The following is a guest post from Jairo Riveros, chief strategy officer and managing director of the U.S. and Latin America at Paysend.
In Latin America, remittances represent an enormous share of the recipient nations’ GDPs.
For example, there were $11.4 billion in remittances received just by Guatemalans in 2020 alone — equivalent to 15% of Guatemala’s overall GDP that year.
There was a boom in VC funding in the Latin American region along with remittances, unlike ever before. Among the largest recipients of that capital were financial technology startups because this group is meeting the needs of the unbanked and underbanked population, which currently represents 45%.
So, what is finally causing digital penetration to pick up in the region? With a focus on money education, fintech companies have a renewed sense of purpose in creating greater financial inclusion for all.
Social, political, and environmental pressures
Minimal access to traditional financial institutions within Latin American countries has caused the unbanked or underbanked population to grow.
Only 30-50% of the Latin American population over 15 have an account with a financial institution, causing banking disparities within the region.
Additionally, monopolies held by more prominent financial institutions have stunted progress and personal economic growth for many.
While the lack of support from financial services is evident, Latin American populations face barriers to becoming banked, such as regulations and requirements.
For instance, until recently, most banks in Latin America did not have digital options like mobile apps.
Therefore, individuals are forced to manage their finances in person at a physical bank location, which is far and few between.
What’s more, in a few instances where people can conduct in-person dealings, they are met with extensive paperwork that sometimes contains outdated requirements like having a landline phone service, despite an increased preference to exclusively own a mobile phone in countries like El Salvador, Dominican Republic and more.
Finally, the approval process could take weeks if a person can successfully file to open a traditional bank account.
The COVID-19 pandemic significantly impacted how people view traditional financial services.
With a push for innovation out of necessity, and a greater focus on educating underserved populations, financial technology services — ranging from remittances to wealth management — gave way to a fintech boom with an estimated 11 thousand startups registered in the Americas as of February 2021.
Why fintechs are at the forefront of financial inclusion in Latin America
Fintech companies are increasingly aware of the barriers underserved populations face and are taking significant steps to break the cycle, whether providing financial education or making it easier to access financial tools for those in developing countries.
While access to regional banking has lagged, mobile internet usage has flourished among Latin Americans and is expected to reach 424 million active mobile internet users by 2025.
Additionally, much of the population that makes up the Latin American community are digital natives — with teens and young adults representing 52% of the entire population.
Younger generations are increasingly paving the way for digital options as some have never had to manage money through traditional banking methods. This has caused fintech platforms to experience a wave of adoption as nearly 40 million people living in Latin America became banked through online options between May and September of 2020.
While cash remains king in some regions, economies worldwide continuously embrace digital financial options.
Latin America is expected to follow a similar path with the help of fintech companies. After having their needs long ignored by traditional banking institutions, underserved populations finally get the attention and support needed to manage their finances effectively.
And unsurprisingly, fintech startups received the largest venture capital funding in the first quarter of 2022 — 43% of the total dollars raised in the region — because these companies focus more on financial inclusion in Latin America.
People in developing countries have faced long-standing hardships to get the access needed to make quality financial management and health decisions, despite the positive impact financial capability and safety can have on physical and mental health.
It’s about time marginalized communities are given the opportunity not previously afforded by traditional systems.