Challenges to Digital Financial Services in Latin America

After the 2008 financial crisis, the number and diversity of providers of digital financial services (DFS) surged in Latin America (LatAm). This trend included the establishment of successful pioneers, such as Cetes Direct in México in 2010, and future “unicorns,” like Nu Bank in Brazil in 2013. According to a study by Finnovista and the Inter-American Development Bank, the most popular types of digital finance solutions in Latin America include mobile payments, electronic wallets, and payment gateways. Despite rapid growth, the benefits of DFS have not manifested evenly.

This article argues that structural disparities in DFS uptake stem from existing inequalities and that DFS growth without effective governance risks entrenching these rather than correcting them. To fully understand this phenomenon, policy analysis must distinguish between two distinct dimensions of the problem. First, inter-country inequality, driven by structural asymmetries in infrastructure, investment allocation, and regulatory capacity, determines impacts across country groups. Second, intra-country inequality across gender, ethnicity, geography, and socioeconomic status remains acute within national markets, preventing technology from reaching the most vulnerable. Accordingly, policy recommendations should focus on structural interventions tailored to these specific challenges.

A Tiered Regional Landscape: Inter-Country Disparities

LatAm’s DFS trajectory is best understood through three country tiers, each defined by distinct regulatory capabilities that either catalyze or constrain inclusive digital infrastructure.

The frontier market of Brazil has achieved near-universal digital payment infrastructure. Brazil’s Pix instant-payment system, launched in 2020 by the central bank, now processes over 40 percent of the country’s electronic transactions and has surpassed debit cards in volume. The country’s capturing $1.977 billion in investment in 2020, against $6 million each for Argentina and Ecuador, importantly reflects regulatory strength, institutional capacity, capabilities, and market scale that other countries lack. This crucial regulatory success stems from a proactive, state-led mandate in which the central bank has acted not merely as a supervisor but as the foundational platform architect, enforcing mandatory participation for large financial institutions and embedding open finance principles directly into market architecture. Ultimately, Brazil presents itself as the primary Latin American success story in promoting financial inclusion.

Second-tier adopters, like Peru, Colombia, and Chile, have also advanced, albeit unevenly. Peru is projected to sustain digital payment growth above the regional average at 14 percent annually from 2024 to 2029, powered by platforms such as Yape and Plin. The 2023 central bank mandates for interoperability, which forced previously siloed private wallets to interconnect, significantly accelerated this expansion. Mexico and Colombia, despite large markets and institutional capacity, both factors that promote DFS growth, have progressed more slowly than expected due to regulatory restraints on DFS innovation. Mexico’s fintech regulatory framework set out in the Ley Fintech in 2018 has proven harder to implement than anticipated, limiting the scaling of local DFS providers and the possibility of new services, such as open banking. While the 2018 law provided early legal certainty, its rigid secondary regulations, heavy compliance costs, and slow authorization processes for Electronic Payment Funds Institutions (IFPEs) have choked early-stage innovation and cemented the dominance of traditional incumbents.

Lagging economies, which include much of Central America and smaller Andean nations, face the most acute financial exclusion. Up to 95 percent of consumers and merchants in these markets could benefit from digital payments, yet adoption remains limited due to widespread poverty, lack of government initiatives, and severe regulatory gaps. Some public-sector initiatives have gained traction: Costa Rica’s SINPE Móvil is among Central America’s most successful mobile instant-payment systems, and Guatemala’s Bono Familia has accelerated digital wallet adoption. However, these remain isolated successes. For the most part, lagging economies suffer from an “asymmetry of omission” in their regulatory frameworks. In the absence of specialized fintech frameworks, local regulators default to legacy, collateral-heavy commercial banking laws. This regulatory inertia creates insurmountable entry barriers for non-bank digital players, reinforcing the exclusion of unbanked populations.

Fragmented regulation across 20 sovereign jurisdictions limits interoperability and prevents the scale needed for sustained financial inclusion. Ultimately, Argentina, Brazil, and Chile now have bank account ownership rates that exceed 80 percent while parts of Central America remain below 40 percent due to these structural inequalities.

Market Concentration and “Dancing with Giants”

A winner-takes-all dynamic is emerging at the international and macroeconomic level in the fintech sector. The region now hosts major players: Brazil’s Nubank has surpassed 100 million users, while Argentina’s Mercado Pago serves 72 million users and Ualá serves over 9 million. These are some of the region’s 20 “unicorns” operating with significant operational scale and representing success in DFS in LatAm.

However, several caveats qualify this success. First, the largest and most successful platforms emerged during a period of high market liquidity, when funds sought high-growth opportunities amid near-zero interest rates. With liquidity now constrained, it is unlikely equivalent funding will materialize, favoring consolidation among deep-pocketed incumbents or acquisitions by traditional banks over broader market competition.

Second, most other local DFS providers operate with minuscule customer bases, ranging from 500 to a few thousand account holders, compared to traditional incumbents like BBVA, which attracts 30 million customers in Mexico alone. Market imbalances are exacerbated by acquisition-driven scaling, which enables established players to consolidate power rapidly. Large traditional banks have responded increasingly defensively, launching digital arms like BBVA’s Openbank and Santander’s DINN. Concurrently, their siloed data environments and lack of appropriate regulation block open finance interoperability, entrenching foreign technology dependencies. Smaller players remain unable to scale due to uneven regulatory infrastructure, lack of funding, and restrictive licensing rules, while global payment giants extract rents without bearing local risks.

Gender, Ethnicity, and Employment: Intra-Country Inequalities

While the regional landscape reflects profound inter-country disparities, these macro-level imbalances are compounded by severe intra-country inequalities within individual domestic markets. DFS expansion does not dissolve historical social strata; rather, without tailored interventions, platforms reproduce targeted exclusions at the intersection of gender, ethnicity, and employment status.

Women face challenges both as leaders within the DFS industry and as users of DFS. In terms of employment, despite comprising 51 percent of the population, women hold only 15–20 percent of leadership roles in DFS companies and secure minimal sector funding. Women-led SMEs across LatAm face a financing gap of nearly $100 billion. This gender gap is structurally reinforced by the architecture of DFS risk assessment. Because women in Latin America are disproportionately employed within the informal sector or experience interrupted formal career trajectories due to unequal caregiving burdens, they frequently lack traditional credit histories, asset ownership, or formal collateral. When fintech platforms deploy automated credit-scoring algorithms without adjusting for these socioeconomic realities, the systems interpret the lack of formal data as high risk. Consequently, algorithms actively replicate old biases under a veneer of technological neutrality, systematically denying credit or offering higher interest rates to female entrepreneurs. At the intersection of these two trends, with women systematically excluded from DFS opportunities, the stark lack of gender diversity among venture capital allocators in the region reinforces homophilous investing patterns. Funding thus flows predominantly to male-led, urban fintech startups catering to an identical demographic.

Rural Indigenous communities in Mexico, Peru, and Bolivia also experience acute exclusion: only 20–30 percent of the rural Indigenous population is financially included due to linguistic barriers and limited digital access. AI systems trained on datasets in English and standardized Spanish frequently fail to recognize informal income patterns or cultural differences, entrenching exclusion for the groups most in need of financial access. Without structural interventions, LatAm’s DFS ecosystem risks amplifying, rather than narrowing, historical inequalities across gender, ethnicity, and employment.

Policy Recommendations

Addressing these structural challenges requires policies tailored to each country tier and guided by four principles: efficiency, equity, security, and freedom. States must act as facilitators, guarantors, and coordinators, not passive regulators. They can do so through four policy approaches, focused on efficiency and infrastructure, equity and inclusion, security and sovereignty, and freedom and competition, respectively.

First, harmonizing payment rails—methods for transferring money—and promoting open banking standards can foster competition by establishing a common infrastructure that new DFS providers can leverage. For example, harmonizing mobile payment networks to work across different banks, businesses, and even countries can assist new fintech companies in cheaply offering payments across the LatAm region, lowering barriers to market entry. India’s Unified Payments Interface (UPI) is an example of a digital payment system that allows users to cheaply and seamlessly transfer money between payment rails. States can also use regulatory sandboxes, or controlled environments that permit companies to test their fintech products before public release. Sandboxes would be especially useful in countries like Mexico, allowing companies to build a customer base and attract investors while awaiting IFPE authorization. Thus, by encouraging open improvements to digital and regulatory infrastructure, countries can lower barriers without compromising stability, facilitating needed investment and innovation for mid-tier and lagging economies.

Second, targeted credit lines for women-led SMEs, equity crowdfunding rules adapted to informal income patterns, and diversity requirements for DFS leadership are essential. Targeted credit lines and crowdfunding for women-led SMEs would offer an alternative to traditional credit-scoring algorithms that deny women without an established credit history the opportunity to enter the fintech space. They could bypass historically high interest rates and predatory payback structures, allowing women to amass capital and innovate without fear of financial ruin. Increasing opportunities for women with informal income, alongside diversity requirements, will break down discriminatory investment pathways and advance gender equity in a male-dominated market. Moreover, adapting digital platforms to Indigenous languages and integrating rural connectivity into AI training datasets can address exclusion at the algorithmic level by expanding DFS access for vulnerable groups or individuals without the resources to access English or Spanish platforms. Mexico’s Financiera para el Bienestar (FINABIEN) offers a replicable model of combining physical presence with digital channels, using in-person support to empower women and Indigenous communities to use DFS.

Third, by drawing on models such as the EU AI Act, which establishes a tiered regulatory system for different types of AI, LatAm countries could simultaneously protect consumers from AI risk while facilitating innovation. Low-income groups, for example, would not be penalized by an AI credit-scoring algorithm, but fintech companies could use AI to offer new services, payment rails, and credit opportunities. Moreover, adopting harmonized Know Your Client (KYC) protocols that verify digital and bank identities would reduce strategic vulnerabilities and prevent adversarial data extraction by global providers.

Finally, protecting market openness requires active enforcement of competition law against incumbent data moats. Digital rights charters and regional agreements on open data standards can preserve user autonomy and prevent capture by foreign platforms, offering collective bargaining power to smaller economies.

Conclusion

LatAm’s DFS disparities are structural and self-reinforcing. The region’s three-tier landscape—frontier, mid-tier, and lagging—reflects differences in regulatory capacity, institutional strength, and macroeconomic stability that markets alone will not correct. Policy must pursue efficiency, equity, security, and freedom simultaneously through tailored interventions at each tier and across the region. No single country can achieve this in isolation: regional coordination is essential to prevent fragmentation, reduce geopolitical vulnerabilities, and build collective bargaining power against global digital platforms. Achieving that outcome requires states to lead, not simply follow, the market.

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Bernardo Bátiz-Lazo is a Professor of FinTech History and Global Trade at Northumbria University (UK) and holds a concurrent affiliation at Universidad Anáhuac (México). A Fellow of the Royal Historical Society and the Academy of Social Sciences, he researches the history of financial technologies in Latin America.

Rodrigo Garza Arreola is a Professor and Researcher of International Economics and Business at Universidad Panamericana (México). His research interests focus on the impact of financing on economic development, digital financial innovation, and the design and evaluation of public policies within these fields.

Image Credit: Banco Central de la República Argentina en 2016 by Casa Rosada, CC BY 2.5 AR, via Wikimedia Commons