In Colombia, where institutional factors favor technology as a tool for development, fintech has proven helpful in promoting financial inclusion, but only through a narrow definition of inclusion—more access. If we broaden our definition of financial inclusion, the country’s progress in leveraging fintech is less substantial. What can the business community and policymakers do to advance fintech for financial inclusion in Colombia?
First, let’s take a step back. In terms of financial inclusion broadly, how does Colombia measure up?
Financial Inclusion in Colombia
Colombia has a favorable environment for doing business in this space. The country ranks high on the Global Microscope’s assessment of enabling environments for financial inclusion and fintech. In part, this ranking reflects favorable regulation, robust agent banking infrastructure, and the availability of simplified savings accounts. Importantly, a 2015 regulatory reform created financial licenses for non-banks, enabling mobile money business models to participate in the industry.
By the traditional metric of financial product ownership, Colombians have become more included, with almost 80 percent having at least one product. Yet while the number of adults with at least one financial product has continued to increase, new metrics conducted by Colombia’s chief financial regulator show that the evolution of active users is not nearly as inspiring.
Financial services are still expensive in Colombia. According to one statistic, 90 percent of Colombians prefer to pay in cash in large part because of the financial transaction tax, which can be avoided by not documenting transactions and remaining informal. There is an important perception that non-cash payments are more expensive, both because formal financial products are seen as expensive and because they preclude the opportunity to negotiate on prices.
One of the major barriers is a lack of trust, which can be overcome by a user-friendly experience. For example, Bancolombia has three related products with promising customer-centricity implications—Ahorro a la Mano, a simplified savings account; Crédito a la Mano, which uses cash flow analysis from the simplified savings account to offer small loans to account users; and Emilia the robot, a chatbot developed with Silicon Valley fintech start-up Juntos that provides friendly financial advice to users. While there are many promising examples, most have yet to prove themselves at scale.
Recommendations for the Path Forward
There is ample room to grow in person-to-government (P2G), person-to-business (P2B), and person-to-person (P2P) transactions. The government has led the push for cash-less transactions, and payments from the government are now almost entirely electronic, but there is substantial room for progress in payments to the government. P2G, P2B, and P2P are where banks should look to expand their service offerings, keeping in mind the principles of affordability and customer-centricity.
Organize for innovation. Juan Carlos Rojas Serrano, DaviPlata’s former Executive Director, writes that it has been characteristics of the company’s DNA that have been fundamental to its success. These include medium-to-long-term focus, innovative culture, and belief in its employees—regardless of position—to create solutions. Changing corporate culture is arguably more challenging than developing new products, but it may be key to successful innovation for some institutions.
Partner for success. There is growing consensus, according to a joint-report from CFI and the Institute of International Finance, that collaboration between fintechs and traditional players will be key to combining the best of tech and finance. This is the driver behind Finconecta, a partnership of the IDB’s Multilateral Investment Fund (FOMIN) and Above and Beyond to select and accelerate fintechs in collaborating sandbox-style with financial institutions to implement innovative solutions. The creation of the Colombia Fintech Association, which supports fintechs in collaborating and adopting best practices from each other, is another promising development.
“Find a use case which really solves a customer problem… which really removes the pain point of solving a financial services issue.” Fintechs would be wise to heed this advice offered by Sopnendu Mohanty, Chief Fintech Officer of the Monetary Authority of Singapore. With all the hype around fintech and the explosion of new services and products, fintechs should not lose sight of the fact that their ability to meet customer needs is their best competitive advantage.
Leverage infrastructure. With an entrepreneurial culture and a focus on profits through high-volume, low-value transactions, research suggests that telcos are better positioned than banks to run mobile money services. Affordability is a key sticking point for Colombian customers, yet mobile customers are accustomed to topping up with agents in stores, on the street, and even online. Telcos can use this already-established infrastructure to add value and grow.
Focus on customer-centricity. The number one challenge for mobile internet in Colombia is safety and security. While government industry-wide efforts, like coordination with the GSMA Device Database have aimed to tackle this, the results have been mixed from a user perspective. Consequences such as account deactivation without warning, unclear privacy protections, and agents’ inability to resolve customer problems create frictions for users. Telcos will need to develop a more customer-centric culture to build a product customers can trust.
Improve affordability. Affordability is still a barrier to mobile internet usage for more than half of non-users, according to a recent GSMA survey. As infrastructure improves, telcos can pass these savings on to their customers and help achieve more comprehensive inclusion, while at the same time gaining new and more profitable customers.
Lead on interoperability. As more services develop, the government should take a more active role to ensure these services are compatible and consumers can transact freely between them, which supports a larger, more vibrant electronic financial ecosystem. Interoperability and API sharing also helps to de-risk innovation, as innovators can build on what already exists and test solutions, and consumers do not have to commit to one network or another.
Reduce reliance on cash. Tax reform, although always challenging, could go a long way in promoting digital financial inclusion. Exceptions to the tax on financial transactions have been made for small accounts, but the tax serves as a major disincentive for Colombians to store cash in digital platforms. This is a principle complaint of the banking industry. Additionally, government collaboration on electronic payment mechanisms for public transportation, utilities, and taxes is fundamental to achieving the goal of reducing the reliance on cash.
Focus on education and rural development to bolster inclusion. It is noteworthy, but perhaps not surprising, that financial product knowledge and preferences vary considerably by income and education level, with the lowest income brackets preferring cash 96 percent of the time, compared to 56 percent for the highest socioeconomic class. Mobile coverage is generally high, but rural coverage is just above 50 percent; thus a focus on rural development can have the largest impact.
While Colombia has the digital and financial infrastructure in place, the tasks of adoption and affordability are more challenging. Research and conversations with various stakeholders in Colombia indicate there is incredible momentum around fintech, financial inclusion, and the intersection of the two. We will have to wait and see the effects of fintech for financial inclusion in Colombia, but at this rate, the next few years will almost undoubtedly be a time of growth and inclusion for the country.
Miriam Freeman is a Master of International Business candidate at The Fletcher School at Tufts University. This blog is based on her capstone project, “Fintech for Financial Inclusion: The Case of Colombia” (December 2017).
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