New technologies such as cloud computing are placing affordable banking within reach of the two hundred million Latin Americans – half the adult population - who do not yet have a bank account. With new digital banks and payment platforms now offering innovative, low-cost products, traditional retail banks have begun to pay attention, writes Enrique Ramos O’Reilly
According to the World Bank, in Latin America there are 210 million citizens who do not have a bank account. This vast, under-served community has proved fertile ground for fintech innovators and investors. And that is spurring traditional retail banks to embrace digitisation more quickly.
By offering simple, affordable financial products and services, and using digital platforms and cloud computing to keep overheads and operating costs low, Latin America’s new digital banks and payment platforms are almost singlehandedly improving financial access and, by turn, driving social progress in the region.
Barriers to entry
When almost half the population has no ties to a traditional bank, barriers to entry for innovators are low.
Take Mexico’s Prestanómico, a cloud based lending platform that streamlined the credit origination process to make affordable personal loans available anytime anywhere in the country. Now in its second year, Prestanómico has placed 1500 loans, doubling its client and revenue base in the first semester of 2018. CEO Guillermo Gomez del Campo expects to continue to triple in size every year in the near future; with infrastructure on cloud this rapid growth can be easily accommodated.
And by using Temenos core banking technology in the cloud it keeps costs as low as possible. As a result, it is able to harness a new source of funds for borrowers, and a higher rate of return for lenders.
El Salvador’s Banco Azul, launched by local investors in 2015, opted for a hybrid digital/bricks-and-mortal business model, but with a fully digital banking core to keep costs low and make it more agile than the country’s more established retail banks. In under two years, the bank signed up 26,500 individual and corporate clients with some of the best margins in the business.
Latin Americans are ready for digital banking because digitisation is spreading rapidly through society, the economy and even government.
At Temenos we’ve been monitoring this trend for some time. For several years we have been sponsors of the Economist Intelligence Unit’s annual survey of global banking trends. And this year the clear theme is that traditional retail banks are taking notice of these changes.
The trends exerting the biggest impact on business, according to the banks that took part in the survey, all stem from the disruption that comes with digitisation.
Take the way the expectations of bank customers are changing. Ricardo Guerra, head of IT at Itaú Unibanco in Brazil, notes that Whatsapp, which has 130 million users in his country, is now the preferred channel for customers to reach call centres. “When the customer runs faster than you in digitisation, businesses face challenges,” he notes. To facilitate instant online replies and easy authorisation processes, Itaú has had to adapt thousands of processes and the internal culture at the bank.
The threat posed by new digital banks and credit platforms, such as Banco Azul and Prestanómico, are leading traditional retail banks to accelerate their digitisation strategies.
The competition is real, but retail banks have an even more powerful reason to embrace new technologies: Digitisation is now widely acknowledged as the most direct route for cutting costs and improving margins, which remains the top strategic priority for more than half the banks in the region, according to the EIU survey. To give just one example: banks are investing in new risk profiling and vetting procedures, and financial budgeting tools, to help customers keep their finances in order and to keep costs and non-performing debt levels down.
In this drive to lower costs, banks are focusing their digital investment more heavily on individual distribution channels and on modernising front and back office systems to support end-to-end digital customer journeys and digital-only standalone operations. For example, Banregio, a regional Mexican bank (and one of the most profitable) uses digital channels to attract new savers with easy-to-use and low-cost products. In Brazil, Temenos has helped Itaú Unibanco test new solutions in the cloud without endangering its day-to-day operations.
Governments, meanwhile, are also steering banks onto the digital highway. Bolivia was the first country in the region to introduce mobile money regulation in 2011, followed by Peru, Brazil and others. A new law in Mexico aims to level the playing field between incumbent banks and new fintech players. It is hoped that by regulating newcomers, consumers will be more willing to try new services in the knowledge that their money is protected.
Chile, Mexico and Brazil, meanwhile, lead the world in e-procurement and e-services, with public administrations requiring contracts with private businesses to be completed through electronic invoicing. Digital business transactions, meanwhile, are helping to build credit profiles for many of the region’s small and medium sized businesses – the first step for lowering the cost of borrowing for these companies.
With the rapid spread of digital literacy, the impact of new technologies, and competition from new digital entrants, retail banks in Latin America have powerful incentives to lower costs and reach out to millions of unbanked customers before their rivals do. By embracing digitalisation now, traditional banks have a unique opportunity to stay ahead of the game and win new clients with more cost-effective products and services.