BANKING on innovation

From the sandbox to the real world, fintech companies identify needs and become providers of core financial solutions. Now, disruptive fintech inspires greater confidence as legislation plays catch-up with innovation.

Colombia’s fintech companies have, by and large, been either digital wallets or mobile payment apps enabling purchases and money transfers. Naturally enough, such services came into their own during the COVID-19 lockdowns. Mastercard reveals that contactless payments in Colombia grew by 19% in 2020, while concomitantly, the use of cash fell to 62%. Colombia's SMEs, numbering 90,000 firms, account for 40% of GDP and 80% of employment. No less than 45% of Colombian fintech start-ups, therefore, target these businesses, which the government, inching toward a cashless society, can but applaud.

Remittances in Colombia scaled USD9.45 billion in 2022, plying the digital route to the otherwise un or under-banked population. “Initially focusing on remittances between Colombian and Venezuelan immigrants, we transitioned to a corporate setup for international payments a year ago.” So says Esteban Villegas, CEO & Co-Founder, Zulu, Colombia, explaining how, “Our growth has been remarkable, with 70,000 customers initially averaging USD100 per payment, but now serving 70 customers with an average payment of USD50,000.” Moreover, “…Embracing a B2B model, we have successfully reduced remittance costs from 6% to 1%.” According to Villegas, “B2C global remittances, annually valued at USD800 billion, highlight our market scope. “Distinguishing ourselves, we facilitate corporate payments, akin to JP Morgan's daily processing of USD9 trillion for a single company. Zulu excels in handling transactions ranging from USD100 to UD5 million, showcasing our robust processing capacity.”

A FERTILE MARKET

The EY 2019 Fintech Report confirmed that Colombia’s was the highest “fintech adoption” rate in LatAm, as 76% of the population relied on fintech solutions, making for annual sector growth of around 120%. In 2022, financial inclusion languished at 55.6% in clustered or dispersed rural areas and 66.7% in rural areas. This reality explains the pragmatic alliance between fintech platforms and traditional banks for comprehensive coverage and visibility. By now, the ubiquitous mobile phone, smart or otherwise, and rising internet connection have precipitated a seismic shift in financial innovation and the options available to citizens. This all spells healthy competition in a legacy financial market long dominated by a fistful of banks. Indeed, Finnovation and

IDB research indicates an annual growth of 26% in Colombia’s fintech ecosystem. Colombia today ranks as the third largest fintech hub in Latin America after Brazil and Mexico, with around 300 players swimming in the local waters.

Sebastian Correa Gaviria, the Co-Founder of digital wallet Plenti, Colombia, told TBY how the business, “…developed out of the realization that many people in Colombia and Latin America lack financial education, not knowing how to save, invest or navigate credit cards.” Significantly, the platform enables users to protect, “…themselves from currency devaluation in Latam, specifically in Colombia, by saving, investing, and using digital dollars.”

MONITORED MARGIN FOR ERROR

Public resistance to new payment technology is hindered by the perceived sense of risk attached, while for firms, the concern is one of reputational damage. This has meant an uphill battle for fintechs. “Banks are generally more inclined to replicate existing technologies in-house, rather than engage with external startups,” Zulu’s Villegas notes, “Convincing customers to trust a new app, especially in an unregulated industry without financial oversight or FDIC-type insurance, demands patience. Creating brand awareness involves simplifying education, making the process intuitive.”

CASTLES IN THE SAND

No slouch, Colombia saw the writing on the wall early on, establishing Latin America’s first regulatory sandbox. In a monitored environment, innovations are thrown at the wall to see which stick, without fintechs requiring a regular financial license for two years of product-honing. What’s more, Decree 1234 of 2020 has enabled the sandbox to test cryptocurrency operations.

THE LAW OF THE LAND

Arguably, however good, an idea only comes into its own in a clearly-regulated environment. External Circular 002 of October 10, 2023, championed consumer rights by addressing public concerns over the practices of digital platforms. In Colombia, fintech’s answer to the Superintendency of Industry and Commerce (SIC), which addressed common concerns like excessive interest charges, undisclosed fees, and unauthorized disclosure of clients’ credit information, the latter a red flag given today’s rampant digital

crime. Financial companies received firm guidelines on informing clients, upon signature, of all interest payment rates and frequencies. Late interest was solely to be charged on overdue installments, and the use of coercive methods against the consumer became subject to severe financial penalties as per Article 61 of Law 1480 of 2011. Other penalties included the temporary closure of a fintech for up to 180 days with repeat offenses resulting in the total withdrawal of their digital platform. Villegas welcomes ongoing refinement of the legal framework in which fintechs operate since, “…anticipated rule changes within the next year and a half are expected to democratize the industry, providing an opportunity for smaller companies to expand their market share.”

NO RESTING ON PAST LAURELS

Christian Knudsen is the Co-Founder & President of Littio, Colombia, the recipient in May of 2023 of the Most Innovative FinTech. “Three years ago,” he tells TBY, “crypto and blockchain were primarily speculative, with individuals either gaining substantial wealth or facing significant losses.” Prompted by the economic reality of Colombia, however, many consumers taking a deeper dive into the potential returns promoted, “…the shift from speculation to utility, coupled [which] allowed us to innovate and execute effectively, leveraging our technology and product expertise.” In consequence, Littio became recognized as, “a pain-killer company, addressing a significant problem rather than just providing a niceto-have solution.” In turn, the swift solving of, “…a real problem quickly led to rapid scaling, allowing us to understand user needs and continuously adapt to meet them.” As to tomorrow, well, predictably, that’s already today’s problem. “Colombia is a promising entrepreneurial hub […] especially in sectors yet to be developed.” Yet, Knudsen notes that, “…the challenge lies in simplifying financial solutions for a diverse user base [in a competitive landscape that] has intensified, emphasizing the need for constant value delivery to users.”