Reasons Preventing Latin American Legal Tech's Growth
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Reasons Preventing Latin American Legal Tech's Growth

CIO Review

While the legal tech market booms around the world, its growth and impact on the Latin American legal market seem muted

Legal tech initiatives have gained popularity worldwide in recent years, without a doubt. Global Legal Tech market value was estimated at US$29.8 billion in 2022, and it will grow at a CAGR of 8.9 percent in the next decade.

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Smart money continues to pour into Legal Tech despite a radically changed economic environment and declining valuations. Latin America is lagging behind more mature markets in the United States and Europe regarding growth and impact from this sector.

Latin American data is notoriously scarce and unreliable, but various attempts at mapping the Legal Tech sphere give an idea of where the market stands.

Brazil is the first elephant in the room. Likewise, Brazil's Legal Tech market stands out in its own right. With its particular regulatory barriers and linguistic barriers, it operates in a separate sphere. It does not form part of the regional ecosystem emerging in the rest of Latin America (mostly Spanish-speaking).

According to research, there are currently around 200 to 250 Legal Tech initiatives across Latin America (outside of Brazil), with 70 percent based in Mexico, Argentina, or Colombia. Due to the relatively high turnover rate, this number is a moving target because the publicly available data does not allow quantifying the current market size.

A categorization of the various Legal Tech projects, whether they originated in the private sector, were captive initiatives within law firms, or were promoted by government institutions (evaluated at 15 percent of all initiatives), shows that about a third of these initiatives involve document management, contract automation, e-signatures, and practice management software.

Legal Tech ecosystems in Latin America can be categorized according to their size, maturity, and health according to four key factors—legal framework and quality of judicial systems, access to digitized public records, a market's size and maturity (the size and maturity of the legal market), and funding access.

The lack of a unified legal system across the region holds Latin American Legal Tech back. The countries of Latin America have their own legal systems, institutions, and regulations. The main trading blocs, such as Mercosur and the Pacific Alliance, still need to achieve the legislative harmonization required to facilitate regional expansion. Legal Tech companies often need help developing products and services that are transferrable across borders, which hinders their scalability.

In the Caribbean, common law legal systems prevail in English-speaking countries, whereas civil law systems prevail in Spanish-speaking countries.

Creating the foundation for legal technology

In Latin America, beyond these differences in regulation, many countries still need more specific regulations required for Legal Tech solutions to be built on a solid foundation. There are notable gaps in privacy and data protection regulations, electronic signatures, e-commerce, and access to public records. Some countries have drafted these laws, but others still need to, and implementation levels vary widely.

Ecuador, for example, has drafted and implemented a highly praised data protection law, while other Central American countries, such as Guatemala and El Salvador, are still waiting for their congresses to approve similar laws. Legislation in other areas is markedly different as well. Adding to this institutional weakness, many countries need a culture of legality regarding social and business relations.

The stability (or lack thereof) of the regulatory framework also impacts the viability of Legal Tech initiatives. For example, Colombia has been undergoing its 21st tax reform since 1990. The region is still constrained by the political instability that comes with increased politization, and any Legal Tech initiatives focused on that sector must consider that.

The digitization of government and judicial institutions lags in most Latin American countries, although 70 percent have a formal digital transformation and innovation agenda for the public sector. An Inter-American Development Bank study shows that only 7 percent of citizens performed their last transaction online with their government. Less than 30 percent of government procedures can be completed online in Latin America. A lack of substantial investment and institutional capability hinders the execution of this digital agenda.

Getting to know the local legal market

A largely small-scale and underdeveloped legal market further exacerbates these conditions. International law firms have gained a foothold in larger economies but primarily serve international financial institutions and multinational companies. In Latin America, there is a low penetration of broadband internet and mobile phone use and a lack of strong domestic private sector development. Despite the appearance of a large market, there are still few actual potential users of Legal Tech. Cultural barriers also contribute to these factors. The region is still hesitant about using technology, not just for legal services, but for all kinds of services, preferring to deal with service providers in person.

A final challenge in the region is more funding for Legal Tech initiatives. Start-ups in Latin America need help finding the investment they need to develop and scale their products. Most venture capital has gone to financial tech (FinTech) initiatives, often called the big brother of legal tech. FinTech has absorbed much of the risk capital that ballooned in the region over the last five years because it is perceived as a better business. Recent investment in late-stage Latin American tech companies has dried up, however, and access to funding for Legal Tech is likely to be limited.

Legal Tech initiatives are still being exposed to funding through regional initiatives, such as the Global Legal Tech Venture Day in Bogota in 2022 and the Magno Foro LegalTech event in Mexico in 2022. The U.S. investment firm Accel-KKR based out of Silicon Valley, has made a significant investment in Chilean company LemonTech, for example.

Latin America has seen a Cambrian explosion of Legal Tech initiatives, but the local context needs to be more fertile for these initiatives to flourish and scale. For now, macroeconomic conditions will likely make it difficult for companies to access funding. Suppose regulatory frameworks, institutional setup, and market conditions improve slowly. In that case, domestic Legal Tech firms will need help to compete with consolidated players outside the region looking to expand their business.

Conversely, democratizing Artificial Intelligence-based solutions, such as ChatGPT, and other tools that make Legal Tech more accessible and user-friendly will expand the user base and open the door to new applications and solutions.

Despite the limitations described above, there is still an opportunity to develop Legal Tech solutions in the virtually untapped Latin American market. The possibility exists for companies that can time the market and navigate its particular conditions successfully.

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