In many parts of the world, fintech innovation has driven banking modernisation. But in Latin America higher margins and good growth potential have largely insulated the sector from change – until now.
Latin America has yet to throw up a leading fintech hub. That is not to say there aren't interesting fintech providers coming from the region, it's just that there is no concentrated area of fintech activity similar to London, Dubai, or New York.
Why would that be? Banking in Latin America follows the European model after all – a handful of dominant banks provide a national, universal service. But these banks are in general more profitable than their European counterparts and growth is also easier to come by. As a result, the dominant banks don't face the same competitive pressures to improve the customer experience, to become more efficient, to find and adopt new technologies. The impetus for fintechs to develop innovative solutions doesn't therefore exist in the same way.
How much longer will that be the case? The world is shrinking. Digital innovations embraced by consumers in one region are quickly demanded by consumers in another. Mobile and internet banking are great examples, and in Latin America new entrants are starting to have an impact. Branch visits, like elsewhere in the world, are down and mobile banking is on the rise.
As in Europe, many of the banks have legacy IT systems that are expensive to run and difficult to maintain and upgrade. The fact that banks haven't faced the same competitive pressures to cut costs and become more efficient might also explain why there have been fewer core system replacements than in Europe and sales cycles tend to be longer.
But digital banking is gradually spreading across the world and Latin American banks are embracing another route. Progressive renovation is increasingly seen as a way of dipping a toe in the digital water.
Enabled by the cloud, progressive renovation allows banks to increase their reach in terms of services, improve customer experience and cut the cost of technology and operating costs without wholesale change. Rather than add to the complexity of their existing systems by adopting apps piecemeal, banks can look holistically at their needs and add for example, mobile capabilities using software-as-a-service hosted in the cloud. This way, change can be made slowly, step by step, and services can be migrated to a new platform when the bank is ready.
New players such as El Salvador's Banco Azul, which is wholly-owned locally, offers mobile, retail and corporate banking – operated on a Temenos platform – and is proving extremely popular. In Mexico, Prestanómico is opening for business soon, offering a virtual lending hub hosted on Temenos core technology. Similarly, Venezuela's Banesco is successfully undergoing a full core banking replacement, giving it full digital capabilities and poll position to offer a modern banking service, ramping up the competition and pressure on rivals.
Other areas of banking are also seeing more fintech activity. Credit bureaux, for example, aren't as well established in Latin America as they are in Europe and fintechs are starting to use social media and data from utilities to offer credit scoring. This is having an impact on banking the unbanked, helping banks such as Soficam and Sefia to reach into more remote population areas to offer microfinance.
Suddenly it can be profitable to offer a loan for $100 because distribution and administrative costs are less than a $1 a month. Private banking is also taking off and fintechs working in security and authentication are having an impact.
The result is that fintech is growing and while there is not yet a hub to rival the world's dynamic centres, there is interesting activity. There have been successful fintech jams in Santiago, Chile and Bolivia and the Miami leg of the Temenos Innovation Jam 2016 saw great entries from Argentina, Colombia and Panama. Temenos is also seeing increased interest from the region in our Marketplace – our online forum and sales area for third-party solution providers.
It can only be a matter of time before competition is ramped up further with international rivals starting to look once again at the region for much needed growth, tempted by the higher margins. The local banks, by moving towards digital services, will be better placed to retain customers and fight off the new competition. At the same time, their interest in digital banking will help native fintechs to flourish.