Access to credit for small and medium-sized enterprises in Latin America remains structurally constrained. This is often attributed to elevated risk, macroeconomic volatility, or weak documentation standards. However, these explanations overlook a more fundamental issue.
The region’s economic structure differs materially from that of highly formalized economies where most contemporary credit models were originally designed. Informality, uneven bureau depth, liquidity volatility, and accelerating digital payment adoption create a distinct operating environment. When underwriting frameworks built for mature, fully formalized markets are applied without structural adaptation, they tend to misinterpret ambiguity as risk.
Understanding why Latin America requires differentiated credit models begins with understanding the structure of the market itself.
Latin America’s SME landscape operates within structurally high levels of labor informality, which materially affects how income is generated, documented, and assessed for credit purposes.
Recent labor statistics show that informal employment represents approximately 54–55% of total employment in Mexico, according to INEGI. In Colombia, informality remains above 55%, based on DANE labor market data. Peru exhibits one of the highest rates in the region, with informality exceeding 70% of employment, according to INEI. In Brazil, despite a larger formal sector, informal employment still represents roughly 38–40% of the labor force, based on IBGE data. Chile shows comparatively lower levels, though informal employment still stands near 27–28%, according to INE.
These figures illustrate that a significant share of economic activity across the region operates outside fully formalized reporting systems. As a result, traditional underwriting inputs (audited financials, tax records, formal payroll data) frequently provide an incomplete representation of real business performance.
Credit bureau infrastructure in Latin America has expanded significantly over the past decade. However, depth and effective coverage remain uneven, especially among micro and small businesses.
A substantial share of adults in the region still lack formal credit histories. Even when bureau files exist, they often reflect consumer lending rather than business cash flow. Thin files, short histories, and limited tradelines are common among SMEs, creating structural ambiguity in risk assessment.
Limited information is often interpreted as elevated risk, even when underlying business performance is stable. In many cases, it reflects structural reporting gaps rather than true credit weakness.
The credit gap for SMEs in Latin America remains material. Estimates from the International Finance Corporation (IFC) place the global MSME financing gap at over $5 trillion annually, with Latin America representing a significant share relative to GDP.
This gap persists despite rapid digitization and growth in SME activity across platforms. The implication is clear: access constraints are not driven solely by demand weakness; they are largely shaped by underwriting architecture.
SME fragility in the region is frequently linked to working capital dynamics rather than structural insolvency.
Many small businesses experience:
In digitally active segments (marketplaces, mobility, food delivery, SaaS-enabled commerce), revenue volatility is observable in high frequency.
Daily transaction flows, order consistency, transaction amounts, refund behavior, and cohort retention patterns provide a live view of business health. Static financial statements provide a point-in-time view, whereas transactional data captures continuous operating dynamics.
In volatile but digitized environments, predictive power increasingly resides in behavioral performance data rather than backward-looking documentation.
Digital payments adoption in Latin America has expanded rapidly over the past decade and continues to deepen. According to the World Bank’s Global Findex 2021, the latest globally harmonized dataset, 73% of adults in Latin America and the Caribbean made or received a digital payment in 2021, up from 45% in 2017, representing a 28-percentage-point increase in four years.
More recent payment infrastructure data shows that Latin America’s digital rails are scaling rapidly. In Brazil, the real-time payment system Pix processed approximately 63.8 billion transactions in 2024, a 52% increase over the prior year, and continued to lead adoption in 2025, accounting for roughly 50.9% of all retail payment transactions in just the first half of the year.
The implication is clear: A growing share of small businesses now generate observable, high-frequency digital transaction data, fundamentally reshaping the information base available for credit underwriting.
Credit models developed in highly formalized economies are built on a specific set of structural assumptions: near-universal bureau penetration, stable accounting practices, relatively low levels of informality, lower revenue volatility, and a clear separation between consumer and business credit behavior.
When those assumptions are applied mechanically in Latin American markets, the result is typically conservative approval thresholds and constrained credit penetration. This outcome does not necessarily reflect higher intrinsic risk among SMEs. Rather, it reflects a misalignment between the underlying economic structure and the risk frameworks used to evaluate it.
Latin America is a differently structured market. As such, it requires risk models designed around its own operating realities rather than incremental adaptations of imported templates.
The opportunity in Latin America is not only to expand the supply of credit, but to recalibrate how risk is measured. In increasingly digital ecosystems, transactional performance has become one of the most accurate indicators of business health.
By analyzing revenue consistency, volatility patterns, concentration exposure, behavioral response to liquidity injections, and repayment performance directly linked to sales activity, it becomes possible to structure credit in alignment with real operating dynamics.
This approach reduces reliance on incomplete financial statements and instead prioritizes observable economic behavior. In a region characterized by persistently high informality alongside accelerating digital adoption, underwriting frameworks must evolve to reflect how businesses actually operate.
Latin America does not require imported credit templates adjusted at the margins. It requires risk models built around its own economic substrate, behavioral data, transactional depth, and platform-native performance signals.
Embedded credit enables that structural shift by aligning capital with observable business performance, providing a structural answer to why Latin America requires differentiated credit models.
