Lending financial technology companies in Argentina are targeting low-income segments and making inroads outside of Buenos Aires to serve the underbanked across the country.

The COVID-19 pandemic has been a key driver for digital adoption, and that surging demand during stringent lockdowns allowed them to reach untapped clients beyond the highly populated area of Buenos Aires, local fintech executives said in a panel about digital lending at the Argentina Fintech Forum.

"A context like the one we faced with COVID has been an accelerator to fintechs like us," said Ezequiel Weisstaub, CEO at Credicuotas Consumo SA. "Our loan portfolio was multiplied by three during 2021."

The share of adults who have debt in the country's expanded financial system, which includes banks and nonbank financial institutions, as of 2020 was 47%, according to data from Banco Central de la República Argentina. However, Weisstaub said that in the low-income segment, access to credit products is severely restricted to 25%.

"The population at the bottom of the pyramid is demanding for credit, and that is a problem in Argentina," Weisstaub said.

For fintech leaders, banks have taken a cautious approach during the pandemic that has left opportunities for smaller digital players. Broad metrics for credit both in Argentine pesos and U.S. dollars have dwindled during the past year as traditional banks moved away from lending with inflation and uncertainty picking up.

"The traditional banking system and incumbents have foot-dragged during the pandemic," said Salvador Calogero, director at local digital lender Wenance. "They took a wait-and-see strategy [while] we had the opportunity to seize a market segment neglected by [them]."

To that end, the emergence of virtual accounts, typically served by digital providers and wallets, has been significant. Virtual account usage rose during the pandemic, with roughly 1 in 4 adult Argentines possessing at least one. The number is up from 7% in 2019, according to central bank data.

Calogero said the network has gained capillarity with the surge of digital banking. "It is a much more distributed pie among different provinces," Calogero said. Roughly a third of Argentines live within the metropolitan area of Buenos Aires, making banking efforts oftentimes heavily geared toward that area.

For fintechs, lending to nonurbanized areas in Argentina used to be risky as it usually had a correlation with higher default rates. However, Juan Salviolo from Waynimóvil said that is no longer the case. Fraud and delinquencies have been consistently lower in 2021, with a good collection rate and loan demand in Argentina's interior towns that are not necessarily provincial capitals, Salviolo said.

Smaller agglomerations in Argentina's interior have long suffered from a lack of financial infrastructure. Central bank data shows that just 48% of communities in Argentina have at least one physical access point to the system. To that end, digital channels have provided an opportunity to widen the scope and increase financial inclusion.

A risky business

But all things considered, executives agreed that lending to the underbanked can be risky. Current nonperforming loan ratios in the portfolio could easily range from 10% to 20%, they said.

For that reason, a strong collection and the ability to predict repayment behavior make a difference for companies and loan rates. "The lack of data in the underbanked segment is a problem," said Sergio Miller, a regional data analytics director with Equifax. "It is a very complex market because there is simply no information available."

And the little information that they have, fintech leaders said, could easily go stale and lose value for data analysis and loan prediction as traditional bureaus inform them of events 60 days after they happened. For that reason, fintechs have turned to other sources such as social media, geolocation software and even portfolio history to make better guesses on the likelihood of loan repayment.

In addition, they continuously refine and polish their own scoring methods. Having proprietary risk models is key to navigating the risky segment, executives said.

"It is a segment with little or no credit records, for which healthy risk management is fundamental," Wenance's Calogero said. "It is very important to tackle the sector with our own scoring that we generate from our own loan books."