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The future of finance in LatAm & the Caribbean

January 23, 2022

Fintech in Peru: New rules could open door to LatAm’s digital giants

Nov 29, 2021

By John Quigley
Peru banca digital regulacion
Proposed regulations to scrap bank branch requirements could open the door for regional fintech leaders such as Nubank or Ualá to seek a foothold in Peru


With the development of Peru’s fintech sector held back by a shortage of risk capital, the conditions may soon be ripe for one of the region’s major digital banks to swoop on the country’s enticing loans market.

Peru’s government is preparing the ground for increased competition in the financial industry by making it easier for fully digital banks to operate in the country, potentially opening the door for regional fintech leaders such as Nubank or Ualá to seek a foothold.

Lawmakers are studying the proposal as part of a package of bills that the government wants to fast track by obtaining special delegated powers from congress.

Under current rules, any company that wants a Peruvian banking license must have the physical infrastructure that banks have traditionally required to serve customers, such as a network of branches. That’s seen as a barrier to firms operating under a fully digital banking model – although not for the country’s most successful wallets, Yape and Plin, which are owned by the major banks.

According to the government, removing the infrastructure requirement is an important step on the road to increasing competition in Peru’s highly concentrated banking industry and thereby driving down the cost of credit.

The regulatory change would make it easier for existing banks to expand their digital services, and would be one less obstacle for a foreign neobank wanting to operate in Peru, said Alvaro Castro, director of Lima-based Sumara Legal Hub.

“It’s very interesting because it opens the doors to truly digital banking.”

Carlos Rojas, a founding partner at Lima-based investment banking and asset management firm Capia, said the country should be attractive to foreign neobanks players since Peruvian lenders have historically enjoyed some of the highest return-on-equity ratios in Latin America. In addition, the country’s comparatively low level of financial inclusion leaves vast potential for growth — just 43% of the population had a bank account in 2017, according to the World Bank.

“The signs are everywhere that this would be the perfect place for digital banks to grow,” said Rojas. When regional digital banks such as Brazil’s Nubank and Argentina’s Ualá want to consolidate their expansion in the region, Peru will be high on their list, given the absence of a strong, domestic competitor in the virtual sphere, he said.

Peru’s banking regulator SBS has said some foreign digital banks have explored the possibility of setting up shop locally.

The firms would still need to apply for a banking license from the SBS to operate in the country, and the authorization process typically takes two to three years, said Castro.

In an emailed response to questions about the possibility it may expand into Peru, Nubank said its focus is on strengthening its operations in Brazil, Mexico, and Colombia. Similarly, Ualá said that for the moment it’s concentrating on Argentina and Mexico, where it’s growing “day by day.”

See also: Crowdfunding in Peru: New rules add to LatAm’s fintech regulation push

Scarcity of venture capital for Peru’s fintechs

While the proposed regulatory changes to banking services in Peru could also benefit any local fintechs seeking to become fully fledged banks—with savings and loans products—they have local headwinds to contend with.

The development of Peru’s fintech sector is accelerating, and verticals such as online foreign-currency exchange have proliferated rapidly in the last few years but many digital ventures are held back by a scarcity of risk capital.

While there are plenty of angel investors to help get startups of the ground, firms that want to scale their business don’t have the same access to venture capital or private equity as their counterparts in Brazil or Mexico, said Carlo Mario Dioses, the co-founder of Leasein, a fintech that rents and leases laptops.

“We always talk about their potential but in reality, Peruvian startups are still in a process of financial strengthening,” said Dioses, who is also vice president of microfinance association Aprofin. “That’s the reason why there still isn’t a Peruvian unicorn, for example: there’s a market but the development of financing is missing. There’s not much of a culture of risk investment.”

That vacuum is another problem the government is trying to address. In June, the national development bank, Cofide, set up a PEN$70 million (US$17.5 million) fund to support investors that want to put money into local startups.

“There are good start ups who need a lot of time to raise money because Peruvian investors don’t lend to them. For serious money they have to go to Mexico, the U.S., or Argentina,” added Rojas.

Even then, foreign investors unfamiliar with Peru may be reluctant to put money on the table, for example in a Series A investment round, if there isn’t a local counterpart sharing some of the risk, he said.

Peru’s government would also like to see the public-sector bank Banco de la Nacion invest in the fintech sector, either by entering alliances with digital lenders that cater to small businesses, buying their equity and even making outright acquisitions.

The legislative package sent to congress includes a slew of measures to broaden the bank’s remit, with the ultimate aim of increasing financial inclusion.

The government’s digital banking proposals should obtain wide support from legislators given the role fintech has to play in broadening access to financial services, said Sumara’s Castro.

See also: Ecuador fintech law: Architect defends proposal in the face of harsh criticism

Spooked investors

Peru’s deteriorating political climate is only making matters worse for fintechs looking for capital to finance their growth, as investors have become more worried the impact of instability on the country’s economic prospects.

The election of a former rural schoolteacher Pedro Castillo as president in July on a radical leftist platform spooked the business community and has dimmed the outlook for the economy, with the central bank forecasting zero growth in private investment next year.

“As many as three fintech companies and startups have seen their external financing delayed as a result of the political situation, which weakens their development structure,” said Dioses.

Political malaise was highlighted by Peruvian fintech B89 as one of the reasons it suspended its “card with credit” service earlier this month.

B89, the country’s first neobank, said in a message to customers that its decision to suspend the credit service temporarily was due to “ongoing political and economic uncertainty” affecting Peru. It didn’t say when the service would be restored. The company continues to offer a pre-pay Visa card.

B89 later announced that its CEO Mauricio Alban-Salas had left the company’s helm to focus on its remittance-driven expansion into the U.S., as part of its long-term goal of becoming an international digital bank. He was replaced by co-founder Amparo Nalvarte, who was formerly head of business development.

Peru’s uncertain political prospects, while potentially making fundraising harder, could create opportunities for fintechs by making traditional lenders more cautious about expanding into riskier, unbanked segments such as small and micro businesses.

The opportunities for fintech are just that—in filling the gaps in financial service coverage left by the traditional banks, Dioses said.

But fintechs that want to expand beyond a single vertical and offer multiple digital services likely will have to contend with international banks with much deeper pockets, such as Nubank or Ualá, added Rojas.

“They’re going to sweep aside the locals, any digital bank that wanted to be full service,” he said.

* iupana is launching a service dedicated to LatAm fintech regulation in 2022. Register your interest here to be one of the first to access the exclusive information and reporting.

See also: Acceleration of M&A in fintech gives new impetus to financial rebundling

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