Guillermo Vial
Philippi, Prietocarrizosa Ferrero DU & Uría, Santiago
guillermo.vial@ppulegal.com

Nicolás Santana
Philippi, Prietocarrizosa Ferrero DU & Uría, Santiago
​​​​​​​nicolas.santana @ppulegal.com

Fintech refers to technologically enabled innovation in financial services that could result in new business models, applications, processes or products, with an associated material effect on the provision of financial services.^[1] The application of technology to finance has expanded to a wide range of products such as:

• payment solutions (payments, clearing and settlement);
• alternative finance (credits, loans and fundraising);
• asset management (individual or business account management, trading); and
• others (insurance, property, health, cloud, etc).^[2]

The world, particularly Latin America, is witnessing a massive Fintech boom. This phenomenon is fuelled by innovative startups seeking to take advantage of widespread smartphone and internet penetration to serve certain segments of the population, and small- and medium-sized businesses that have not had access to banking and financial services or only have limited access to such services.

In line with this boom, there has been an exponential growth in Fintech M&A activity in Latin America. In 2018, the region was home to 1,166 Fintech startups that raised a cumulative $800m.^[3] This represents a market-wide, year-over-year rise of 66 per cent, with Brazil (realising 150 per cent growth) and Mexico (93 per cent) leading the way. In the second quarter of 2019, Fintechs secured $481m, representing a six-quarter high and accounting for 69 per cent of the total raised in the region across all of 2018.^[4]

In 2019 Latin America became one of the fastest-growing regions for fintech funding. The region topped both China and India for fintech funding in Q2 of 2019.^[5] Furthermore, Latin America-based Fintech funding has grown at a 57 per cent compound annual growth rate (CAGR) since 2016 and South America funding has grown 153 per cent quarter-to-quarter.^[6]

Recently, Latin American Fintech ecosystems have experienced so-called ‘mega-rounds’, whereby startups that have been in business for ten years or less had raised large investment rounds. In 2020, the investment from venture capital (VC firms in Latin America was $4bn, spread over 488 transactions in Latin American startups. Fintech was the sector that led such financing rounds, with 39 per cent of the total amount invested.^[7] Moreover, in the first half of 2021, five Latin American Fintech companies achieved unicorn status: Clip and Bitso in Mexico, dLocal in Uruguay, and C6 and Ebanx in Brazil, all of which has further sparked interest in innovation in the Latin American financial sector.

Latin American Fintech has clearly become an attractive investment sector for global VCs, private equity funds, banks, corporate investors and corporate venture capital firms driven by massive unserved or underserved markets, deepening founder talent, promising startup models and an uptick in notable exits. Moreover, it has become increasingly difficult to detect and compete for Fintech startups in mature financial markets such as the United States and United Kingdom.

At the beginning, while the Latin America Fintech industry was in an early stage of development, seed, Series A and B investment rounds were primarily focused on helping startups build robust business models. It was unclear whether there would be the appetite to help these companies further develop; however, Latin American Fintechs have been raising large rounds in recent months with follow-on funds from Fintech-focused VC firms and prominent regional VC funds. Today, it can be stated that any prior distrust from investors in Latin American Fintechs has been overcome; with the advent of international players that have the capacity to make large investments, such uncertainty has been dissipated.

Chile

Chile has a vibrant Fintech startup ecosystem. The Chilean Fintech ecosystem is made up of approximately 179 startups, 60 per cent more than two years ago, representing an annual growth rate of 38 per cent.^[8]

The Chilean Fintech industry is led by the payments and transfers segment, which accounts for 23 per cent of the identified startups, followed by:

• business finance management (20 per cent);
• loans (13 per cent); and
• business technology for financial institutions (10 per cent).^[9]

As of 2020, the total amount of alternative financing (credits granted by Chilean fintech) reached $804m. This represents an average annual growth of 83 per cent since 2013 and a 64 per cent increase over 2019. The amounts of alternative financing in Chile during 2020 allowed the country to become the second largest market in Latin America, representing 15 per cent of total alternative financing amounts in the region.^[10]

Unlike Brazilian Fintechs, Chilean Fintechs cannot reach mega-scale without ever expanding outside the country. Therefore, Chilean-based Fintech will have to expand across other countries of the region to achieve scalability, and that has been the path followed by several Chilean Fintech companies. The internationalisation rate of Chilean Fintech startups is 47 per cent, which is significantly higher compared to the average for the region (32 per cent).^[11] The Chilean government has been promoting Chile as a Fintech hub for Latin America and, according to the World Bank report ‘Doing Business 2020’, Chile is the leading economy in Latin America to do business with.^[12] This leading position in the region supports Chile’s future potential to lead the development of the Fintech sector in Latin America.

However, Chile has an Achilles’ heel: the absence of a specific regulatory framework. Unlike Mexico, Brazil and Colombia, Chilean Fintech activity is not subject to ad hoc regulation. On the one hand, this has led to regulatory uncertainty inhibiting fledgling Fintechs, and on the other hand, the lack of specific regulation has made it difficult for consumers, investors and potential clients alike to develop confidence in innovative products and services offered by Fintechs. As a result, this issue is potentially hampering the expansion and scaling up of these ventures.

To remedy this weak spot, the Chilean Commission for the Financial Market (CMF), Chile’s financial regulator and supervisory body, submitted its proposed fintech law to the Ministry of Finance in February 2021, with the aim of fostering the establishment of more Fintechs and the development of more financial innovations. On 3 September 2021, the Ministry of Finance submitted, in turn, to the Chilean Congress the long-expected Fintech law bill. This bill is the result of a joint effort of authorities such as the Ministry of Finance, the CMF, the industry chamber FinteChile and the Inter-American Development Bank, and seeks to set forth a flexible and neutral regulatory framework, allowing the regulatory burden to be adjusted proportionally to the risks of the service, activity or agent.^[13]

The Fintech bill aims to regulate crowdfunding platforms, alternative transaction systems, credit and investment advisory services, custody of financial instruments, order routers, financial instrument intermediaries and crypto assets, amongst other activities. Importantly, this bill also provides a regulatory framework and implements certain aspects that are key to enable open banking in Chile. This is crucial in providing a friendly and supportive environment for Fintech initiatives, and promoting Chile as a Fintech hub for Latin America.

It will be interesting to see where Chile will rank in terms of its Fintech ecosystem in the coming years once the Fintech regulations come to pass, as this is likely to open up new opportunities for investments, partnerships and further growth.