New technologies, and particularly those harnessed by banks, could become a key growth engine for the region, writes Enrique Ramos O'Reilly, Temenos regional director, Latin America & Caribbean
São Paulo hosted this year's World Economic Forum on Latin America, and its overarching theme spoke to the essence of what we do at Temenos – harnessing technology to improve economies and people's lives.
Participants debated the meaning of what WEF founder and CEO Charles Schwab has called the Fourth Industrial Revolution and what it means for Latin America. The key message is that everyone – citizens, business and government – has much to gain from this once-in-a-generation transformation driven by digitalization.
We heard many inspiring stories. From Luis Alberto Moreno, head of the Inter American Development Bank (IDB), we learned that digital tools are becoming a powerful ally in the fight against corruption: e-government projects that eliminate red tape reduce opportunities for bribes to change hands.
For example, Uruguay is close to enabling citizens to initiate 100 per cent of their government transactions online, and Argentina is also moving to become a paperless government.
Where progress is needed
It is clear however that Latin America has to work on its digital infrastructure to reap the benefits of e-commerce, digital banking and a myriad other data-driven modernisations.
Only half of the population had internet access in 2015, according to the World Bank (figure one) lower than anywhere in the world bar Africa and developing Asia. Furthermore, two-thirds of people living in Latin America and the Caribbean have no access to mobile broadband, either through a lack of coverage, cost or skills.
Figure 1 – Internet Usage in 2000 and 2015, by Region
Source: World Bank's World Development Indicators.
More competition in the high-speed internet market could improve service and prices, says the IDB. Reducing tariffs and taxes on technology products would also make them more accessible.
How technology can promote financial inclusion
I had the opportunity to discuss financial inclusion with a number of regional bank executives at the forum. Financial inclusion matters, because it allows people to participate in the financial system, start and expand businesses, invest in education, manage risk, save for the future, and absorb financial shocks. Yet according to the World Bank's Global Findex Database 2014, 200 million Latin Americans, just under half the adult population, still have no access to a bank account.
Microfinance, once championed as the solution to raise millions out of poverty, is undergoing a reassessment as some evidence points to the financing of unprofitable ventures, driving poor people deeper into debt.
Stepping into the breach are Tier 4 or Tier 5 financial institutions, like small community banks, that have begun to address the significant needs of the unbanked with basic lending and savings products. To make up for the lack of bank branches, these smaller institutions partner with "corresponsales bancarios", or small stores that double as branches. One trend we are seeing is that Tier 4 and 5 banks are making clever use of technology to lower their IT costs and thus make their products more affordable – a key element in the promotion of financial inclusion.
The need to modernise legacy systems
Larger retail banks also understand that the key to lowering costs and much more – harnessing data to understand their clients and offer better products, for example – lies in modernising their legacy systems. Until now their high profitability has acted as a drag, with relatively cheap software programmers patching up old systems rather than banks investing in new core architectures.
But it is only a matter of time before digital disruptors start challenging the incumbents.
And where competition is already global Temenos is helping Latin American banks to maintain their competitive edge. Wealth management is one example. The sector is undergoing a renaissance in the region. The rise of a mass affluent sector has prompted banks to develop more sophisticated products and services such as state-of-the-art wealthtech suites. These are not only revolutionising the type of service that advisors can offer their clients but they are also transforming banks' systems for international operations, fund management, foreign exchange operations, and corporate banking services for entities outside the region.
Tougher banking regulations will also require smarter compliance and back office systems. In Chile and Mexico, a local version of MIFID requires banks to ensure good selling practices are in place. As current systems need to be patched or changed to accommodate new processes, banks are realising that a modern system on a flexible architecture provides the best platform to accommodate all these changes.
Examples such as these gave the Forum an inkling of the wealth of opportunities that lie in store if Latin America succeeds in unlocking its digital potential. And as financial intermediaries, banks have a pivotal role to play in leading the region's digital transformation. Technology will be the driver for growth in banking and many other sectors of the economy, in addition to improving the well-being of the population as a whole.