Nearshore Americas
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How Latin America’s New Banks Are Rewriting the Rulebook

Latin America’s banking sector has long been conservative and risk-averse. This has contributed to relatively slow growth and frequent financing problems in the region. For new investors looking at banking in Latin America, this could be the solution that suits you.

There are dozens upon dozens of fintechs and new banks operating and competing with long-established and traditional banks. Some of these entities started as simple fintech apps, while others were spun off traditional banks or benefitted from early capitalization.

Some of these cater to incredibly niche audiences, such as the LGBTQI+ community (Pride Bank) or gig economy workers (Zizzi). More interestingly, entrepreneurs from the banking sector have waded in with significant funding to act as a formal bank right from the start.

However, a new generation of banking visionaries are looking to break the mold in what can fairly be described as a revolution. The innovative strategies of new banks in Latin America promise to help liquidity across the region’s economies.

For now, Brazil, Argentina, and Mexico have been challenger banks’ primary ecosystems.

In general, the region has an enormous number of unbanked or underbanked people in it, meaning that they are unable to access credit or easily save money. Some of this is not helped by rural conditions, with access to traditional bank branches not always guaranteed and ‘banking deserts’ commonplace, meaning people turn to informal solutions.

With so many people excluded from the traditional banking system but still in desperate need of credit, there is a flourishing loan shark scene across the continent. Often known locally as “gota a gota” (drop by drop), these operators charge unfeasibly high rates of interest explicitly designed to trap borrowers in a debt spiral. The consequences of failing to pay are not always solely financial: these are commonly criminal operations.

For small to medium businesses and entrepreneurs, a lack of ability to attract funding or take out reasonable loans can be crippling. Limited start-up capital means a much longer journey towards full actualization of a business, and also heightens the risks of an unexpected pitfall derailing the company before it gets going.

Taking this economic panorama into account, it is no surprise that fintech companies have sprung up to offer something to those excluded from the established system. Some of those now are so large that they have essentially become banks themselves.

What needs are new banks addressing? What are their corresponding strategies?

Basically, the key idea is all about opening up a previously very conservative and closed banking system. Many countries in Latin America even now persist with ludicrously outdated systems.

In some countries, ATMs will not work for cards from some banks, and it’s common to face fees for withdrawing cash from a different bank’s machine. Other banks refuse to give full Mastercard/Visa access via debit cards. Mortgages and loans involve a rigmarole of hoop-jumping.

That’s where the innovative strategies of new banks in Latin America come in. They are all designed to resolve those problems, building a different type of product and way of doing business that particularly chimes with younger people.

Rather than treat their institution as an exclusive club you should be happy to join, they look at ways to bring new users on board.

Probably the most visible part of this for the regular person in Latin America is the interest rate that they receive on their savings. Traditionally, banks offered very low rates of interest (often below inflation) on regular accounts, instead offering products similar to ISAs, where money was illiquid for months if not years.

Then there is the interface between the customer and bank. Rather than having to deal with people in a physical branch, the majority of new banks work essentially as apps, meaning everything can be handled either in the comfort of your own home or on the go. Better yet, most are fully personalized, with a plethora of options available.

For the generation now entering the banking landscape, this is absolutely crucial. Digital natives are absolutely at home navigating through apps and indeed frequently find actual human assessment stressful.

The inconvenience of traditional banking models is a huge turn-off and feels outdated. No wonder, then, that they flock to the new banks, who have had everything fully digitally integrated from day one.

The new banks also put a lot of resources into making their clients feel valued and responding to their needs. For example, Nubank’s expansion into Colombia was based around an advertising campaign that promised to help you out, not just to save you money. Each card is delivered to your home in a cutesy box with a handwritten note. That attention to detail goes far with younger clients.

While products such as mortgages or ISAs are the traditional focus of traditional banks, new banks focus much more on smaller loans, often with limited or non-existent capital.

Crucially, they put a much higher level of trust in their clients, betting that the risk of defaults is lower than other banks assume. This is often true, with their clients trying to build up from a precariously low credit rating situation.

It is so too for services such as wealth management. High net worth individuals are well-served by Latin America’s large banks, but the same cannot be said of those who have little or nothing to invest.

New banks have a much wider range of offers and look to help out everyone with money deposited, rather than only the richest. This builds trust, which is often (quite literally) repaid.

International transfers via standard banks are an absolute pain for almost every nation in Latin America, often involving both bureaucracy and dollar conversion. Many new banks sidestep this via more flexible systems of transfer. In a continent that still receives a lot of remittances from overseas and foreign direct investment, this is a boon for many small and medium size businesses as well as individuals.

And these innovative new strategies of new banks in Latin America are bearing fruit. An investigation by the Locomotive institute found 4 in ten Brazilians have money in a new bank, with that rising to over half among the under-30s.

This is in some ways less a battle for existing clients, but for those yet to come, with the new banks gambling that their customers will stay with them as they grow richer over the decades.

What comes next?

It’s hard to say how exactly this will play out. What is clear is that there is unlikely to be a return to business as usual. People brought into the banking fold will expect to continue in the same vein, and competition in terms of interest rates and flexibility in banking isn’t likely to disappear.

Whether the brave new world will see NuBank achieve its aim of reaching the top or whether the traditional established banks will reassert dominance is not clear. However, it’s entirely possible that there will be an expansion of market entrants in coming years, some of whom will survive while others fall away. This may mean midterm turbulence followed by long-term stability and a new normal.

What’s for sure is that, in order to survive, a new way of doing business is going to be necessary – complacency simply is not going to be an option over the coming years. The innovative strategies of new banks in Latin America have provided an enormous wake-up call to the sector, but they are by no means impossible to copy. Once that happens, the market will become a lot more cutthroat.

Craig Dempsey

Craig is the Managing Director and Co-Founder of the Biz Latin Hub Group. Craig holds a degree in Mechanical Engineering, with honours, a Master’s Degree in Project Management and various other diplomas covering logistics, personal management and government administration. Craig is also a military veteran, having served as an Australian army officer on numerous overseas operations and is also a former mining executive with experience in various jurisdictions, including, Canada, Australia, Peru and Colombia. You can contact Craig here.

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