Latin America’s Fintech Rebels Declare War on Inflation
WHY YOU SHOULD CARE
Losing your wealth to bad fiscal policy ain’t no fun at all.
By Wesley Tomaselli
When he’s on the road, dashing in and out of airports for work around Latin America, Argentine Gabriel Paluch often opens up his laptop, peers down over his thick black mustache and skims the numbers on the screen. His screen shows him the value of money he’s loaned borrowers through Afluenta, a Buenos Aires–based financial platform. If his borrower doesn’t default, he’ll get around 20 percent back on the principal amount. Net. Annual. After inflation.
Inflation. That’s the key word for Paluch and a growing number of Latin Americans who are seeing their peso value get eaten up by what they perceive as irresponsible politicians and banks. And in response, Latin Americans — especially millennials — are turning to fintech platforms as an alternative to traditional banks, real estate or that space in between the mattress where you stash dollars. A frustrated 49 percent of the region’s population and many small- and medium-size businesses are outright excluded from traditional financial services, according to the Inter-American Development Bank (IADB). Others, who have access, don’t even bother using the system because of decades of broken promises.
Now it’s time for revenge [against banks].
Gabriel Paluch, an Argentine user of fintech platforms
IADB found that between 2014 and 2016 around 700 startups in the fintech space have popped up, with $186 million in venture capital in 2016. Afluenta offers peer-to-peer loans and investment. Crowdium, another fintech startup, focuses on real estate. And crypto-powered Wayni is uniting a bitcoin medium for exchanging loans with two old digital technologies: the ATM kiosk and the cellphone. But they all have similar goals: strip out traditional banks, aka the middleman, and get the people fair yields.
“Something that everyone knows but no one says is that the banks here have always abused us,” says Paluch, who lives in an economy where consumer prices are expected to increase about 24 percent this year. “So now it’s time for revenge.”
Latin America’s battle with inflation isn’t new, and old wounds are still fresh. In the 1980s, the region was rocked by debt crises, where a combination of macroeconomic factors ballooned the amount of what governments owed the rest of the world. Inflation rates soared. In 1990, the regional inflation average was 438 percent. Tighter monetary policy since has pulled that number down significantly, but chronic inflation still haunts key Latin American economies. Last year, inflation in Brazil hit 8.7 percent, in Argentina it was 41.2 percent and in Venezuela a whopping 627 percent, according to data from FocusEconomics and Bloomberg. “Every country has its peculiarities, but this is mainly because of a lack of fiscal discipline on the part of governments around the region,” says Henkel Garcia, a Venezuela-based financial analyst for Econometrica. According to Damian Lopo at Crowdium, the poor stewardship is “why, when you’re a kid, you grow up hearing your parents say: invest in bricks and mortar,” a reference to the safety of real estate. In Argentina, there’s also a long history of saving in unbanked dollars instead of banked pesos.
“I think markets need to be more human, more fair,” says Afluenta founder Alejandro Cosentino from his office in Buenos Aires’ Palermo neighborhood. Many Argentines still remember when the government restricted withdrawals of deposits in 2001, inciting widespread protest. “Banks are taking the lion’s share,” adds Cosentino. “If you buy a CD [certificate of deposit], you don’t even beat inflation.”
Afluenta, which opened shop in 2012, does credit assessment for its clients, and then its clients choose how to borrow and lend, and with whom. The belief is that it can do more accurate assessments with algorithms and therefore manage risk better than banks. Over at Crowdium, which took on its first clients in early 2016, the platform connects investors to real estate projects “without having to have half a million dollars,” explains Lopo, who says it has $3.5 million in projects. Wayni relies on the near-ubiquitous nature of the cellphone across economic backgrounds to offer finance. “Of 40 million people living in Argentina, about 16 million belong to a lower economic class where only 28 percent have access to financial services, but nine out of 10 have a cellphone in their hands,” says Juan Salviolo, Wayni’s founder.
Cosentino has already set up offices in Argentina, Peru and Mexico, and plans to be in Colombia and Brazil next year. Crowdium and Wayni plan to expand to other economies in Latin America as well. But according to Lopo, they will have to keep ahead of establishment finance, “because the traditional banks are worried about these new technologies,” and they’re not just going to stand and watch from the sideline. Some new financial services might have a tough time getting millennials on board as well, for the reason that they are still financial services. Take Manuel Leal, a 27-year-old Venezuelan living in Buenos Aires who says he’s unbanked and saves in a mix of dollars and cryptocurrency. “No one I know would put their money in any kind of financial institution,” he says.
Episodes in economic history — as early as the merchants of Venice in the 1200s and 1300s, as recent as credit default swaps in the early 2000s — show us that innovation in financial markets can be a bumpy ride. But if a little turbulence is part of beating exorbitant rates of inflation, a growing number of Latin Americans seem to be using the choice of where to put their money as an opportunity to yell “revolt!”