> Posted by Pablo Anton-Diaz, Research Manager, CFI, and Sergio Navajas, Senior Specialist, Inter-American Development Bank
Financial institutions in the Latin American and Caribbean (LAC) region are not investing in fintechs. Over the years the financial institutions in the region have demonstrated their willingness to adopt creative new solutions, such as microcredit and agent banking in the quest to advance financial inclusion. But with fintech solutions, compared to institutions in other regions, Latin American financers have been reluctant to invest. Why?
Worldwide, fintech is touted as a major force that has the potential to downright revolutionize the financial sector. Because its foundations are entirely digital, its scaling-up possibilities are enormous and could be more quickly realized than any previous industry innovations. However, the transformations that many traditional financial institutions (FIs) are beginning to undertake to become digital businesses have been filled with obstacles. This has been particularly true in LAC, where the financial sector is dominated by commercial banks, which hold most of the regional sector’s assets and lending portfolios.
The fintech community is currently composed of more than 10,000 fintech firms around the world and over 1,000 investors (venture capital funds, mainly) that have invested over US$50 billion in the last 3 years. However, investment has been lagging specifically in LAC compared to other regions. And compared to other regions, the potential for fintech in LAC is especially high: financial access in LAC (only 51 percent of adults own an account) pales in comparison to both the East Asia and Pacific region (69 percent) and the rest of the OECD countries (94 percent). Out of all the emerging markets, LAC is the least developed region in fintech, behind both Asia and Africa.
Large multinational banks in LAC like BBVA and Citi have been the exception to this regional fintech trend. Through alliances, buy-outs, competitions, and other creative mechanisms they’ve been able to attract some of the best and most suitable fintechs out there to meet their needs. However, more local and medium-sized financial institutions are not well equipped to do this, and so the few alliances between fintechs and FIs that have been created in this space have been ad-hoc in nature or through a few highly motivated funds that understand the potential. Therefore, there’s clearly a need to accelerate this process in order to promote the connection of medium-and-small FIs in LAC with the global fintech community.
To combat this issue, the IDB’s Multilateral Investment Fund (MIF) announced last Monday the creation of FINCONECTA, a program that will integrate solutions between financial technology companies from all around the world and financial institutions in the LAC region using a singular streamlined platform called “Forward”. The main goal of FINCONECTA is to incentivize rapid prototyping, collaboration, and interoperability amongst the participants of this new interconnected ecosystem of solutions in order to foster exponential growth of the financial industry in LAC. Forward is powered by Above & Beyond, an organization that works via strategy consulting, technology solutions, and investment to close this industry synapse between fintechs and financial institutions.
The 10-month program will include a process of connection, fusion and acceleration between fintechs and interested FIs so they can collaborate and drive responsible growth in the financial industry of the region. Participants will be able to interact with one another using a single platform that will handle all the necessary API connections, allowing FIs to test and evaluate multiple technology solutions provided by different fintechs before choosing the ones that suit them best and adapting them to their own needs. On the other hand, FINCONECTA will also help fintechs gain direct access to a larger pool of interested FIs that they’ll be able to offer their solutions to, in order to contribute to the digitization process in Latin America and the Caribbean.
Starting in April 2017, registration on the platform will be open to all types of fintechs and FIs.
FINCONECTA is the first of its kind in the industry and was created specifically to solve the integration and interoperability challenges that FIs and fintechs face when they want to establish partnerships. The current model for integration is typically done on a one-to-one basis (i.e. one FI with one fintech), a costly solution that can take months (if not years) to implement and requires dedication, prioritization, risk analysis, and lengthy procurement procedures. Additionally this model does not offer solutions to achieve interoperability, which is crucial to promote adoption and use among new clients. FINCONECTA addresses these challenges through the platform’s interconnectedness and through additional support and guidance provided to FI and fintech participants. FIs, with a single connection, will have the ability to select various FinTech solutions for testing in a comprehensive tech and regulatory sandbox. Fintechs, on the other hand, with one connection will gain access to all participating FIs. FIs and fintechs of all sizes will be invited to participate, in order to create a marketplace where they can collaborate and support each other to reach scale.
If you would like to learn more about this initiative, we invite you to visit www.finconecta.com, and join us March 16, 2017 at 12:30 pm at the Inter-American Development Bank for a Q&A with Jorge Ruiz, the founder and CEO of Above & Beyond. More details on how to attend can be found here.
This is a joint blog post between the CFI Blog and the IDB’s FOMIN Blog.
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