Financial innovation in LatAm calls for open collaboration with start-ups
Andrés Fontao, Finnovista: Latin America’s banking and finance sector faces great challenges
Fintech is upending the way we understand the financial sector in Latin America; financial services are experiencing deep transformations as a result of start-ups’ love for change driven by new technologies.
These companies, teeming with innovation and disruptive business models, are the engine behind the revolution of the sector that has reached Latin America.
The banking and finance sector in the region faces great challenges.
The first, a requirement to adapt to a digital revolution where fintech start-ups are the main propellers of change, forcing more traditional players to evolve at the same pace. The second is a pervasive issue in Latin America: financial institutions are often too busy with internal paradigms that hinder innovation and forward thinking.
Two main strategies to move past these obstacles exist: first, open collaboration with start-ups aiming at innovation; second, innovation as an internal product that requires no co-operation with external players such as fintech start-ups.
According to a joint report by the Inter-American Development Bank and Finnovista, financial institutions in Latin America are best served working with fintech start-ups, not competing against them, to win over the 250-million unbanked population currently targeted by – and effectively won over by the low entry requirements of – financial inclusion start-ups.
In the financial world, the most effective way to innovate is through collaborative innovation. Unfortunately, an internal innovation strategy as the sole source of change has shown to be unable to keep up with with market needs and technological progress. Thus, the best way to achieve innovation is to combine external and internal innovation.
Company philosophy and capacity for change are key elements of the formula each company must try to establish to innovate under the open collaboration paradigm. Once company guidelines have been developed, financial institutions can engage in innovation through solutions that include hackathons, conferences like Finnosummit, start-up competitions, accelerators, and corporate VCs.
Mind you, the big obstacle for a change-oriented company is that of designing an organisational structure that pushes it to step outside its comfort zone. In the traditional environment of Latin America, the real challenge is encouraging financial institutions to master the know-how of making cultural and organisational changes. Such modifications should aim at innovation, experimentation and collaboration with start-ups looking to thrive in the same ecosystem as the institution.
As regulation and stronger players in the fintech scene appear, these changes should become easier to implement. By then, however, financial institutions that have not yet jumped on the fintech innovation bandwagon will have lost a significant competitive edge.
Latin America is looking for guidance on this matter, and Mexico is answering its prayers. The leading country in Latin American fintech is considering a bill to regulate fintech start-ups, a pioneering initiative by global standards. The bill is a push to acknowledge the here-to-stay outlook for fintech in the region, and would provide a framework to facilitate the implementation of new tech-based products in a very specific market.
One of the main points of the bill is that investment in most fintech ideas would be not only legally allowed, but encouraged. The recognition and regulation of fintech start-ups as valid and value-creating businesses would create new opportunities in Mexico.
At the heart of the bill there are provisions for a unique regulatory sandbox, a government-sanctioned entity that would foster open collaboration. Temporarily relaxing regulatory requirements while providing supervision for certain projects, this entity would enable joint innovation between banking institutions and fintech start-ups.
Harnessing the power of this would-be law would create an unmissable chance for Mexican financial institutions to stay ahead of the curve in technological innovation. The banking sector must set forth processes that facilitate collaboration with traditional entities, both private and public, as well as competitors, entrepreneurs, clients and investors.
Making this attitude a cornerstone of a digital strategy is key to survival in the changing future, and no place embodies this attitude better than Miami. The Florida city has become a hub for Latin American entrepreneurship, as it represents a bridge between the experience, networking and funding opportunities in the north and the human capital and markets ripe for disruption in the south. Moreover, given the close ties of many inhabitants of the city with Latin America, keeping a close watch on fintech innovation stemming from the area is a sure way to stay on top of changes and opportunities across the region.
In August this year, Miami saw about one thousand representatives from banks, tech giants and fintech start-ups exchange ideas and establish collaborations during the cl@b 2017 event, organised by Felaban. The federation, representing 620 banks in the region, brought together banking representatives with fintech experts to discuss everything fintech: from blockchain and big data, to financial inclusion.
Another clear example of innovation between sectors is Visa’s Everywhere Initiative, a fintech competition sponsored by Visa and designed to speed up innovation in financial and payment services.
Andrés Fontao, managing partner, Finnovista
