2020 wins and improvements in financial inclusion and alternative data in LATAM
During 2020, the discussion around a more inclusive financial economy was at the center of the fintech conversation. New potential solutions have been introduced to address this situation, such as the use of alternative data to assess creditworthiness. Faced with the current banking landscape, and the destabilization that the Pandemic brought, the possibility arises of not only transforming the credit market, but also working towards financial inclusion in social terms.
The financial ecosystem in Latin America excludes a large part of the population that today find themselves unbanked. Pre-Covid, 45.6% of the adult population in Latin America was excluded from the financial system, slated Ignacio Carballo, Research Economist and Director of the Fintech Ecosystem & Digital Banking Program at UCA. These potential customers do not have the established credit history required by traditional credit scoring models and are thus marginalized as risky. The pandemic put a spotlight on this situation and enlarged the existing social gap.
“This vulnerability, unfortunately, results in the increase in exclusion rates and access to credit” says the economist Sebastián Olivera, founder of the Montevideo Fintech Forum and Co-founder of WeFintech. Until now there has not been much data on this segment of the population but the existence of an ambitious young population that leans towards the digital presents itself as a clearly visible market, added Olivera.
See more: Provenir announces latest client in Mexico: Exitus Credit
Banks and fintech organizations are trying to solve the problem of financial inclusion by offering integration with new technological tools of Artificial Intelligence. The use of alternative data for credit scoring as a potential solution presents a great opportunity for growth for fintech institutions in the region. This new technology introduces new ways to evaluate financial product risk levels by applying alternative scoring platforms that complement the use of traditional methodologies for a more accurate evaluation.
Financial system is rapidly evolving towards progress.
First, the pandemic has accelerated the adoption of technological innovations that consolidate new information and could be leveraged for alternative credit measurement. Ignacio Carballo confirmed that this year in Brazil, the creation of the Coronavaucher reached 66 million people and it is estimated that 26 million of them were unbanked. He also stated that Colombia’s Ingreso Solidario program has reached 1.5 million unbanked and in Argentina, it is estimated to have reached 3 million unbanked with the Ingreso Familiar de Emergencia.
In 2020, we have moved towards a firmer infrastructure as is the creation of new regulations and a more reliable financial structure. For example, in Mexico the Fintech Law issued its first license in January 2020 while in Brazil a legal framework is already being developed. “We can easily say that 2020 is an important turning point for Latin America, helping to strengthen the foundations of a fintech revolution” said Bruno Diniz, Fintech advisor and author of the book “The Fintech phenomenon”.
See more: Provenir expands partner ecosystem to empower smarter decisioning across the credit lifecycle
What has also seen an upward trend this year is the creation of new competitive players in the financial system. This great leap in the financial sector has generated a positive competition that leads traditional institutions to make quick technological decisions to keep up with the new way of working. Marcial Gonzalez Fraga, economist specialized in Fintech Research and Marcel Van Oost, advisor and founder of Fintech Startup Advisor highlights that big data approaches provide the insights that companies need to iterate and make credit scoring decisions.
Collaboration between fintech companies and players in the financial industry allow for a rapid scale up of new financial proposals. CredoLab and Provenir are working together bringing an alternative solution to enhance financial development in regions where the market is yet to be explored. The goal is to offer decision makers new risk assessment tools by investigating and analyzing metadata obtained from smartphones and locate potential customers who are currently excluded from the bank financing system.
Another 2020 triumph in the region is the continuous investment of capital for fintech related entities. According to Latam Fintech Hub, Latin America has raised US $ 525M and 74 deals in just the first half of the year. This increased investment results in the expansion of new businesses from different segments. As highlighted by Clementina Girlado, founder and CEO at Dots & Tech, the Latin American FinTech universe has more than 2,000 companies in different degrees of maturity from digital payment and digital credit to collective financing solutions.
Today LATAM is a challenging region but, at the same time, it presents itself as an alternative scenario for the financial system. Marcial González Fraga and Marcel Van Oost highlight that within Latin America Mexico in particular has become a fintech paradise given the combination of its strategic location, limited access to financial products and the large size of its domestic market.
Finally, 2020 has seen an accelerated use of alternative data to generate a positive social impact for the creation of sustainable businesses. Thanks to this new information, more people are integrated into the financial system creating their own businesses and thus collaborating in the growth of the economy.
Despite the destabilization of the financial system brought up by the Pandemic we find new customers with valuable data previously ignored. This framework becomes an opportunity for 2021, a way to reactivate the economy and introduce previously unthought innovative ways to achieve the final goal, financial inclusion.
