Fintech: State of Innovation and Opportunities in Latin America and East Africa

1        Introduction

Venture capitalist, private equity firms, corporations are increasingly channeling an unprecedented flow of capital into global financial technology (fintech) companies. Technology is changing the way consumers relate to their finances and the way institutions function in our financial system.  For instance, in Latin America, a wave of exciting and ground-breaking fintech innovations are attempting to take advantage of a lack of financial services. Fintech companies such as NUbank, Pingit, and ContaAzul are more appealing to the underbanked, underserved due to their more advanced and user-friendly systems. In Africa, fintech is essentially creating a new industry from scratch. The widespread use of mobile wallets is enabling companies that are already serving low and middle income segments to broaden their service offering to include other financial services.

2        Trends in the Fin-Tech Sector

Reduction in Corruption

The trend of corruption will set to be minimized when cash is digitalized – mobile services like Easypaisa in Pakistan and M-Paisa in Afghanistan are allowing the transfer of money straight from government accounts directly to the account of the target user. This renders the role of the middlemen to be unnecessary – which in most emerging economies, a corruptive influence. [1]

Blockchain

Blockchain is a peer-to-peer technology that uses its distributed ledger and advanced encryption to guarantee the provenance of every transaction. An up and coming trend is blockchain digital identities, which is based upon a mobile biometric fingerprint or eyeball, with a mobile wallet that has interoperability and standards. This movement is set to become a mainstay in Africa in the near-term future where a cheap mobile identity scheme takes over the world.[2]

Mobile Revolution

Another exciting aspect is that most models will be built and scaled in an AI-enabled and mobile-only world. P2P platforms will scale with intelligence embedded into their algorithms and payment systems will include API-friendly platforms. Let us look at the absolute numbers in Latin America: there will be more than 605 million smartphones in the region by the year 2020 – a figure only dwarfed only by the Asia Pacific region[3] – therefore there is no doubt that crowdfunding platforms and wallets will target millions through their mobiles.[4]

2.1      Developments in Latin America

Mexico – one of the largest economies in Latin America, with an emerging middle-class signifies boundless opportunities. However, against this backdrop, lurks a financial services industry of contrasting fortunes: large, nimble banks and financial institutions thrive in a country with abysmal credit penetration, low financial inclusion and a prevalence of frauds.

The Mexican government has sought to rectify this through the launch of its National Financial Inclusion Strategy (NFIS) – a roadmap to accelerate access to financial services for more than half of the population currently left out of the formal and regulated financial system.

In the private sector, Mexico’s fintech industry has practically conditions ideal for venture capitalist: large untapped markets, highly scalable models, startups with solid traction and multiple exit scenarios.

Mexico’s key challenge is to increase financial service penetration, and to extend financial access to people who are currently out of the reach of the regulated financial sector. Today, more than half of internet users bank online and microcredit institutions have fostered a better environment for financial inclusion by creating a culture of credit in micro-business owners.

In Colombia, there has been an emergence of approximately 70 startups in the fintech industry in recent years[5] which business models include payments and remittances, online loans and improved financial services. According to Asobancaria[6], in Colombia “the decrease in the cost of processing, storage and operation and the new ways of ascertaining the identity or the credit capacity of customers are the key features that have allowed fintech companies to design more affordable products for low- income homes and companies, which –if it weren’t for these innovations– would not have access to financial products and services.

Finally, an interesting development that is worth observing in the upcoming years is the increasing utilization of bitcoins in Venezuela. The colossal social spending program carried out by the Venezuela government has led to astronomical levels of inflation. As a result, Venezuelans are turning to Bitcoin as an alternative to protect their savings from the rapidly decreasing value of the bolivar.

2.2      Development in Africa

An interesting trend is taking place in Africa where telecos are playing the role of banks and banks are taking on the role of telecos. For example, FNB Connect, a “virtual mobile network” launched by the South African bank aims to compete in the telecommunication space in the country. On the flip side of the landscape, M-Pesa, a mobile platform owned by Kenya’s telecommunication company Safaricom has evolutized the financial industry in East Africa.

Traditional banks are also now reaching out to fintech startups – acknowledging that their innate bureaucratic structure does not them to be flexible and hence having difficulties riding along the fintech wave. They also know they have failed when it comes to reaching lower income consumers in informal markets and therefore the partnerships with the smaller startups to help them connect with the consumers and in turn, provides the opportunities for smaller companies to scale.

3        Challenges

One of the gating factors to financial inclusion is the ironic fact that the poorer one is, the more one has to pay for transacting and transmitting.  For example, the average remittance cost of sending money from Kenya to Uganda is over 10% if performed through a bank and 8% through Western Union.  In fact, the cost of sending money back home to Africa is higher than anywhere else in the world.[7]

Another uphill battle Fintech startups are facing both in Latin America and Africa is the excess regulation set in place. There is a real risk that financial innovation will fall through the cracks of a complicated system of regulation in emerging markets – the need to comply with complex regulations and navigate through political power is stumping Fintech innovation.

Some other common challenges would-be FinTech innovators face across the country are lack of funds to expand and scale; antiquated credit scoring methods; inability to identify users; and sub-par infrastructure that prevents access to both online and brick-and-mortar financial institutions.[8]

4        Opportunities & Moving Forward

The banking sector in Africa is set to be disrupted faster than anywhere in the world. With bitcoins and blockchain technology, a lot of the financial infrastructure will be leapfrogged, rendering the need for third parties like banks operating as trust brokers. Blockchain, in particular is hyped to be the most significant social and political innovation to impact Africa in 100 years. A possible groundbreaking movement could be a digital economy based on blockchain and bitcoins which could hold political leaders to a higher level of accountability.[9]

According to the World Bank[10], with the rapid development and advancement of fintech, there is an urgent need to safeguard financial stability. In the unfortunate event should a failure occur in these new products (bitcoins, blockchain technology etc.), public confidence would be severely eroded given the amount of investment – emotionally and financially, by the underserved, compromising years of financial sector development.

In a nutshell, this new risk landscape requires new ways of thinking about regulation and financial supervision in particular cybersecurity risks, where banks and regulators have to depart from traditional supervision processes. We are starting to see an uprising in terms of financial innovation and inclusion. In order to maintain and uphold the integrity of the sector, there is an imminent need to regulate Fintech effectively, coupled with applying regulatory knowledge in new ways both from the private and public sector.

[1] http://bravenewcoin.com/news/financial-inclusion-digital-identity-and-the-white-house/

[2] http://thefinanser.com/2016/06/financial-inclusion-digital-identity-white-house.html/

[3] http://knowledge.wharton.upenn.edu/article/why-latin-america-is-the-next-big-mobile-battleground/

[4] https://techcrunch.com/2016/07/28/the-rise-and-rise-of-mexican-fintech/

[5] hipertextual.com/2016/06/fintech-latinoamerica

[6] http://www.asobancaria.com/wp-content/uploads/2016/02/Semana-Economica.pdf

[7] http://thefinanser.com/2016/05/the-african-mobile-revolution-part-one.html/

[8] http://vilcap.com/2016/04/04/top-ventures-improving-access-financial-services-mexico/

[9] http://qz.com/618674/africas-big-banks-are-betting-on-fintech-startups-and-bitcoin-to-beat-disruption/

[10] http://www.thestar.com.my/business/business-news/2016/07/22/world-bank-well-regulated-fintech-boosts-inclusion/

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