Investment Banking in LATAM - 6 disruptive trends in the 2021 market

By José Antonio Casciola

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Closing the year with the launch of the Webb telescope, we witnessed a 2021 with key milestones for technological development: The first space tourists, the adoption of Meta and its positive reception, the popularization of NFTs, among other things.

As in previous years, technology has solidified disruption in various markets, with investment banking being a relevant case study.

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Disruption in the investment market in Latin America is fueled by 6 trends:

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Democratization of Investment

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Two elements have been key in the massification of the investment market:

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1. There is evidence of an increase in the number of individuals with access to traditional investment tools. The increase in the number of retail investors is largely due to:

• • New digital platforms, characterized by easy access and simple onboarding.
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  • The increasingly widespread idea of investment accounts without a minimum.
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  • The introduction of fractional trade shares and the increase in the offering of options trading, which allow for an increase in the volume of investors and provide greater ease to new players.

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Data: 11% growth in the global retail investment industry.

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1. Cryptos and new investment options are becoming increasingly simple and attracting more audiences

• More investment platforms are starting to offer options to invest in new types of assets, with non-traditional value propositions that are simple for retail users to understand. We see players like Axie Infinity, which propose gamification of NFTs where playing increases the asset's value. And creators of digital assets that are becoming increasingly relevant, like Larva Labs.

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Data: $1.2B invested in crypto and other assets in H1 of 2021, with expected higher volume for the next year. 328% growth in NFT investment in H1 of 2021.

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Flexibilization and Personalization of Investment Offering and Experience

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• Investment tools present modular investment options that allow for customization, adapting to the needs of different users, and varied risk and knowledge profiles. For example, Betterment allows users to allocate their assets in various customized funds, in a simple way, and recommended based on their interests.

• Disruptors create platforms with focused and packaged products to offer specific solutions to different investment profiles. An example is Acorns, which focuses on user profiles with lower investment capital, offering products that allow investment through rounding.

• Focus on generating less friction for the user throughout their flow. From opening to investment liquidation. For example, Fintual Mexico has a fast and close life verification onboarding compared to other players. Smooth funding and withdrawal experience.

• Clear and personalized communication of the value proposition, directed to the user through digital channels. Titan makes returns and fees available on its website. It presents the value proposition through shorts.

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Growth of the Fintech Ecosystem in Latin America

• This growth derives from increased demand for financial services, decreased barriers to entry, advances in regulation, and support from incubator and accelerator organizations.

_{Data: >$9.8B invested in Latin American fintechs in 2021. 12/34 Latin American unicorns are fintechs, with the top 3 in investment reception. 88% of financial institutions consider that part of their business will be consumed by fintechs. x3.1 increase in the value of the Global X Fintech ETF in the last 5 years.}

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Incumbents Renew Their Value Proposition and Forge Alliances with Disruptors

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• They begin to test new value propositions in segments traditionally not served by their products. In Mexico, GBM+ launches a new proposal, targeting a new segment of digitized clients.

• They forge alliances with disruptors: Disruptors bring greater flexibility and risk tolerance to the table, in exchange for resources, data, and regulatory facilities. Example: A well-known case is ING in Belgium, which launched "Fintech Villa," investing in and creating partnerships with 115 startups, allowing it to leverage new technologies to face changes in the ecosystem, for example, Kabbage, an online lending platform.

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Technological Enablers Boost Efficiencies and Promote Reduction of Face-to-Face Services

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• There is a trend towards reducing operational costs through automation and streamlining customer-facing banking processes.

• Disruptors tend to charge lower fees by achieving a lower cost structure, thanks to the use of technology and automation. These digital leaders can achieve operating returns 70% higher than traditional players.

Data: Disruptors offer 44% less commission than incumbents, $7.3B in reduced costs for banking by 2023 as a result of the use of chatbots, $1.3B in reduced costs for banking insurance by 2023 as a result of the use of AI.

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Reduction of Face-to-Face Services

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• The digital experience is increasingly relevant as a central point of contact for banking services, and branches play a complementary role to this experience, creating trust and credibility.

• An evolution of the physical banking experience is expected, where branches enhance the user's connection with the digital world (e.g., virtual tellers, AI-based robots, augmented reality).

Data: 46% of users of financial services globally use only digital channels. 12% decrease in physical branches in 2 years in Chile, 1.3% in Mexico in the last year; 6.8% in Colombia.

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Emergence of a New Investor Profile

New investors are characterized by confidence in the market, easy access to investment tools, high levels of leverage, and greater willingness to take risks.

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• The new investor has greater confidence in the market due to the avoidance of economic crises in the last 15 years and better access to financial education.

• Investors increasingly find it easier to access investment due to new digital tools and their affinity for them. They are starting to manage investment assets at younger ages.

• There is evidence of less aversion to individual investor risk-taking and higher levels of leverage.

• Due to the decrease in economic growth, it becomes more challenging to obtain attractive returns without high risks.

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Conclusions

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The investment banking market has undergone profound transformation in recent years due to technological advances. These have allowed newcomers to create disruption in the market, where the differentiating experience, enhanced by the delivery of focused products, creates a break with the services offered by traditional investment banking.

Given the new facilities, the increase in financial education, and the increasingly low levels of risk aversion, there is a growing mass seeking investment tools. In response to this need, not only legacy players but also fintechs are offering traditional products with a better experience and/or new products popularized in recent years.

If we focus particularly on the Latin American region, we see a landscape where abruptly new players, with strong investment and support from incubators and accelerators, penetrate a market with strong banking potential.

There is great potential for incumbents to leverage the security of their brand and renew their value proposition or create synergies with new fintechs.

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