Brazil and Mexico are the FinTech champions of Latin America

07 June 2018 Consultancy.lat

Financial institutions, multinationals and investors worldwide are racing to understand how FinTech can benefit their businesses. Early adoption of FinTech has, in only a few years, turned into a relatively steady early global maturity in 2017 led by China and India. Whilst many would think that the Silicon Valley-driven United States would be leading the way across the Atlantic, Brazil is the FinTech champion of the Americas. 

Brazil is well endowed when it comes to digital. It boasts the most technologically orientated population in Latin America, of which 85% live in urban areas. However, 40% of this population is said to be excluded from one of the world’s most concentrated banking system. This combination has proven the perfect melting pot for the early adoption of FinTech.

Brazil is a world leader in the early adoption of FinTech and has made dramatic leaps forward considering it has just emerged from recession. With the highest number of FinTech start-ups in Latin America, the country’s traditional banking sector is expecting to feel the effects of this disruption on a larger scale than elsewhere in the continent. 

FinTech adoption rates across our 20 markets

Latin America as a whole however has many of the same inherent issues as Brazil. High interest rates and low access to capital and a lack of financial services in general have created a push to develop FinTech across the board. In combination with a rapidly transforming and urbanizing population, Brazil’s early adoption of FinTech will continue to demonstrate to other Latin countries the benefits of the new technologies. 

Beyond being a role model for its Latin neighbours, Brazil is turning heads in the US as well. According to EY’s FinTech Adoption Index in 2017, the US adoption of FinTech as a percentage of the digitally active population is 33%, the same as the global average. Brazil however is ranked as the worlds fourth largest adopter of FinTech with a ranking of 40%, only behind China, India and the UK. 

Accordingly, this has North American investors scrambling to South America’s largest economy, and Brazil is ready to show off. In September this year, São Paulo will play host to the FinTech Roadshow, drawing US tech investors, companies, consulting firms and start-ups to some of Brazil’s leading FinTech institutions. The event will be held between the US Consulate in Brazil and Hotel Unique, comprising of two days of meetings and networking, followed by the full day conference ‘Fintech in LATAM: The Future of Finance’. 

Comparison of the top five markets with the highest FinTech adoption for each FinTech category

The event will be run by Miami-based strategy consultancy PHM International in conjunction with LatinFinance. PHM International works both with the public and private sectors within emerging markets and developing economies. The firm, formed in 1997, also initiates trade missions with the U.S. Trade and Development Agency, which has allowed this event to be classified as a Certified Trade Mission. 

"Brazil's burgeoning FinTech sector represents real opportunities for U.S. investors and companies," said Hank Kearney, President of PHM International. "Brazil is home to the largest number of FinTech companies in all of Latin America and ranks highest in EY's 2017 FinTech Adoption Index in areas such as money transfers and payments, financial planning, savings and investments, and borrowing.” 

EY report highlights Nubank’s success

The Brazilian FinTech sector is paving the way for Latin America in terms of money transfers, payments, financial planning savings as well as in investments and borrowing. Included in the EY 2017 report is the example of Nubank, a Brazilian FinTech powered financial institution which has successfully disrupted the Brazilian financial sector. 

Comparison of past, current and anticipated future use of FinTech, by market

Launched in 2013, Nubank is the first fully digital and branchless credit card company in Brazil which developed their entire technology stack in-house. The company aims to attract customers who want to use mobile interfaces to manage their finances, and Nubank utilises online communication methods to provide round the clock customer services. The bank has grown substantially since its inception, driven by its exceptional customer service which has attracted a wealth of social media attention. 

David Vélez, Founder and CEO of Nubank, commented on the hostile environment in which Nubank was conceived and of the challenges which they overcame; “When I came to Brazil, all I heard was that I couldn’t start this type of business here, the big banks wouldn’t allow it and the regulation was too complicated. Thirty different market specialists all said, “Forget it, you are a foreigner and you just don’t understand.”

“We built Nubank despite all conventional wisdom, in the midst of Brazil’s worst economic crisis. Today, more than nine million people have applied for Nubank. These results should motivate every entrepreneur to keep challenging the status quo,” Vélez concluded.

Digitization could add $240 billion to Mexico’s GDP by 2025

22 January 2019 Consultancy.lat

New in-depth analysis by McKinsey & Company ranks Mexico 55th in digital maturity out of 151 countries. When compared to countries with similar economic output, Mexico is in good shape, but the country has “yet to achieve the kind of world-class digital transformation that fuels productivity and economic growth.”

Countries that have adequately transformed, such as Estonia and Malaysia, have incomes close to Mexico, but punch “above their weight” when it comes to digital maturity. Mexico is about halfway there. Taking steps to improve its global digital position, however, could increase the country’s GDP by  7-15% (approximately $155-240 billion) by 2025. Such an increase would be powered by increased productivity and employment in existing industries, new digital businesses, a broadened expanded information-and-communication-technology (ICT) sector, as well as the successful labor force transition into the digital world.

Mexico is the second-largest economy in Latin America, meaning it is in the unique position to set the regional standard for a “digitally enabled” government.

For their analysis, McKinsey & Company researchers Alberto Chaia, Gonzalo Garcia-Muñoz, Philipp Haugwitz, Max Cesar, and Andre de Oliveira Vaz defined digital maturity using four categories: government, foundations, economy, and society. The study also laid out steps that Mexico could take to improve its digital maturity. Of these four factors, Mexico has the most work to do in digital economy and digital foundations, categories in which its scores are just below average – and which are highly correlated.

Digital maturity of Mexico according to McKiney

The bad news first

Digital foundations essentially encompass the ability of citizens to participate in a digital society. This means internet access, mobile networks, and so forth. “In 2016, Mexico had just 13 fixed-line broadband subscriptions for every 100 inhabitants” the analysis found. “The rate of subscription to mobile broadband is higher, at 61%, but this still leaves a sizeable portion of the population unconnected and thus spending additional time and money getting to physical centers to access government services.” This lack of access causes Mexico to rank 93rd overall in the digital foundations category. 

Mexico’s digital economy, in turn, is hindered by its “shaky” digital foundations. It sits in 92nd place of all countries surveyed. There is a lack of access to high-speed internet, as stated, as well as an unreliable postal service and a lack of bank accounts among the population, with just 40% of citizens aged over 15 having an account. These factors decrease the country’s potential to develop an e-commerce industry that is widely and conveniently used. Exports of ICT goods, as well, account for an astonishing less than 1% of all exported goods and services.

And now for the good news

Mexico’s digital government, which ranks 39th overall, has made great strides in recent years. The creation of gob.mx, for example, provides "a one-stop portal that consolidates 34,000 databases from 250 government institutions and 5,400 public services. The platform is described as the “centerpiece” of Mexico’s digitization efforts, allowing citizens easy access to important legal documents such as birth certificates, as well as automating internal processes, making workplaces tasks run more smoothly for government employees.

Despite this – and the appointment of a national digital strategy coordinator who sits on the president’s staff - Mexico “receives low scores from its citizens on their overall satisfaction with the convenience and accessibility of government services.” Citizen experience was the worst-rated of those group countries surveyed (Canada, France, Germany, Mexico, the United Kingdom and the United States). There was also a largest perception gap between the private and public sector.

How digital can boost Mexico’s GDP

A digital society, according to the report, “can improve the quality of life for citizens by fostering greater civic participation, providing access to information, and offering new tools for health and education.” As previously shown, Mexico is pushing such platforms, including several subsections of gob.mx, on which citizens can participate in public polls and discussions, and present potential digital solutions to serious societal problems such as earthquake detection systems.

Mexico is well on its way to achieving a “good” or “very good” digital maturity rating (right now, the country is “acceptable”). According to McKinsey, “There are three basic initiatives Mexican government leaders could consider putting on top of their priority lists [to speed the transition into the upper echelons of digitization].”

First, the Mexican government must define a digital vision and strategy. Second, it must link that vision to policymaking. Entwining the two ensures that digitization acts as a “lever” to a policy’s success. “To establish a clear link between its digital vision and public value, Mexico’s incoming administration may want to consider revisiting the country’s "National Digital Strategy" for 2013 and aligning it with Mexico’s current and future needs, as well as with the new government’s priorities,” the report states. A “test and learn” attitude toward linking digital vision and policy will also be necessary, as the only way to avoid repeated mistakes is by closely evaluating those that have been made, then planning accordingly. Adopting this attitude, according to the report, will necessitate more flexible budgetary strategies.   

The third suggested initiative is all about power to the people. Successful digital transformations are those that are centered around the citizens, rather than the institutions that serve and govern them. This means service delivery is key, and centralization of digitalization efforts – initially, perhaps, in the form of a council that would oversee governmental transformation – could greatly aid government agencies in getting the people what they desire. As Mexico transforms, so would the ways in which ideas are generated and put into action. For instance, the United States has the US Digital Service, which works with the White House, and Singapore relies greatly on the Government Technology Agency, which reports to the country’s president and implements digital strategies.

Digital maturity benchmark

Filling in the cracks

Because Mexico ranks on the low end of the “digital foundations” category, it is obvious that the other four categories, which by nature fall under the “foundations” umbrella, are potentially negatively affected. As such, McKinsey offers five steps that could be taken to strengthen the country’s digital infrastructure. 

Private companies, for one, could be offered incentives to provide broadband internet to “marginalized” communities, such as those in Oaxaca and Chiapas. The study points to India as an example, where the government-created National Optical Fibre Network (BharatNet) “successfully brought broadband services to approximately 115,000 villages, aiming to deliver broadband connectivity to 250,000 villages overall.” 

Talent is also an issue. “In recent years, Mexico has made significant strides to boost the number of college graduates with degrees in science, technology, engineering, and mathematics (STEM),” the report states. In 2016, 25% of university graduates with a STEM degree. 

But degrees aren’t so much the problem as education in general. “Only 17% of Mexicans graduate from college, making the talent pool small.” Programs that keep primary and secondary school teachers in the loop are a must – as are “reskilling” programs meant to train a percentage of the workforce that is soon to be displaced by technology such as automation. 

Rounding out the five suggestions are a system that easily and simply explains new regulations regarding technology - an invaluable resource for startups; the development of cybersecurity units required to monitor the security of such a large, overarching transformation; and a streamlined, interoperable model for data sharing across multiple government agencies. 

It’s an investment

The challenges and obstacles in Mexico’s path to digital transformation are not inconsiderable, but are neither without long-term reward. “Going digital will require an investment of financial resources, extensive coordination among the multiple stakeholders and levels of government, and new regulations governing the growing e-commerce and fintech sectors. It most likely would entail participation incentives for the private sector, since governments should not attempt to 'go it alone.' In the end, both sectors of society stand to reap the value digitization will sow.” 

Related: Mexico leads Latin America in robotization, followed by Brazil and Argentina.