Technological innovation has brought new trends in the financial world, including FintTechs, tech companies positioned as a low-cost alternative and open to meet the needs of the population, even the most vulnerable groups.
The FinTech sector in Latin America and the Caribbean has been growing rapidly, and much of the industry has a focus on financial inclusion. An example of this is that 40% of FinTech startups in the region serve SMEs with little or no access to banking services as their main client, according to Finnovista’s monitoring.
Like all innovation, FinTechs have shown in short periods of time their ability to integrate stakeholders, shift schemes and design new products tailored to the needs of their customers, especially those who have not had access to the financial system.
Based on the above, and in order to close the gaps in financial inclusion, CAF—development bank of Latin America—has developed the Financial Inclusion Laboratory (LIF), which seeks to identify the best FinTech initiatives in Latin America in terms of financial inclusion of vulnerable groups and MSMEs.
Although FinTechs are an important opportunity to achieve greater digital financial inclusion in the region, it is necessary to design and implement comprehensive measures that include policy responses based on supply and demand, while addressing the potential barriers to the use of digital financial services.
First, supply-side policies must be implemented to ensure infrastructure and coverage for the use of new technologies. There must also be regulatory frameworks that promote competition and efficiency in the telecommunications sector to make data use prices affordable and competitive. The same must occur with the financial sector and the different stakeholders offering digital financial services: both traditional banking and FinTechs, to make prices and fees for the use of these services competitive and affordable for the entire population.
With regard to telecommunications infrastructure and connectivity, it is important to ensure that people in remote areas have access to connection networks that allow them to access digital financial services. The same must occur on the side of the financial sector and the different stakeholders offering digital media for financial transactions, i.e. both traditional banking and FinTechs.
Second, the countries of the region should promote adequate regulatory frameworks in order to achieve the multiple goals of financial inclusion policymakers: financial stability and integrity and consumer protection. This regulation should protect consumers and investors, ensure healthy competition, and provide safeguards against financial instability and integrity risks.
Similarly, policymakers should also consider novel approaches to ensure high-quality oversight and regulation, support the safe use of innovative technologies, and at the same time ensure that regulation is proportionate to existing risks. To this extent, it is vital to adapt regulatory frameworks to strike the right balance between enabling financial innovation and addressing challenges and risks to financial integrity, consumer protection and financial stability.
Furthermore, cybersecurity policies are fundamental to safeguarding citizens’ rights in the digital realm, such as privacy, property, as well as to increase people’s trust in and familiarity with digital technologies.
On the demand policy side, building financial capacities and financial consumer protection regulatory frameworks is critical, even more so considering the growing number of vulnerable people who have been included in the formal sector through digital products and channels during the pandemic. In that sense, another key is designing and implementing financial literacy programs that encourage the proper use of digital financial services while promoting responsible financial behaviors.
Special attention should also be given to the need to build the digital skills and knowledge of the most vulnerable groups that have traditionally been excluded from the financial system. In this sense, it is important to have public policies that call for building digital—not just financial—skills.
Strengthening the digital financial ecosystem focused on MSMEs is key to recovering from the COVID-19 crisis. One of the common trends in the context of the pandemic has been the expansion of microcredits through FinTechs. In a context where payment ability of companies has been compromised, many of them resorted to alternative mechanisms to cover their working capital needs. This trend is expected to continue, and thus, it is important to prepare the ground for MSMEs to have the financial and digital capabilities to ensure a responsible use of digital financial services.
Lastly, it is necessary to keep in mind the different sides and dimensions of financial digitalization pushed by the COVID-19 pandemic, in an effort to have it translate into greater inclusion and greater financial well-being for the population. If this comprehensive vision is not maintained, initiatives may not translate into expected results and existing gaps, as well as the already high financial vulnerability of the population in the region, could be exacerbated.
