How some Latin American countries are laying the foundation for a thriving fintech economy.
By Gesu Antonio Baez and Charlotte Osterman | September 5, 2018
There’s a real problem in developing economies: People can’t bank. From private individuals to small businesses, many can’t even make payments. According to figures from the World Bank, 66% of sub-Saharan Africa remains completely unbanked. And as for Latin America, which has been credited with rapid growth and dynamism over the past decade, an astonishing 70%, or roughly 400m people, don’t have access to formal banking. The main reason for this, more often than not, is location. The majority of those deemed unbankable tend to live in rural areas. For banks, reaching these potential customers is expensive, burdensome, and often risky due to higher transaction costs.
Enter fintech innovation
Where traditional banking structures falter, innovation can take full charge. Financial technology startups and programs from large telecommunication groups are the buzz in emerging markets, offering mobile applications and services other banks simply cannot. Nubank in Brazil, for example, provides mobile banking and credit card options for the country’s unbanked – roughly 44% of the population. Eighteen months after its initial launch, more than 3m Brazilians had signed up for Nubank’s credit card, which, in partnership with MasterCard, provides no fees and passes on savings to customers through lower interest rates. In Kenya, M-Pesa offers mobile transactions and texting payments for 30m users in 10 African countries.
Sustainable economic development cannot be achieved without fully empowering citizens by facilitating financial inclusion, fostering entrepreneurship, and building an economic environment that supports growth. Global platforms from the General Assembly of the United Nations to the World Economic Forum have long advocated for this notion as a priority for economic development. But why hasn’t there been as much political will from governments in emerging economies to partner with the fintech sector?
Governments in developing countries need to recognize the value of startup innovation, especially from fintech, as a way to fill the gaps where traditional mechanisms are failing. This means flexible regulations and lifting barriers to promote fintech innovation and enable it to complement the existing banking structure. Embarking on strategic discussions with the traditional banking sector and incentivizing partnerships are critical steps to removing roadblocks to innovation. Ghanaian Vice-President Dr Mahaudu Bawumia, for example, recently urged the Bank of Ghana to avoid employing regulations that would hinder the fintech process. While the government’s recognition of fintech’s importance for greater financial inclusion is crucial, action – or, more bluntly, political will – is needed to foster dialogue with the blocking bodies to ensure fintech startups can thrive.
The case of Mexico
When financial innovation and political will coincide, the results can be profound. One example is Mexico. For the past several years, Nacional Financiera (The Development Bank of Mexico) has focused on fostering small and medium-sized enterprises (SMEs), especially businesses led by young people and women, to urge them to take part in regulated banking systems and access small loans and services for their businesses. In 2016, there were a total of 5.6m SMEs in Mexico, the majority of which were micro-enterprises, according to the OECD.
“The Mexican government understands the huge opportunity that fintech startups can have in order to achieve greater financial inclusion and incentivize the formalization of the economy,” Luis Humberto Benitez Gonzalez, program manager at Nacional Financiera, told us in an interview. He co-ordinates a national program to identify young entrepreneurs and is designing a new program that promotes economic integration for returning migrants. “The difference is we’re talking about a country where 61% of the population has access to the banking system yet half of the workforce is employed via [the] informal sector with cash transactions.” Benitez Gonzalez went on to explain that National Financiera promotes entrepreneurship in Mexico by offering easy access loans with extremely low interest rates under the caveat that businesses formalize their banking.
The government sees the benefit of fintech in supporting this goal, and has thus collaborated with Fintech Mexico with the intention of creating a legal framework to incentivize the development of fintech startups, which now number more than 230. This move was passed into law in March 2018, a policy legacy for outgoing Mexican President Enrique Pena Nieto.
But the collaboration between government and the fintech sector doesn’t stop there. “One important challenge the government faces now is access to smartphones,” said Benitez Gonzalez. Only 50% of the Mexican population has a smartphone – a hindrance for any mobile banking initiative in rural parts of the country. “But this is another avenue of collaboration that fintech startups, the Mexican government, and telecommunication companies can take on, with a goal of 70% smartphone accessibility by 2020.”
The Mexican government’s willingness to work with fintech startups demonstrates how crucial political will is for sustainable development and for its citizens to benefit from true economic empowerment. Be it obstacles from traditional banking or domestic issues such as accessibility, political will from government authorities can help remove roadblocks and usher in substantial growth and a sustainable future.
Gesu Antonio Baez is the founder and chief diplomatic consultant of Pax Tecum Global Consultancy. Charlotte Osterman is the company’s corporate sustainability advisor. Follow them at @PaxTecumGlobal.