Latin American fintech companies are uniquely placed to pioneer new and better approaches to compliance across the region.
With innovation at their core, fintech businesses recognize that a strong compliance program provides strategic advantages on the path to the international stage
Unicorns—startups valued at more than US$1 billion— entered the market in Latin America in March 2022 alone
Source: Market data
The past two years have witnessed an explosion in technology-focused businesses in Latin America and an unprecedented rise in venture investment in the region. Across LatAm, there has been a particular rise in unicorns—startups valued at more than US$1 billion, with twenty entering the market in March 2022 alone. The demand for digital interconnectedness and the needs of the underbanked LatAm market have catalyzed this technological boom and contributed to its varied specialization.
Technological growth has been fueled by a lack of financial services for certain consumers in the traditional financial sector, an increased demand for digitized financial services in the wake of COVID-19 and increased regulation that enhances the transparency and security for investors using these platforms.
The technology unicorns in Latin America range from e-commerce delivery platforms to digital banks and property-management systems. One particular area of growth is in fintech, which comprises technology, such as computer programs, used to support or enable banking and financial services, including digital lending, payments, blockchain and digital wealth management. Within LatAm, payments and remittances currently remain the largest fintech sector, with 25 percent of the fintech market; however, other areas are experiencing important growth, including digital loans and crowdfunding. These fintech and other technology-based businesses are springing up in many countries across the region, including Argentina, Brazil, Chile and Mexico.
LatAm's fintechs are entrepreneurial in nature, with aspirations to unlock their growth potential globally. With innovation and widespread accessibility at their core, fintech businesses can reach anyone and everyone, providing technology that levels the playing field and opens up the previously underserved markets. And with the ability to serve untapped markets through technology, LatAm's fintechs can be scaled globally and are well positioned to experience significant growth.
Entrepreneurial businesses often face challenges as they keep up with the pace of high growth. While growing market share is prioritized, critical functions such as compliance may not be sufficiently prioritized and may be at risk of lagging behind. In LatAm, the risk is even greater because the enforcement of anti-bribery and anti-corruption laws has been inconsistent. However, the region's fintechs should not look to the past, but instead focus on the future, recognizing that they are on a path to the international stage, where having a strong compliance program provides strategic advantages and supports sustainable growth. In creating such a program, fintechs will help shape the compliance culture in LatAm by importing best practices and relying on technology to innovate compliance processes.
Leadership is key to culture
LatAm's fintech leaders should embrace a culture of compliance. Strong leadership is more than adopting a code of conduct with core values such as transparency, integrity, ethics and signing the cover message. It requires engagement with team members and making the values as important as the most critical business KPI. Entrepreneurial fintechs have an advantage in engaging with team members. Their leaders are connected to team members through the use of technology, which makes them more present and accessible than ever. With minimal investment upfront, leaders can establish a lasting foundation to build a compliance program and avoid the time, commitment and resources that may be required to embrace belatedly a culture of ethics and transparency.
LatAm startups raised US$2.8 billion in Q1 2022
Source: LAVCA
Planning for success
While establishing a tone from the top is fundamental, implementing a compliance program requires crafting and designing policies, procedures, systems and controls designed to prevent or detect conduct that is unlawful, contrary to policy or inconsistent with corporate values. Fintechs are well positioned to execute these programs, as they often work in cross-functional teams on a project basis. Implementing a compliance program should be no different and have the same priority as the most promising or product-development initiative. The compliance-project team should involve all relevant functions, reflecting the fact that compliance is a shared responsibility. The compliance-project team should develop plans to implement the compliance program, report progress to the board (or similar corporate body) and be held accountable for implementation of the program.
Accelerate learning by importing knowledge
LatAm's fintechs may face challenges to building a compliance team with experience in the industry and region. As a result, they should adopt a global approach to attracting team members, taking advantage of the modern work landscape to invest in compliance resources and hire professionals with industry experience from other regions. Making the right investments in leadership and management will foster development within the compliance function, allowing for team members to grow and take on additional responsibility as the business grows. It also will provide credibility to the compliance function at a critical stage of development.
In 2021, venture investment in the LatAm market alone reached US$15.7 billion
Source: LAVCA
Resourcing for a lasting impact
Fintech firms should be willing to invest in their compliance program, realizing that the benefits are long term. A LatAm fintech will require capital to grow, which may mean accessing capital in international markets, being the target of an acquisition, or becoming a listed company. Indeed, in 2021, venture investment in the LatAm market alone reached US$15.7 billion, which is more than the venture investment during the entire past decade across the region and three times as much as the previous record of US$4.9 billion in 2019. Growth pathways will almost certainly involve an evaluation of the compliance program during due-diligence processes conducted by lenders, investors, underwriters or acquirers that apply international standards to the company's program. And with the SPAC market, the path to becoming a listed company has become accelerated. Having strong compliance programs will not only facilitate the diligence process, it will expand the pool of potential lenders, investors and suitors and otherwise strengthen the company's negotiating position.
A strong program and culture of compliance can add other benefits as well. Today's investors have begun to analyze a company's performance and make business decisions based on an increasing number of ethical considerations. A company's ethical behavior impacts shareholder market perceptions and investor decisions regarding which companies to target.
In businesses with a poor compliance culture, employees may act in a way that exposes the company to the risk of breaches and subsequent damages. Compliance breaches can be costly, not just due to potential damages, but also because of the risk of reputational damage. Accountability, transparency and ethics can make a company more reliable and, as a result, more attractive to today's investors.
Having a strong compliance program also can provide protections from enforcement. In a region where enforcement currently varies, it may not seem like a benefit, but as fintech companies expand their reach, they expose themselves to the possibility of cross-border investigations in all those countries where they do business or have customers. An effective compliance program can be used as a defense in many jurisdictions. And fintechs will be well prepared as the enforcement landscape in LatAm evolves. Within the past ten years, LatAm countries have enacted laws to combat corruption, with enforcement likely to follow. As one example, Brazil's passage of the Clean Company Act, in effect since 2014, led to unprecedented corruption and fraud investigations. Many individuals and companies that had previously operated without scrutiny suddenly became embroiled in large scandals and subsequently faced hefty civil and criminal sanctions. Following Brazil, other Latin American countries passed laws to meet international anti-corruption standards. For example, the region saw Colombia's Transnational Corruption Act and Argentina's Law 27.401. Argentina, Mexico, Peru, Ecuador and Costa Rica now provide for corporate criminal liability for bribery of domestic public officials and, in some countries, corporations can be liable for related conduct such as money laundering, commercial bribery and bribery of foreign officials. By situating themselves on the cutting edge of compliance in these countries, fintech companies can meet the demands of a modern business prepared for any changes that may come.
of venture capital, funding raised in Latin America in Q1 2022 went to fintech startups
Source: LAVCA
Innovation drives efficiency
Fintechs also may hold the key to unlocking new and better approaches to compliance. With technology at their core, fintechs can leverage their expertise to develop new processes, procedures and controls that drive efficiency, maximize resources and focus on risk. Some technology giants already have announced their own anti-corruption and transparency initiatives, often leveraging tools such as cloud computing, data visualization, AI and machine learning, among others, to detect and deter corruption. These projects demonstrate that technology will be at the forefront of fighting corruption in the future. For example, the use of data can illuminate hidden patterns and relationships that may be of concern. Similarly, employing cloud computing, data visualization, AI and machine learning can help aggregate and analyze enormous and complex amounts of data, exposing red flags that would have otherwise gone unnoticed with traditional methods.
In sum, the rapid rise of the Latin American fintech industry has attracted hefty investment in the area, resulting in the creation of a few unicorns, with more investors expected to flock to the market. The region's regulators are slowly catching up, although both the rules and their enforcement still vary country to country. LatAm fintechs can help make the region's tech sector more attractive to investors by formulating and adhering to strong compliance programs that include responsibility sharing among all employees and that employ a variety of new technologies to better meet the burden of due diligence and risk assessment.
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