began to bust in 2022 after a spurt of groundbreaking success. Klarna and others experienced huge devaluations in 2022, reflecting investor fear over high credit exposure and in 2022, and the segment began to receive criticism as Gen Z customers racked up debt and experienced falling credit scores. Increasing regulation is pushing some players out of specific markets, such as New Mexico in the US; in addition, global markets around the world are expecting greater scrutiny over point-of-sale lenders.
However, this trend does not appear to be impacting Latin America, where a certain flavor of Buy Now Pay Later (BNPL) has been around for decades—most credit card holders regularly use monthly installments to manage their financial lives, especially in times of inflation. Against this backdrop, credit is becoming increasingly available from neobanks, BNPL fintechs, marketplaces offering credit (MercadoCredito), and (quietly) from merchants like Walmart, Elektra, Magazine Luiza and Falabella, which are lending in-store to under-digitized consumers. In fact, with banking services now available nearly universally (70%+ penetration), it is likely that access to credit will become a new barometer for financial inclusion in Latin America in 2023. And if consumers can access credit, they can continue to consume, they can manage their way out of financial crises, open a business, and conduct other activities that support the economy overall.
5. Embedded Finance Will Increase the Value of Companies across the Region
Globally, a known fintech trend is that “every company is becoming a fintech.” This is thanks to embedded finance and banking-as-a-service, through which non-banks can offer financial services, such as digital accounts and credit. In Latin America, we are beginning to hear rumors of “credit-as-a-service”, “acquiring-as-a-service,” and “identity-as-a-service.” This is significant because by embedding financial services into one’s business structure, companies create a recurring and highly profitable (most of the time) additional revenue stream. MercadoPago is perhaps the best testament to this, with its fintech revenue doubling in 2022, contributing to 36% increased net revenue in Q3 2022.[5]
The news may tell a bleak story—it usually does—for Latin America in 2023, even for the fintech sector. And while macroeconomic and even political trends may not favor the business environment, continued innovation from the public and private sectors are undoubtedly creating a positive environment for the industry. A potential fintech consolidation and declining consumer spending will have some losers, but with faster payments, open banking, and credit evolving, Latin America may be on the cusp of exciting times.
Sources:
[1] Vedantam, Keerthi, 2023. Crunchbase. “Tech Layoffs: U.S. Companies That Have Cut Jobs In 2022 and 2023.”
[2] Techloy, 2022. “LatAm startups laid off around 1,000 employees in the past week.”
[3] Esto considera Pix, tarjetas de crédito, débito y prepago, transferencias intrabancarias, boletos, TED, DOC y débito directo
[4] ACI, 2022. “Prime Time for Real Time.”
[5] MercadoLibre, 2022. “Investor Presentation Third Quarter 2022 Results.”
