Digital Financial Services (FINTECH) in Latin America

Abstract

This document assesses the degree of disruptive power of the application of cutting-edge technologies to financial services at a global level (a phenomenon known as Fintech). From there, we analyze the implications that this trend is having on the development of the banking system, with particular focus on the case of Latin America.

In this field, digital platforms are competing vigorously, although large technology companies have clear advantages (most regarding user data) should they decide to enter Fintech full-on. It is worth mentioning the specific business approaches of Google (Artificial Intelligence), Amazon (cloud computing-Big Data), Apple (cellular connectivity), Microsoft (corporate applications and cloud computing) and Facebook (Big Data management in social networks). In parallel, massive transactional systems of P2P payment systems and the so-called "digital-wallets" (Paypal, Wechat-Tencent and even WhatsApp) are growing as important alternatives within the context of financial markets, representing a source of tension for the traditional banking business.

The conclusion is that the traditional banking industry perceives latent competitive threats from this Fintech revolution. That is why it has awakened in recent years with waves of acquisitions-alliances with Fintech startups (improving their human capital in the process), in order to achieve better provision of technological services through the so-called "internal innovation hubs" (although they are also using outsourcing models for particular aspects of the business model).

This paper also reports the results of a bank-survey on the development of Fintech-Digital Banking in Latin America. Being aware of Fintech's competitive threats, the surveyed banks are reacting through strategies of: i) alliances with Fintech companies (36% of the sample); ii) "organic" innovation within banks (29% of the sample), where many entities have implemented their own internal "digital laboratories" or "innovation hubs"; iii) outsourcing of digital services to Fintech companies (21% of the sample); and iv) acquisition of Fintech companies (9%). In addition, results suggest that the region shows favorable elements of development in digital banking supply, although there are persistent lags of adoption of those digital banking services on the demand side (where most users still prefer traditional banking channels such as physical offices).

Regarding prospective challenges for the development of digital banking in Latin America, the survey established concerns in key areas pertaining to: i) changes in the current regulatory framework; ii) the recurring theme of cybersecurity; and iii) overcoming cultural resistance within the banks themselves. Finally, surveyed banks project that, during the next five years, traditional banking and startups will end up “slicing” the industry in different niches of the market, while 34% think that their reactive innovation strategies will be enough to maintain their banking leadership. This document also presents the details of the countries' individual results (Colombia, Paraguay, Perú, Ecuador, México and Argentina).

JEL Classification: G00, G21, O33, G30