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Economic Uncertainty: Another Economic Cycle for Latin America


December 16, 2022 | Jonathan Pryer

The global economic landscape is uncertain as we face factors such as inflation, regional conflict, and changing financial regulations. Latin America has not been spared from downturn, but there are opportunities for lenders and FIs that embrace technology. We sat down with Jose Vargas, Provenir’s EVP and GM of Latin America, to get his take on the current economic challenges and what it will take to make it through unscathed (and even grow!).

The current banking/lending landscape: inflation and devaluation has hit the region hard

While economic uncertainty is widespread, Latin America has had similar scenarios to learn from. Economic conditions tend to be cyclical, and the region has come through crises worse than this – this slowdown is not uncharted territory. 

The effects, however familiar, have hit the region hard as inflation and currency devaluation has risen in key markets. Argentina is experiencing the worst inflation, with a rate of 64% in June 2022; Colombia struggles with a major devaluation of the peso, which reached 4600 COP to 1 USD in July 2022. 

As a result, interest rates are up, namely in Brazil, where rates have reached 13%. Mexico also faces high interest rates, and in addition to a decrease in loans, they must contend with the economic dependence on the US, also experiencing a downturn. On the regulation side, financial reform in Chile is expected to have an effect on the regional economy and add to volatility.

The impact on lenders/consumers: increased caution and scrutiny

In an expected move, both lenders and consumers have taken increasingly cautious approaches to the economy. The interest rate hike is an example of this, as is the deceleration of both loan applications and originations. 

Risk management takes center stage as the slowdown continues, and riskier profiles that may have been considered during a cycle of surplus are no longer a risk worth taking. Some international banks have even deemed certain markets too risky and have chosen to exit, focusing on those that are profitable instead.

However, fintechs typically have more flexibility than incumbents and can find opportunity where large financial institutions retreat. Armed with significant funding, fintechs will put that capital to work and find innovative ways to serve consumers in this uncertain landscape.

How fintechs/FIs can support their customers: manage portfolios smarter with tech

During economic slowdowns, the focus changes from growth to maintenance. The main focus shifts from engaging new but potentially risky customers to supporting current ones, especially as their own financial outlooks are susceptible to change. Anticipating that change will help FIs stave off losses. 

Risk management will require more than increasing interest and tightening credit eligibility – lenders will have to manage credit limits, overdrafts, upsell and cross sell, and support customers at risk of collections. Financial institutions that use data-driven predictive technology will have competitive advantage over those who don’t – they will be able to act proactively to protect customers from default instead of managing them after it happens.

This period is also ripe for lending innovation, specifically for BNPL and other credit products. As consumers across LatAm financially struggle and as FIs become more conservative, there is a gap that will need to be filled. Fintechs that are able to take on more risk now have the chance to do just that.

Outlook in LatAm: continued embrace of innovation will mitigate economic uncertainty 

Latin America has been a hub of financial innovation and that will continue to prove true as we move through economic uncertainty – the region’s fintech boom is not over. As more complex problems arise in the current landscape, the sector will provide solutions. 

Fintechs and FIs that aren’t well-versed in risk management will need to become experts to come out of the slowdown in a strong position. However, financial services providers that have access to the right technology, data, tools, and strategy will be able to meet customers’ needs, even with tighter risk parameters. 

Get the global perspective

Want to dive deeper into LatAm insights with even more breakdowns and predictions? Curious about how other regions will fare during economic uncertainty? Get the full picture from Provenir’s experts, who cover everything from the current landscape to tips for FIs looking to weather the global slowdown.