The future of finance in LatAm & the Caribbean

Pensions in the crosshairs: Fintechs take aim at new market

Apr 4, 2022

By Antony Pinedo

Investment fintechs want to fill the space left by traditional finance in the vast retirement-savings market and present products to attract voluntary contributions from workers

Wealthtechs are beginning to compete in the massive pensions sector with digital investment products that allow users to plan for retirement—an area historically underserved in Latin America.

Wealth management applications blazed a trail by expanding access to investments in international securities. For example, buying shares trading on the New York Stock Exchange—something that was previously available only to large investors—was put within reach of anyone with a smartphone and a small amount to invest.

Now, as part of the evolution of their products, wealthtechs have identified a new opportunity: pensions.

It’s a market where wealthtechs can positively impact workers’ futures by complementing traditional pension systems while at the same time generating new revenue streams.

“Unfortunately the system of pension fund managers on our side of the world is failing; it didn’t fulfill the promise made at its inception: to guarantee a pension. You’ll have to guarantee it for yourself,” Valdemaro Mendoza, co-founder and CEO of tyba, the Colombian wealthtech belonging to Peru’s Grupo Credicorp, told iupana.

Last year, the firm launched a voluntary pension product in Colombia; it’s a model that takes advantage of government incentives, such as tax exemptions on money being saved for retirement.

This is “a niche product,” says Mendoza, who adds that workers using the product are looking at long-term savings either to buy a home or to leave them untouched for at least for 10 years, as required by local regulation.

While voluntary pension contributions are a niche now, they have the potential to become a big business area, given retirement savings in Latin America exceed US$822 billion, according to calculations by Preqin, an alternative asset consultancy.

Other platforms have also followed suit. In Mexico, Chilean fintech Fintual is leveraging local regulation to launch new solutions.

“In Mexico, we have legally viable alternatives for savings to complement the statutory ones. It can be done through a mechanism known as the personal retirement plan,” says Norma Briz, the fintech’s general director for that country.

Fintual will launch the product this year as a complement to the regular retirement fund management system known as Afores. It will also be available to informal or independent workers, who make up the bulk of the workforce.

Briz points out that in Mexico, where approximately 59 million people are in some sort of employment, only 8 million workers pay regularly into a pension fund. And upon retirement, they receive a monthly pension equivalent to about 30% of their last salary, she says.

It creates a situation that’s ripe for alternative solutions that offer workers an economic cushion for their retirement. And, although it seems like a logical step for fintechs that facilitate investments, it’s not that simple. In the US, Robinhood—perhaps the world’s best-known wealthtech—doesn’t yet offer individual retirement accounts (IRAs), which enjoy a more favorable tax regime.

Read next: Credicorp modernizes data management as hyper-personalization beckons

The expansion of wealthtechs

In recent weeks, there’s been a series of investment platforms embarking on cross-border expansions. Mexico’s Flink entered the Colombian market via the acquisition of digital broker Ualet; and Colombia’s Trii branched into Peru following an agreement with local brokerage Kallpa SAB.

Mendoza, the tyba CEO, identifies two reasons for the vertical’s expansion: the business model is “very replicable” in Latin American countries, and in addition “regional expansion is very easy to do” because wealthtechs were conceived as 100% digital platforms, he says.

Tyba will expand to Mexico in 2023, the firm’s fourth market, having already established operations in Chile, Colombia and Peru.

Fintual gained a presence in the Mexican market with the acquisition of the investment fund distributor Invermérica in August of last year, giving it a combined US$650 million of assets under management.

“The wealthtech industry definitely has great potential in the region and more and more people are interested in putting their money to work through investment products,” says Sergio Jiménez, Flink’s co-founder and CEO.

Flink started the process of acquiring Ualet in 2021 and Jiménez says they are working with the Colombian regulator to start operations in the middle of this year but don’t have an exact date.

Read next: From payments to loans: competition for SME customers intensifies

Crypto Investments

Cryptocurrency is another area with significant potential for wealthtechs. Venezuela and Colombia are among the top 10 countries with the highest take-up of cryptocurrencies in the world, according to a study published in March 2021 by Chainalysis, a company specializing in blockchain services.

Growing demand has led to innovation in cryptocurrency investment in the region; Colombia’s financial regulator created a sandbox in which fintechs and banks—including Bancolombia, the largest bank in the country—can link user accounts to crypto trading platforms.

In light of these developments, tyba plans to give users the option of investing in crypto in all three of its three markets this year. “We are going to launch on June 30 in Chile, on August 30 in Colombia and on December 31 in Peru,” Mendoza said.

For Flink and Fintual, meanwhile, the incorporation of crypto into their platforms is a remote prospect. “We want to focus on giving millions of people in Latin America access to the New York Stock Exchange,” Jimenez said

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