Digital banks continue to expand offerings despite macroeconomic headwinds

How digital banking is transforming access to finance in Latin America and the Caribbean

Despite wider economic challenges such as inflation and supply chain disruptions, digital banks and neobanks are continuing to attract new customers and accelerate financial inclusion in Latin America and the Caribbean. 

Neobanks use apps, software and other technologies to operate exclusively through digital platforms. They are usually limited to bank accounts and cards because they often lack credit institution licences, while digital banks offer the full suite of traditional banking services online. 

However, as neobanks expand their product offerings the line between the two categories is growing blurred. 

With a portfolio that includes credit cards, loans, insurance products, business accounts and other payment solutions, Brazil鈥檚 Nubank has been the largest neobank in the world since 2021. It also tops lists of the world鈥檚 largest digital banks, valued at some $45bn at the end of 2021. 

Nubank added 20.7m customers in 2022, bringing its total to 74.6m customers globally. This was reflected in a record revenue of $4.8bn for the year, $1.5bn of which was from the fourth quarter alone. 

Disrupting traditional banking 

The popularity of digital payments expanded globally during the Covid-19 pandemic, driven by a decline in cash payments and growth in e-commerce that offered digital banks and financial technology (fintech) start-ups more broadly the space to expand. 

The growth of digital payments has been strongest in emerging markets, where the value of non-cash retail payments increased by a compound annual growth rate of 25% between 2018 and 2021, compared to 13% globally for the same period. 

Factors including young and tech-savvy populations, rising demand for access to financial services and strong currency performance relative to developed economies are driving growth. Beyond these, Latin America and the Caribbean offer additional advantages, including the fact that the region has a higher GDP per capita than other developing regions. Moreover, only 51% of adults in Latin America and the Caribbean have a bank account, of whom only 28% make direct payments with them. Moreover, only 45% of small and medium-sized enterprises in the region have access to finance, but such entities account for 30% of the region鈥檚 GDP and 67% of employment. 

The number of fintech platforms in Latin America and the Caribbean grew from 703 in 2017 to 2482 in 2021, or 22.6% of the global total. Brazil accounted for 31% of all platforms in the region, followed by Mexico (21%), Colombia (11%), Argentina (11%) and Chile (7%). 

Nubank鈥檚 disruption of the traditional banking sector in Brazil is notable given the sector鈥檚 traditional concentration: five large traditional banks managed 84% of the country鈥檚 loans and 90% of retail banking branches in 2019. It is also reflective of a larger trend in the region. 

In 2022 eight Latin American fintech start-ups attained unicorn status, accounting for half of the firms that received more than $1bn in investment that year. However, the number of new firms reaching unicorn status is expected to decline in 2023 considering wider global headwinds, resulting in lower valuations of existing unicorns and the absence of investment mega-rounds. 

While digital banking in the Caribbean has not seen the pace of growth experienced in Latin America, there are notable success stories that indicate potential for more start-ups to enter the space. Founded in Trinidad and Tobago, WiPay offers a range of digital payments solutions. After relocating to Jamaica in 2021, the company founded neobank Colour Bank, with the aim to serve the Caribbean and African diaspora population in the US. 

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Shifting landscape 

As a sign of the migration towards digital banking, fintech companies have been acquiring traditional banks to expand their service offerings and customer bases. Last year Mexican fintech Credijusto acquired Finterra bank for nearly $50m, while in Argentina fintech Ual谩 bought Wilobank, the country鈥檚 first digital bank, and invested $80m to operate in Colombia after closing a $350m investment round in 2021 and acquiring Mexican bank ABC Capital. 

Even non-traditional investors have an appetite for the growing market. Last October Abu Dhabi conglomerate International Holding Company acquired a 50% stake in Lulo Bank, Colombia鈥檚 first regulated digital bank, for $200m. 

Seeing the evolution of digital payments and the benefits they offer citizens, governments in Colombia, Mexico and Chile 鈭 home to five of the eight unicorns that emerged in 2022 鈭 are crafting new regulations to accelerate the growth of digital payments by adopting systems such as Brazil鈥檚 PIX, which allows instant payments using QR codes. 

In 2019 Banco de M茅xico, the central bank of Mexico, launched a similar system called Cobro Digital, or CoDi. The platform uses QR codes and near-field communication technology to permit mobile electronic payments and saw transaction values triple in the 2020-21 period. Meanwhile, authorities from the Central Bank of Colombia are working with their Brazilian counterparts to implement PIX in the country. 

Regional offerings 

A large portion of the population in Latin American and the Caribbean remains unbanked and has limited access to credit or debit cards, presenting significant opportunities for digital banks. 

When it first launched, Nubank鈥檚 only offering was a credit card. Now it has a range of services, including a cryptocurrency exchange that launched last year with over 2m users. This month, it will issue its own cryptocurrency, nucoin, by airdropping 80% of the currency to existing users, who can participate in cashback and other rewards programs. 

Other fintech unicorns like Mexico鈥檚 Stori and Klar expanded their businesses through credit card offerings. Last month Ual谩 launched a credit card offering through ABC Capital in Mexico, where only 33% of adults had access to formal credit in 2021. 

Puerto Rican digital institution Zenus Bank, which makes US bank accounts available to customers in over 46 countries, launched a Visa Infinite card in March that can be used as a debit card for purchases around the world. 

Latin America and the Caribbean is also notable for its innovation and willingness to build partnerships across borders, both within the region and beyond. Some local super-apps 鈥 all-in-one mobile applications that offer users access to multiple services 鈥 have transformed their payment and financial transaction processing services into digital banks. 

For example, Colombia鈥檚 Treinta, a super-app that allows micro-, small and medium-sized enterprises to register sales and expenses, track debit and credit, manage inventory, share digital receipts, download reports and view statistics, now offers real-time payments for person-to-person and person-to-merchant transactions. 

Another Colombian super-app Rappi started in food delivery and now offers digital banking services through RappiPay after gaining approval for its licence last year. 

Meanwhile, digital payments unicorn Ecuadoran Kushki operates in five countries in Latin America and has global capabilities through its new division Kushki Mundial, while Colombia鈥檚 Habi launched Habi Credit last year to provide access to mortgage loans for customers buying real estate through its platform.

Higher interest rates still pose questions about how much the fintech sector in Latin America and the Caribbean can grow, but investors continue to take note. In January JPMorgan Chase and the International Finance Corporation announced a $27m investment round for Colombia-based KLYM to provide loans to small and medium-sized enterprises in Latin America.