The fintech startup ecosystem is vibrant and the country has already issued a “Fintech Bill”. What are the opportunities for fintech companies in Chile? Let’s see why the Chile is an ideal gateway to invest in LatAm fintech
Although the Chilean fintech industry is smaller compared to regional neighbors, Chile has a vibrant finch startup ecosystem and the country's alternative finance market is one of the largest in Latin America. The Cambridge Center for Alternative Finance has underlined that as of 2020, the total amount of alternative financing (credits granted by Chilean fintech) reached $804m.
According to data, in Chile, the startup and fintech sectors have experienced a boom in recent years, attested by a continuous rise of venture capital investments.
Speaking in numbers, today Chile’s fintech ecosystem is fifth in terms of the number of fintech companies, after Brazil, Mexico, Colombia and Argentina. But it is also important to highlight that Chile has the highest number of fintech companies per million inhabitants, so that is an interesting indicator insofar as it shows that there is a significant adoption of fintech in the country.
It is estimated that there is currently around 179 companies in the Chilean fintech sector, positioned within the following markets: Banking payments and transfers; Cryptocurrency, Blockchain/DLT; Crowdfunding and Lending; Market/Trading; Risk Management; Insurtech; Financial Management; Investing/savings.
That definitely leads experts to think that the growth of the ecosystem will continue, along with the opportunities that come with it, such as increasing financial inclusion, arrival of new investors, greater collaboration with the banking sector and obviously building the corresponding regulatory frameworks to support the growth of the fintech sector.
Chile's Fintech Bill. A new law to strength fintech
Despite the whole sector booming, the LatAm country has an Achilles’ heel: the absence of a specific regulatory framework. Since 2012, Chile has been promoting greater competition, innovation, and financial inclusion. The goal is today to further develop its national financial services sector and support consumers. At that time, the country launched Sernac Financiero, a public institution that regulates practices in the granting of credits and other financial products. It was the first step into fintech.
Two years ago, the Financial Portability Law came into force, allowing individuals and micro and small businesses to quickly switch either from one financial service provider to another or from a current financial product and service to a new one contracted with the same provider. So what’s next? Chile is making a major push to regulate the fintech sector and introduce open banking rules to make payments and transactions simpler and more efficient. It’s time for the so-called “Fintech Bill”.
To remedy this weak spot, now the South American country is making moves towards regulating the fintech sector and making open banking mandatory. Last year in September, the government presented a fintech law’s draft, better known as “Fintech Bill”.. The document makes it clear that banks and card issuers will be the first to share customer data — with prior consent — to third party financial service providers.
The proposal is following the “Guidelines for Developing an Open Finance Framework in Chile, with a Focus on Competition and Financial Inclusion”, published by the Chilean Ministry of Finance in August 2021. These guidelines propose a specific regulatory framework to facilitate the development of Open Finance in Chile, promoting greater competition and financial inclusion.
According to experts, the proposed bill to regulate financial technology services in the country is expected to sharply increase competition in the Chilean financial system. Chile’s fintech law would contribute "substantially" to growth in the industry, as well as boost startups' access to investor capital, Kevin Cowan, vice president of the country's Financial Market Commission, or CMF, told S&P Global Market Intelligence.
What is the status of open banking in Chile?
Today, the use of the open application programming interfaces (APIs), that enables third-party developers to build applications and services around existing financial institutions, is not a current reality in Chile. Nevertheless, banks in Chile, through the use of APIs, do share their clients’ personal information with third-party service providers across private agreements, without a mandatory regulation that governs it. Thus, the parties operate under the rules of the free market economy and without government regulation.
In February 2019, CMF issued a document called “White Paper: general guidelines for crowdfunding and related services”, which indicates the general guidelines that the legislator should take into consideration when regulating fintech companies. Although the White Paper mainly focuses on crowdfunding, it also gives some general guidelines about online banking, especially regarding robo-advisors. Today Chile is in the initial stage of implementing open banking.
In this regard, the lack of regulation means there is an absence of barriers to hinder the entry of new actors but, on the other hand, it also plays against the financial industry and open banking since the same lack of regulation generates a certain level of distrust and uncertainty in the public. That’s why the above-mentioned “Fintech Bill '' will be a game changer in the Chilean finch sector.
Any hot trends in the Chilenaes fintech sector?
Interest in fintech has grown a lot in Latin America. Thus, what are the most important trends we could see in Chile? According to Angel Sierra, co-founder and executive director of FinteChile, “the first is the significant growth of the entire category of digital payment processing in Chile and Latin America”. In Chile as well as in other countries, “we are seeing the digitalisation of money, and there has been significant progress in the adoption of payment methods and e-commerce”. It is necessary to have a means of payment to be able to make purchases on the internet. “This payment vertical is the one with the most investment growth and this should continue for the next couple of years because half of Latin America does not have access to basic financial services”, underlined Sierra.
The first payment product that people usually have is a debit card or a prepaid card, which ultimately becomes a digital means of payment. The opportunity here is huge; more companies will enter the space, and the ones already here will keep growing. There is a huge challenge associated with the digitization of money. Another second top trend is Open Finance. Latin America has already started to adopt this concept of open data in the financial system and 2022 will be a key year in which several Latin American countries will take important decisions. Chile has already started to do so with its fintech law.
What are the opportunities for fintech companies in Chile?
As we had the opportunity to analyze in previous articles, there is a strong appetite in Latin America for innovation in banking. In 2017, 13% of total local IT investment in 2017 came from banks. Chile is also considered one of South America’s most stable and prosperous countries. According to Born 2 Invest, Fintech companies in Chile have raised $107 million in the capital and Investors see Chile as being the second most desirable region for investing in the fintech sector after the US. That’s why Chile is an ideal gateway to South America to foreign firms too.
Chile is one of the most commercially open countries in the world and stands out as the best in the region for its ease of doing business and its economic freedom - and taxation law -whilst also being the most competitive country in the region. As we said before, the country is also planning to become a hub for technological investment, attracting large companies to expand there.
