What impact do startups have on the world? Often, a heck of a lot. And when a group of startups works on a similar set of problems, they frequently bring about massive shifts in how day-to-day life is lived. In the case of financial access in Latin America, new data indicates that startups have had a large, and measurable, impact.
As the global venture capital market has contracted, Latin American startups have raised significantly less than they used to compared to other markets that TechCrunch tracks. This is not a new trend by any means, but the figures are stark now that we’re more than halfway through 2023.
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A new Atlantico report indicates that venture capital volumes (measured in billions of dollars) in Latin America declined 65% in the second quarter of 2023 compared to a year earlier. Notably, that indicates that investment in fintech, the category that has historically attracted the most capital in the region, also declined in the region.
It is obviously not encouraging that Latin American startups are facing a more severe lack of funding than other markets right now — not all news there is bad, it’s worth noting — but to look at only the bad news of the moment would mean we’re effectively ignoring how much impact startups in the region have had. In particular, we’re talking about the impact of startup investment, fintech and Latin American consumer finance.
In Latin America, fintech has long been a sector that startups have loved to tackle. It is not hard to understand why: The region was, and remains, significantly underbanked than many other large countries. In its report, Atlantico compares Latin America to India and the United States, noting that from 2011 to 2017, the rate of bank account penetration in LatAm rose from 39% to 55%. In contrast, India saw penetration soar from 35% to 80% in the same period, while the United States had a more modest 88% to 93% gain.
Things look different after 2017, though. Bank account penetration rose from 55% in Latin America to 74%, while in India, it receded from 80% to 78%.
No national statistic is influenced by a singular factor, so we do not want to overstate the case. But, given how many fintech startups raised money (and the buckets of money investors poured into the sector) in Latin America during the last venture boom, it’s not hard to connect rapidly improving bank account penetration with startup activity over the same period. All that capital had a real impact.
Crunchbase data makes it clear that the pace of fintech investment in Latin America accelerated in 2017 before finally decelerating back to more “normal” levels in late 2022.
The share of venture capital that went to LatAm fintech has been stable since then, however, with little variation between 2022 (43%) and the first half of 2023 (45%), according to LAVCA data compiled by Atlantico. And you can’t ignore the compounding effects of the capital that poured into the sector year after year: The tens of billions of dollars that were invested in fintech startups in the region had massive financial impact, resulting most notably in Nubank’s massive IPO.
We often focus on the financial results of companies and their backers, but the human impact of that investment is the real story here. And when it comes to Latin America, that investment has resulted in millions of people going from having no bank account at all to using a very innovative payment solution right on their phones.
Nubank, for instance, has made banking much easier for the average Brazilian with its mobile app and credit card programs than incumbents, which often took days to issue accounts or cards and offered a comparatively poor customer experience. The bank now boasts of 80 million customers in Brazil, and Atlantico reports that 42% of its clients consider it to be their primary bank — basically, millions of Brazilians now predominantly use a digital bank known for its credit cards and mobile offerings.
Looking beyond Nubank, it is fair to say that fintech investment has generally led to a better banking experience for the Brazilian population. Not just because of what fintechs are offering, but also because it forced incumbents to react. Moreover, it is part of a broader framework change, as regulators are successfully pushing for open banking and creating opportunities that startups can jump on.
The ubiquity of Pix, in particular, is impressive. You could describe it as Brazil’s instant payment system, but that doesn’t fully explain how prevalent the service has become in the daily lives of Brazilians. In a survey by Atlantico and AtlasIntel, 43% of respondents said they were using Pix daily, and 30% said they used it weekly. For comparison, only 21% said they were using cash as a payment method every day.
Indeed, Pix’s payment transaction volume grew by 229% between 2021 and 2022, and Brazil now accounts for 15% of all real-time payment transactions globally. That’s an eye-opener if ever there was one.
Pix’s popularity hasn’t gone unnoticed, and we understand that it played a major role in Visa’s decision to acquire Brazilian fintech Pismo for $1 billion this June as well.
What’s more interesting is the impact Pix has had as a payment facilitator. As Atlantico’s report points out, “adoption of digital payments correlates with formalization of labor and access to credit.” The mechanism is twofold: “As payments become more digital, the rate of informal employment drops,” and more formal labor equates to higher access to credit.
Thus, the growth of fintech — partially predicated on venture inflows from both local and international investors — could have a wider economic impact beyond just banking.
A word of warning from Atlantico that we can only agree with: Increased access to credit in Latin America “could lead to more indebted populations.” Still, it is clear that Mexico and Colombia, for instance, want what Brazil has and are indeed adopting a similar open banking agenda. Mexico has a lot of catching up to do, though: While it had 23 neobanks last year compared to only three in 2016, cash is still king when it comes to daily payments.
Brazil, meanwhile, is already moving on to the next step of its digital money agenda. In parallel with expanding Pix’s ambit to include international transactions, the country is working on a pilot for its digital currency, Drex, and on the next phase of its open finance initiative, which is already generating tailwinds not only for fintech, but also for insurtech. Could it pave the way for the next Pismo? We’ll be watching.