Regulating for success in Chile’s fintech sector
- Chile has a vibrant fintech start-up ecosystem with over 100 fintech players
- Chile’s population is highly banked compared to the region but has limited access to higher-tier financial services
- Lack of fintech regulation makes it difficult for fintech companies to obtain funding, partnerships and support
- Fintech regulation is currently on the way, which will help boost confidence in the system
- Despite the lack of regulation, Chilean fintech companies are one of the most successful in the region, many of which have since branched out from Chile into the region
Chile has one of the strongest banked populations in the region, with 97% of the population having access to basic financial services such as bank accounts, debit cards and more. The remaining 3% of the population includes those who are over-indebted, migrants and low-income seniors.
However, only a minority are able to access higher-tier banking services such as loans, investment and trading accounts, due to the income disparity in the country.
Fintechs are companies offering technology-based solutions and products that improve, personalize or automatize the use and delivery of financial services. As such, it is not surprising that some of the most popular fintech services offered in the country are:
- Payments & Remittances: the predominant sector, comprising 31% of the total
- Financial management: the next, comprising 17% of the total
- Crowdfunding: the third, comprising 11.6% of the total
Successful case studies
Chile is one of the leaders in the fintech market in Latin America, alongside Colombia, Uruguay and Argentina, with over 100 fintech companies listed under the Chilean fintech association, FinteChile – and many have seen considerable success.
One of the most notable fintech companies in the country is Global66, which offers payment and remittance services, all of which are provided online. They moved over USD 300 million in 2020.
Fintual, a fintech company that utilizes algorithms to help individuals invest in diversified portfolios, has also grown considerably. In 2018, it became the first Chilean startup to be accepted by Y Combinator, one of the world’s most renowned accelerators. Fintual now manages over USD 300 million in assets in Chile and Mexico.
On the crowdfunding side, an example is Broota, which has over 1,700 angel investors on its platform, who have invested nearly USD 10 million in various startups.
Chilean fintech companies are one of the most mature in the region, with nearly 70% having more than three years of operations – but they still lag behind their counterparts in the US, Europe, and Asia.
This is due to three main challenges that Chilean fintech companies face: the lack of funding, the dominance of traditional banks, and the absence of a supportive regulatory framework.
- Lack of funding
In terms of funding, only 2% of the fintech companies have managed to secure more than USD 10 million in funding, with 31% securing funding of between USD 100,000-500,000 in 2019.
As such, one of the main grievances with the fintech ecosystem is the lack of funding available in the market.
This is further validated by a study conducted by FinteChile and EY, where 71% of the fintech companies interviewed mentioned that funding in the country is insufficient.
2. Dominance of traditional banks
Traditional banks still hold sway in the Chilean financial system.
As such, in the last couple of years, it has been a difficult slog for fintech companies to make inroads into the financial ecosystem.
Often, fintech companies veered more towards providing personal services such as payments and remittances; crowdfunding; or services for private enterprises.
However, there has recently been a mental and structural shift whereby traditional banks are starting to see the benefits of partnering with fintechs.
For instance, in late-2020, Santander Chile announced a financial partnership with Getnet, a Brazilian fintech that offers a new payment platform as well as other solutions for electronic transactions. Getnet entered the Chilean market in 2008.
In 2018, Banco Estado launched an Innovation Challenge, inviting fintech companies to come up with solutions and products that could be of use to the bank and its clients.
Thus, it is expected that more partnerships and alliances will be forged, going forward.
3. Regulatory framework
To date, Chile does not have any fintech regulations, unlike countries like the United States, the United Kingdom and even Mexico.
This is one of the main reasons funding and partnerships has remained rather difficult to acquire for the fintech community.
Without regulations, it is difficult for consumers, investors, and potential clients alike to develop confidence in the offered products and services. Regulation would help to generate greater confidence in the fintech sector, promote investment, and offer more incentives for companies to develop new products.
Thankfully, regulation is on the way as the Commission for the Financial Market – la Comisión para el Mercado Financiero (CME), Chile’s financial regulator and supervisory body recently announced in February 2021 its proposed fintech law, with the aim of fostering the establishment of more fintechs and the development of more financial innovations, which it has since submitted to the Ministry of Finance for approval.
The draft law also incorporates the Open Banking concept, based on a couple of principles hat would facilitate greater exchange of information, services, and confidence in the financial system:
- The use of open APIs that allow third-party developers to build applications and services around existing financial institutions
- More financial transparency options for clients
- Use of open source technology to achieve the two principles above
As such, 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 would open up new opportunities for investments, partnerships and further growth.
Regional and international expansion
Chilean fintech companies that have taken the lead to expand into international waters include Compara Online and Buda.
Compara Online, an insurance marketplace that started eight years ago, has since grown into being the biggest insurance marketplace in the region. To date, the company has moved into Argentina, Brazil, Colombia, Mexico and Peru.
Buda is a cryptocurrency marketplace that has grown from its humble origins in Chile to Colombia, Peru and Argentina, thus becoming one of the largest cryptocurrency marketplaces in the region.
Despite the widespread devastation COVID-19 has wreaked on the region, including in Chile, one silver lining is that the pandemic has accelerated the growth of the fintech sector.
According to the study conducted by FinteChile and EY, 53% of the fintech companies that participated declared that they broke even in 2020. Within those companies, 70% of them affirmed that they had a growth in revenues of more than 30%. In addition, more than half of those (52%) confirmed that their revenues increased due to the pandemic.
As a result, an overwhelming 93% of the fintech companies interviewed indicated that they have their sights set on foreign markets, with Mexico taking the lead at 45%, Peru at 37% and Colombia at 18%.
While challenges exist, the future for fintech in Chile definitely looks bright.