Innovation and Digital Transformation: The Keys to Financial Inclusion in Latin America | NTT DATA

Wed, 29 March 2023

Innovation and Digital Transformation: The Keys to Financial Inclusion in Latin America

A significant cultural shift is underway in the financial sector, with an acceleration of ecosystems between fintech companies and traditional financial institutions, driving scenarios of competition.

The pandemic and the incursion of fintech have led to an unprecedented increase in financial inclusion in Latin America. The World Bank, in its Global Findex report, found that in just a decade, the percentage of banked individuals in developing economies increased from 42% to 71%. This figure allows us to view the situation from two perspectives: on the one hand, we can celebrate the significant evolution; on the other hand, we must realize that we still have a real challenge ahead.

Innovation is key to covering the underserved segments of the Latin American population. Fintech companies were the first to understand this. By their very nature of having a strategic vision based on technology, they were able to quickly provide timely solutions and reasonable prices to a much wider audience.

Improved Coverage and Lower Cost of Client Attraction

Currently, this phenomenon also applies to traditional financial institutions. Previously, opening a bank branch was the only way to bring financial services closer to the population. This meant that rural areas, with vulnerable or hard-to-reach communities, were left off institution’s radar, implying investment and effort not justified by the potential profitability that a branch could generate.

Today, connectivity and digital transformation allow increasing coverage with almost no limitations, with the cost of client attraction tending towards zero since it is done digitally. Telecommunications companies are one of the leading accelerators of financial inclusion. If a person has a smartphone, they can operate financial services online.

Approaches to Digitization

Traditional banks choose different strategies in their approach to digital banking to promote financial inclusion. One consists of digitizing the traditional model and launching an app that offers products and services through a virtual channel. In other cases, they created a neobank, a side brand supported by new technologies. This approach is often seen in traditional banks with legacy systems that hinder rapid modernization.

There is no magic recipe. Each institution must find a balance to do it in the shortest time,  which is a powerful variable, as being late with their digital offer can be costly for a bank's future - and with managed risks. Therefore, supporting a technological partner with experience and knowledge of the market can be essential to achieve that purpose.

Along the way, a cultural change emerged as a key factor in enabling traditional banks to accelerate their transition to digitalization: the creation of ecosystems with fintech. Initially ignored by traditional players and then considered as a potential competitor, institutions began to reconsider fintech as strategic allies as they gained scale, proposal, and business volume. Today, traditional institutions frequently hire fintech for specific services under a "white label" format.

The Importance of Financial Education

The ability to bring financial services where people are is just one of the challenges of financial inclusion. The other is financial education since it is not only about making an electronic payment or having a bank account, but understanding concepts such as savings, investment, or transaction security. This is another great challenge for financial institutions, both traditional and fintech: increasing the number of users and simultaneously making sure each client uses the products and services in the best way.

Financial inclusion is one of the driving forces of development in Latin America and digital  transformation is the key that sets it in motion.


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