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The fintech opportunity to bank the unbanked in Latin America

As Jorge Soto noted in conversation with BBVA, increasing connectivity is making developing economies a hotbed of innovation in financial services: “It is empowering startups to create relevant solutions to the bigger and more significant challenges that still exist in those markets, which have largely already been solved elsewhere.”

Soto should know. Alegra, the Colombian cloud-based bookkeeping platform of which he is CEO, was BBVA Open Talent’s 2016 edition winner. The company enables microenterprises to better organisation information about their incomings and outgoings, and to handle invoicing and expenses reliably and consistently. It’s a vital service, tailored specifically to the needs of small businesses operating predominantly in the informal economy.

Many of Alegra’s customers are using cloud apps for the first time, benefiting from more widespread connectivity. But it’s clear that it is on to something: the startup has 25,000 active daily users and is adding between 1,000 and 2,000 companies per month.

Alegra’s opportunity, Soto says, stemmed primarily from the fact that the Latin America region arrived later than much of the rest of the world to the transformative impact of online services such as the cloud, which has only really entered the mainstream there over the past three years. Previously, the businesses Alegra serves were either operating without technology-driven accounting solutions or trying to ‘make do and mend’ with solutions imported from US and European markets that weren’t best suited to the needs and challenges specific to the Latin America region. They needed a local solution to their market-specific issues.

Internet access

Uptake of cloud services across Latin America has depended on deeper penetration and increased reliability of high-speed internet connections. It’s something that is easy to take for granted in the developed world, where good-quality connectivity has become a day-to-day staple, increasingly just another utility alongside water, gas, and electricity. But while more than 4 billion people around the world will have regular home access to the internet by the end of 2018, that will still leave around half the world’s population offline.

In many developing economies, it can still be difficult for people to reliably access basic infrastructure such as roads, information and communication technologies, sanitation, water, and energy. Internet access can empower people to transcend these limitations. This is why connecting “the next billion” has long preoccupied governments, humanitarian organizations, and corporations around the world.

It's clear from the efforts to increase connectivity that the "next billion" will connect to the internet very differently from how their predecessors have. Connectivity will increasingly be wireless by default, and powered by new technologies such as 5G.

Connecting the next billion has huge implications for banking and finance, in particular when it comes to better serving the 1.7 billion adults that remain unbanked, mostly in developing economies, so that they can safely and securely access financial services from banks and government. It is no surprise, then, that innovative fintech startups are emerging in developing markets to disrupt traditional banking systems and capitalise on increasing connectivity.

Many of the next billion will be mobile-first internet users, empowered by the increasing range of highly capable smartphones available at more affordable price points. But the newly-connected unbanked are unlikely to flock to traditional banks’ mobile offerings in the first instance — working largely in informal labour markets and cash-driven economies, and with poor or non-existent credit ratings, those banks will likely have few products or services to offer them.

With two-thirds of those 1.7 billion unbanked individuals have a mobile phone that can be used to access financial services, it’s much more likely that they turn to mobile- and digital-first products and services that are better tailored to their circumstances. 21 percent of adults in sub-Saharan Africa, for instance, now have mobile money accounts, and 52 per cent of them have used digital payments in the past year.

Mobile connectivity will empower these individuals to send and receive money, pay bills, and buy goods without needing access to physical infrastructure, and in doing so open the gateway to e-commerce - another online service, like enterprise cloud apps, that has been held on the runway in Latin America.

Of course, online payments typically require access to the traditional banking system – you need a bank account to move money online, even using platforms such as PayPal – but startups are emerging that enable the unbanked to capitalise on the increasing opportunities of e-commerce. OpenPay, a 2015 BBVA Open Talent finalist that was acquired by the bank in 2016 is one such company – the Mexican startup enables online payments for the unbanked by providing codes to use online to complete transactions or redeem offers via mobile money accounts.

It’s a perfect illustration of Alegra’s Soto’s point about the biggest problems still remaining to be solved in developing economies. While for much of the world e-commerce has been a mundane reality for many years, its emergence elsewhere has combined with the limitations of the banking system to present an exciting opportunity for fintech innovation.

Cloud services and e-commerce are just two of the stages on which we will see innovation in years to come as the dual aims of banking the unbanked and connecting the next billion converge. BBVA, through its Open Talent competition -- now in its tenth year, looks forward to seeing what is on the cards.