By Sergio Navajas (MIF/IDB) and Pablo Anton (CFI)
When it comes to financial inclusion, the Latin American and Caribbean (LAC) region is no stranger to innovations coming from the outset of the formal financial sector. In fact, microcredit and agent banking are prime examples that illustrate the willingness of both regulated and non-regulated institutions to adopt creative new solutions in the quest to improve access and quality of financial services for certain underserved sectors of the population. Successful innovations such as this have become intricately woven into the fabric of formal financial systems in the region. However, in the case of Fintech, the situation is different. A Fintech innovation goes beyond simply improving an existing financial service or enhancing back-office operations; it can be way more disruptive, nimble and massive than that. It can create an entirely new type of institution or even a completely new concept, testing new ways altogether for interacting with clients.
Fintech is touted as a major force that has the potential to downright revolutionize the financial sector. Because its foundations are entirely digital, its scaling-up possibilities are enormous and much faster than any previous innovations developed for the industry. However, the transformations that traditional Financial Institutions (FI) are undertaking to become digital businesses have been filled with obstacles. This has been particularly true in LAC, where the financial sector is dominated by commercial banks, which hold most of the assets and lending portfolios. Additionally, financial access in LAC (only 51% of adults own an account) pales in comparison with both the East Asia and Pacific region (69%), as well as the rest of the OECD countries (94%) . It is no surprise either then that, out of all the emerging markets, LAC is the least developed region in Fintech, behind both Asia and Africa. The FinTech community is currently composed of more than 10,000 FinTech firms around the world and over 1,000 investors (Venture Capital funds, mainly) that have invested over US$50 billion in the last 3 years. However, investment has been specifically lagging in LAC compared to other regions.
In the case of large multinational banks like BBVA and Citi, the transformation has been outsourced through alliances, buy-outs, competitions, and other creative mechanisms to attract the best Fintechs that suit their needs. However, more local and medium sized financial institutions in LAC are not equipped to do this, and so the few alliances between Fintechs and FIs created in this space have been on an ad-hoc basis or through a few highly motivated funds that understand the potential. Clearly, there’s a need to accelerate this process to promote the connection of medium-and-small LAC financial institutions with the global Fintech community.
With the intent of providing a viable solution to this issue, the IDB's Multilateral Investment Fund (MIF) announced last Monday the creation of FINCONECTA, a program that will integrate solutions between financial technology companies from all around the world (FinTechs) and financial institutions (FIs) in the LAC region, using a single streamlined platform (called “Forward”). The main goal of FINCONECTA will be to incentivize rapid prototyping, collaboration and interoperability amongst the players of this new interconnected ecosystem of solutions, in order to foster the exponential growth of the financial industry in LAC.
This 10-month program will include a process of connection, fusion and acceleration between FinTechs and interested FIs so they can collaborate and drive responsible growth in the financial industry of the region. Participants will be able to interact with one another using a single platform that will handle all the necessary API connections, allowing FIs to test and evaluate multiple technology solutions provided by different FinTechs before choosing the ones that suit them best and adapting them to their own needs. On the other hand, FINCONECTA will also help FinTechs gain direct access to a larger pool of interested FIs that they’ll be able to offer their solutions to, in order to contribute to the digitization process in Latin America and the Caribbean. Starting in April 2017, registration on the platform will be open to all types of FinTechs and FIs.
This solution is one-of-a-kind, and was created specifically to solve the integration and interoperability challenges that FIs and Fintechs face when they want to establish partnerships. The actual current model for integration is mostly still done one-to-one (i.e. one FI with one FinTech), a costly solution that can take months (if not years) to implement and requires dedication, prioritization, risk analysis, and lengthy procurement procedures. This option does not offer solutions to achieve interoperability, which is crucial to promote adoption and use among new clients. FINCONECTA will offer a solution to both of these issues through an interconnected platform and additional support and guidance for FI and FinTech participants. FIs, with a single connection, will have the ability to select various FinTech solutions for testing in a comprehensive tech and regulatory sandbox. FinTechs, on the other hand, with one connection will gain access to all participating FIs. FIs and FinTechs of all sizes will be invited to participate, in order to create a marketplace where they can collaborate and support each other to reach scale.
If you would like to learn more about this innovative initiative, we invite you to visit www.finconecta.com, and join us next March 16, 2107 at 12:30 pm at the Inter-American Development Bank for a Q&A with Jorge Ruiz, the founder and CEO of Above & Beyond. More details on how to attend can be found here.