Fintechs that are not afraid to get their hands dirty: Why is the industry in Colombia living its greatest moment?
Traditional banks with credit lines strangled by COVID-19, SMEs without access to loans and customized services, and a digital payment environment boosted by new regulations. These are some of the reasons that explain the opportunities in the Latin American country right now
Not a credit card, that thin plastic sheet that makes most people feel safe and backed by the strength of a bank. Much less an executive assigned to look after her and the needs of Prisier, the company she co-founded to help other entrepreneurs manage their pricing strategies, maximizing profitability. The Colombian entrepreneur Lina María Restrepo Arango felt frustrated, after requesting funding in a traditional institution, from which she only got a resounding “no”.
From Prisier’s office, in El Poblado, a commune in the city of Medellín, Restrepo had imagined that the paperwork would flow smoothly. Her company’s 2019 financial statements showed an eloquent positive balance, but this merit was not the key to obtaining credit: the decisive factor for the bank was that the company had less than two years.
“Just this year, because of the pandemic, the bank approved my quota (for a loan), but they haven’t paid me anything… And even though I already have someone to answer me (a bank agent), it’s like there’s no interest (on their part),” summarizes Restrepo.
That banking rebuff triggered a resilient state in Lina Maria Restrepo. Quickly, she looked for an alternative and held on tight to the lifeline launched by Sempli, a fintech oriented to working capital credit and with no age limit on the incorporation of these micro and small companies. “With Sempli it was all very fast; technological process, very good rates. Now I’m waiting for Sempli to launch its credit card, because I don’t want to take a traditional bank’s card,” she says.
The experience of this businesswoman is not exceptional. According to figures from CAF-Development Bank of Latin America, “in the case of Argentina, Brazil, and Mexico, which represent 65% of the region’s GDP, only 40% of formal small companies have access to a line of credit, while more than 95% of large companies enjoy this and other financial services.”
A pattern that is repeated in the rest of Latin America, where access and cost of credit are the main obstacles for SMEs to do business, compete, and, consequently, grow. These hurdles explain in part the major growth of the Colombian fintech industry – the third largest ecosystem in Latin America, only surpassed by Brazil and Mexico, according to the Finnovista consultancy firm –, and which is mainly focused on the loan segment, an offer that today is delivered by 48 startups that account for almost 25% of all fintech operations in the country.
The big winner of the COVID-19 pandemic is called digital
The startup that rescued Lina Maria Restrepo has good results to show: “We have been fortunate to go along with (the SMEs), with nearly US$40 million in credit generation, and we are the first fintech in the micro and small company segment in Colombia,” says Esteban Velasco, CEO of Sempli, highlighting a leadership achieved after having turned the “baffling” concept of banking penetration used in the country into a leitmotif and business opportunity.
"At a business level there is access to banking, [basic services such as] deposits and savings, however, there is no depth [in this banking inclusion process], which has to do with access to financing. It is a lie to talk about access when you are not asking the question from the point of view of indebtedness"
ESTEBAN VELASCO, CEO AT SEMPLI.
Sempli has also used in its favor an endemic situation that affects the creation and sustainability of SMEs, the few opportunities that exist for those “reported” entrepreneurs, a label that falls on those suspected of carrying the risk at a cost, due to their insufficient “scorecredit”.
76%of consumer loans from traditional banking entities went to people with scores over 694, a grade that few entrepreneurs can boast about, in 2019, according to Datacrédito-Experian, a credit bureau in Colombia.
“We love generating good financial health for micro and small entrepreneurs (…) For all entrepreneurs who are starting their careers and who have a world to conquer,” says the CEO.
But above all, Sempli has been able to read the pandemic timing and act with ease to adapt its solutions to those entrepreneurs who fell with the planetary onslaught of the new coronavirus, but who, true to their nature, will rise again. How? With a new capital.
“We launched very early, in March, relief plans for our clients,” explains Velasco, referring to a successful contractual flexibilization that, with perfect timing, was offered at the same time that the traditional banks, in 92%, opted for rigidity, by increasing their demands for consumer loans as part of the ravages caused by the COVID-19, according to a measurement by the Central Bank of Colombia.
“The big winner of the pandemic is called digital. People made decisions much more oriented to digital transactions (…) And with this pandemic, Sempli looked inward and said: `the time has come to step on the gas,'” recalls Velasco, a speech that led the fintech to create a fixed asset insurance with SURA and to conceive a credit card, that plastic that Lina María Restrepo is looking forward to and which is in the licensing process with Visa.
Digital payments had already accelerated by 2019 in Colombia, according to a study by Minsait Payments consultancy, which highlights that, in that year, the country led the biggest regional change in payment methods used by the adult population in banking: the use of cash fell from 93.6% in 2018 to 80.5% in 2019.
Also according to the consultancy, there are already 27.5 million debit cards and 14.8 million credit cards in Colombia, making consumers in the country the Latin Americans who spend the most on these financial products.
However, there is “a deep-rooted habit of using cash” in Latin America, a cultural trait that Enrique Neira, BBVA’s Open Innovation executive in Colombia, sees “as an opportunity to innovate in the financial sector. For this reason, different players in the market are capitalizing on the current situation, delivering solutions that allow digital and contactless payments to segments of the population that would not have used this type of convenience before,” he says.
Neira prefers to see even the devastating economic effect of the pandemic, in this context, through that same hopeful lens. “It has been a hard blow to the economy, but part of its impact has been positive in terms of the adoption of digital payment methods. Of course, we are still far from saying goodbye to cash, but I think we are one step closer to this goal,” he projects.
How has BBVA promoted the cultural change necessary to further increase the confidence of Colombians in digital payments? It hired cavemen. Thick-bearded troglodytes that prefer stone as cladding for their own homes, Neanderthals who were used in the campaign “Stop being a Uga Uga”, where the benefits of using digital were highlighted, ironizing those Colombians from the caves that remain attached to cash and preferring to go to a bank branch to make transfers.
Likewise, “with BBVA Móvil we put the bank on people’s cell phones, avoiding commuting, queuing, and the contact with cash; furthermore, we were the first bank in Colombia to stop charging interbank transactions from cell phones, this as a strategy to encourage the decrease of cash use,” describes Neira. He adds: “We attended to the needs of clients who do not have a smartphone, developing products such as Dinero Móvil, which offers the possibility of opening a financial product through the mobile banking app and with only the cell phone number”.
Using smartphones as a marketing argument goes with the times of the so-called “new normal”.
65.8 MILLION - That’s how many mobile phone subscriptions Colombia has according to the Ministry of Information Technology and Communications data from the last year’s second quarter. From 2000 until today, there was a 60.48% increase in this number.
The devices’ penetration also points to new habits that could be established in the times of the “endemic” already predicted by the World Health Organization (WHO), such as the reluctance of consumers to continue avoiding physical contact and the use of coins and banknotes. Behaviors that the Visa Back to Business study of 2020 raises to a dramatic level: change is a matter of survival. According to it, “78% of global consumers have adjusted the way they pay for products, due to intensified safety concerns”.
Colombian fintechs are transforming challenges into opportunities
As difficulties and absences of the traditional financial system turn into opportunities in the hands of the new wave of fintechs, this industry in Colombia is already growing at 120% per year. In the past three years, investors have put more than $1 billion in it, of which $300 million landed in the first five months of the pandemic, according to Colombia Fintech.
“The investment made by Softbank, in Rappi, of almost $1 billion, in 2019, was an outstanding investment that continued to enhance the scope of the startup ecosystem in Colombia and Latin America,” stresses Neira, pointing out that to two other important movements: the arrival BBVA OpenPay in Colombia, a fintech born in Mexico, focused on the payment process, which was bought by BBVA Mexico, in 2018; and Lineru, one of Zinobe’s projects which has received an investment of $30 million from Monachil Capital Partners, a global investment firm founded by Ali Meli, a former partner at Goldman Sachs. “This investment is interesting since it is reaching the lending market with the low-amount loan model, demonstrating its potential not only to the ecosystem but to the national government. Proof of it is that it has been the first fintech used by the government to provide a line of credit to the country’s independent workers, in the midst of the COVID-19 pandemic,” says Neira.
And as if it was not enough, what about Nubank, the world’s largest independent neobank that landed in Colombia last September, and that in its first 24 hours had reached, according to the company, 20,552 requests to “enter the waiting list for the Nu credit card”.
All this auspicious performance, in a country of 50 million inhabitants, “marked by the lack of access to credit by consumers and the underbanked population”, as described by Finnovista, and where 9 out of 10 SMEs are neglected by the traditional system, makes possible to infer that the creators of these disruptive companies today may feel that they are sailing on a river that is very generous in resources, a watercourse where fintechs in Colombia navigate surprised at being able to get their hands dirty.
This flattering view is shared by Marcela Chacón Sierra, Latin America spokesperson for Transactional Track Record, who projects an increase in investor appetite for the Colombian market. “While it will be natural for some investment funds to direct their interest towards more stable and non-cyclical economic sectors in the short term, the fintech sector will be another attractive sector in the medium term in Colombia,” she explains.
Countries like Colombia, with millions of consumers outside the formal banking system, will be key for private equity funds, so they can expand new ventures that will encourage competitiveness in the region, especially in the financial services market that apply new technologies to investment activities
MARCELA CHACÓN SIERRA, LATIN AMERICA SPOKESPERSON FOR TRANSACTIONAL TRACK RECORD.
The evangelist and the President’s counselor behind Colombia’s fintech boom
The upward path of Colombian fintechs has its origin back in 2017, when these ventures accounted for 46 firms, all hungry to lead an emerging industry connected to the so-called “new economy”. To do so, they built an organization that represents their interests, Colombia Fintech, a union arm that in the last year has become key in the materialization of a public policy that recognizes fintechs as an industry of inclusion and digitization of society.
But its success is not only due to the lobbying of every business associations but also to the successful selection of its current union ‘evangelizer’, Erick Rincón, lawyer and former professor at the University of Rosario, who before leading Colombia Fintech had the audacity as an academic to specialize in the pilgrim field of Technology Law, to then jump as a manager of Certicámara, the first digital certification entity in Colombia.
With that background, Rincón began to design legal solutions for banks and fintechs on digital identity, digital payments, and legal development for payment gateways. A task that, by the end of 2018, was attractive to the members of Colombia Fintech, who decided to recruit him. Today, the organization has more than associated 240 companies, from crowdfunding platforms to electronic factoring fintechs and neobanks.
Despite considering that Colombia is not lacking special regulations for each segment of the financial ecosystem, Rincón dedicates half of his time to the development of improvements in public policy conditions that allow the financial technology industry to be further enabled.
“I believe that the fintech industry should not necessarily be supervised by the financial authorities. That depends on whether the activity generates any kind of tension with fundraising activities, or if some kind of regulation is needed”. According to him, only seven of the companies associated with Colombia Fintech are currently watched and supervised by the Financial Superintendence.
Under these guidelines, 2020 has been a pivotal year for fintechs, a turning point in the positive perception of the industry, as the government and citizens recognize its great contribution to financial inclusion. They are endorsed by the fact that more than 3.5 million digital loans were granted and that more than 20 million Colombians have access to digital wallets or electronic payment methods through them. “If you don’t see the figures, you don’t recognize their importance, you are blind,” says the president of Colombia Fintech.
But the achievements made by the third ecosystem in Latin America also owe thanks to Víctor Muñoz, the High Counselor of the Presidency for Digital Transformation, who on several occasions has expressed the conviction that fintechs can be a great engine for Colombia.
Muñoz, with vast experience in the technology industry – he was CEO at Comdata Group for LatAm –, has a particularity in his biography: he was a failed entrepreneur, through a fintech project called Binaria, which aimed at connecting people willing to invest in ventures that needed financing. “But I invested more resources in the legal analysis than in the development of the platform. Because in Colombia, due to the issue of money laundering, I cannot massively capture people’s money. It is prohibited. At that time, I could only have done it through a bank. So, as an entrepreneur, I dropped,” he tells.
Knowing the pain points of entrepreneurs empowers Muñoz, who holds a position with the rank of minister, through which he now has a direct dialogue with the secretaries of state of the presidential cabinet. “Because if we do not advance in digital tolls, the conversation must be held with the Minister of Transportation,” he exemplifies so that the strategic importance of the rank is understood.
But even more important is that, like a ‘whisperer’, in Casa de Nariño, the government palace of Colombia, he is attended and heard by the president, Ivan Duque, an expert on issues related to innovation, such as the “orange economy”, a concept in which the president specialized during his time at the Inter-American Development Bank (IDB).
“The president is very connected to innovation. So he is absolutely convinced and committed. And I, being his advisor, it is with me that he talks about these issues, what are the projects, investments, plans, the next decisions. And he gets very involved. I tell him that as a presidential advisor I’m fortunate to have one who knows about technology and innovation. See, you can talk about only two presidents who handle these issues that way: Estonia’s (Kersti Kaljulaid, who leads a 100% digital country) and Colombia’s. Having a president who is capable of having a natural conversation about the issues of transformation, cybersecurity, innovation, is to feel that 40% of your work is already done,” Muñoz told LABS, while behind him there were four screens that in real-time were delivering dynamic indicators related to the COVID-19 in the country.
With this powerful presidential support, Colombia has been able to bet on the issues of the Fourth Industrial Revolution, creating a homonymous Center, the fifth of its kind in the world, where it works in areas such as artificial intelligence, blockchain, and the Internet of Things (IoT)
VÍCTOR MUÑOZ, THE HIGH COUNSELOR OF THE PRESIDENCY FOR DIGITAL TRANSFORMATION.
“That allows us to combine innovation, the Fourth Revolution, and regulatory issues. This is how we have just launched a sandbox for regulatory testing in crypto assets, in conjunction with the Financial Superintendency of Colombia, a regulator that is learning in real-time on an issue that has generated a wide debate in the country, due to the dangers of assets laundering,” reveals Muñoz.
How new regulations can push Colombia’s innovation ecosystem further
Eyeing Mexico, the second fintech ecosystem in Latin America, Colombia wants to go further. Although there is a clear difference in the size of both markets, for the Financial Superintendent of Colombia, Jorge Castaño Gutiérrez, that great leap could happen when the interlocking of a set of factors allows “the development of an environment for the consolidation of innovative models financial services”, from regulation to a greater and more specialized tech workforce.
Castaño believes that progress has already been made on some of these factors. For example, in regulation, “with the formation of a National Council for Inclusion Policy and Financial Educationthat seeks to frame the role of fintech companies in public policy,” says the superintendent. “And in the case of infrastructure, although the coronavirus crisis highlighted the need to invest in technological infrastructure, the truth is that the country currently has more than 7.1 million fixed internet accesses, and 6 of every 10 Colombians have mobile internet access,” he says.
But there is still room for improvement in several areas, including one that is fundamental to the fintech ecosystem: the acquiring market.
So far, these licenses only fall on traditional financial institutions, as the 2019 regulation places requirements that fit like a glove for traditional banking. But if a change is made, payment gateways or fintechs could be added to that market, allowing new players to expand the country’s supply of financial services.
“In the last few months, things have happened in Colombia. Unions, such as Colombia Fintech or the Colombian Chamber of E-Commerce, have become more active. This has brought them closer to government policies as well. So, now there are several decrees in development that are looking to regularize some issues of the digital market, the acquirer market,” says hopefully Francisco Leon, Latin America operating director of PayU, a payment gateway that operates in seven markets in the region, as the fintech arm of the global groupProsus. “Today we act only as a payment gateway and we have to have an acquiring bank, an acquiring network; and as many times the traditional acquirers do not have enough capacity to reach the base of the pyramid”.
Since 2019, the Normative Projection and Financial Regulation Studies Unit (URF), an entity attached to the Ministry of Finance,has been working on a draft decree that seeks to open Colombia’s acquiring market to unmonitored agents. Castaño, who has participated in the drafting of this project, anticipates that “in accordance with the latest version of the project, the Superintendency will keep a record of the non-supervised companies that carry out the acquiring activity, in order to evaluate the soundness of these entities and protect the interests of the financial consumer ”.
Combining flexibility and entry barriers, so that actors have an increase in their capital, is a criterion shared by Esteban Velasco, Sempli’s CEO. “There are products that normally require more regulation. But it is also important to generate entry barriers so that unregulated financial entities that do want to become regulated, or fintechs, can enter this world (acquirers), as long as they have significant capital, because that will demand higher levels of funding. It doesn’t seem unreasonable to me that these two points come together: greater flexibility on the part of the regulator and an increase in the players’ capital.”
In line with Velasco, Jorge Arbache, VP of the private sector at CAF, believes it is necessary to achieve balanced regulation for the industry. “The pandemic accelerated the times, created opportunities that were not there, that were not visible, whether for the adoption of in-house management technology, or for production technologies, all technologies that increase productivity, issues that include fintechs. Thus, because of the pandemic, many of these will be able to put on the table of the SMEs their solutions, very interesting developments, generating more knowledge in people and increasing the development of the whole industry. But we have to think very carefully about regulation. Maintaining prudence, so as not to create problems for this industry, which is so promising,” Arbache points out.
Fintechs also base their goodwill on the spirit of Decree 1400, of May 2005, when the government decided that Low Value Payment Systems would be monitored by SFC and authorized for the transfer of funds among participants through the reception, processing, transmission, clearing and/or settlement of transfer and collection orders. Services that fall to different entities to avoid monopolies and stimulate competition.
“For this purpose, in Colombia there are, among others, the following entities: Banco de la República and ACH Colombia for operations with checks and electronic orders; ATH for operations between banks of Grupo Aval; Credibanco and Redeban for operations with debit and credit cards, and Visionamos for operations between financial cooperatives,” lists Castaño.
Due to all the above, fintechs are optimistic about the regulation that is coming, although, for the time being, they do not fall into obsession with success. They have no choice but to wait and see what will appear from behind the curtain that will be raised by the Regulatory Projection and Financial Regulation Studies Unit (URF).
If a decree that embraces flexibility in the acquirer market is issued, startups operating in Latin America’s third-largest ecosystem will celebrate with their usual joy. But not just them: also entrepreneurs like the persevering Colombian entrepreneur Lina María Restrepo Arango, that woman who is eager to get her hands dirty.