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Founder of Vodanovic Legal, a Peruvian boutique dedicated to financial services advisory and the promotion of financial inclusion, Ljubica Vodanovic, shares her expertise on the impact of Covid 19 and the latest trends in Fintech.
Leaders League. What were the effects of Covid on the development of fintech, in Peru specifically and in the wider LatAm region?
Ljubica Vodanovic. The Covid-19 pandemic accelerated the advancement of digital financial services in all countries, impacting both traditional and new actors. Due to the pandemic, we went from a predominantly face-to-face model to a virtual one. Unlike with other markets, this new model will largely remain intact after Covid. The fintech business model is poised to lead this transformation since they are 100% virtual who do not require a physical presence to provide financial services. Its financial solutions allow for streamlined payments, loan authorization and the connection between liquidity needs and the supply funds, which are essential activities, given the current context. Finally, its focus is also inclusion, as they want to reach sectors which are overlooked by the traditional system. Thus, the pandemic hastened the inevitable process of digitalization in Latin America.
How is the regulation of the fintech industry developing and what progress is being made toward the acceptance of digital financial solutions.
In Peru and the wider LatAm region, we have made considerable progress in recognizing the importance of the fintech industry and the need for it to be regulated according to four key characteristics, these being: a) that regulation ought to be proportional to the industry’s risk; b) to seek equitable regulatory treatment for traditional financial services and for new actors (thus level the playing field); c) to regulate services and not technologies, so that technological advances are not limited; and d) to aim for a uniform regulation, considering regional or global markets, not just the local one.
In LatAm, progress in the regulatory process has been positive, although we recognize that it is still quite recent. It is led by Mexico and Brazil, followed by Colombia, Chile, Peru and Argentina. Though the pace of advancements is uneven, there is a general upward trend.
Peru advanced a lot during the pandemic. For instance, we already have a regulation covering crowdfunding which is flexible enough to promote it. We also saw important advances in the regulation of payments, which led to the appearance of more mass-use digital wallets that do not depend on having a bank account, and to the introduction of a sandbox or test spaces for business models and innovative products.
Around 60% of Peruvians do not use financial services, meaning that, although there is a large gap to cover, there is also great potential considering that in 93.3% of Peruvian households at least one member has a cell phone. In addition, 88% of the population that uses the internet does so through cell phones.
To move forward, it is essential an approach that prioritizes generating financial products is adopted, alongside services that take into account the needs of individuals and their families, helping them to solve very specific problems in their daily lives. Financial inclusion should not be regarded as a simple access to credit or to a bank account, but rather as a mechanism to generate products and services that provide people and their families with added value. We need financial services that are simple, transparent, accessible and user-friendly. If we offer something complex, no one will use it. In that sense, technology is one of the main drivers of this new stage of inclusion.
How do you see the evolution of digital financial services in Peru?
The change is clearly positive. Last year, the use of mobile payment tripled and the use of mobile applications for payments quadrupled. Today, Peru ranks third in the use of payments with applications in Latin America, only surpassed by Mexico and the Dominican Republic. There are payment gateways, payment aggregators and payment solutions (cryptocurrency purchase operations) and the QR, an increasingly used technology. However, the most noticeable trend today is the rising use of electronic money (digital wallets), a large market for bank and non-bank players that grew by more than 66% during the pandemic.
In Peru and regionally, there have already been success stories. For example, in payments and transfers, we have digital wallet providers Yape in Peru, Ualá in Argentina, Nequi in Colombia and Yappi in Panama. Regarding credit, we have the microloans offered by Bancolombia in Colombia, Omni Crédito in Brazil and Cooperativa de Ahorro y Crédito Pacífico in Peru. Regarding remittances and international transfers, we have the success stories such as RippleNet and MoneyGram, among others.
Digital capabilities are transforming the financial industry. Its future moves towards the provision of services through virtual platforms operated via applications available from a multiplicity of providers offering diverse services in a single platform. This way, it disengages itself with the traditional model, which is based on physical agencies and payments in cash. The new model will promote competition, improve the user experience, give more people access to financial services , and provide long-term sustainability to the industry. It is an irreversible process that has already begun.
Precisely, banking as a service (BaaS) is a new business model that allows financial institutions to “integrate” other non-bank enterprises (such as startups, techs, bigtech, retail or corporate companies) into their platform so that they can offer financial products. We believe that the Latin American financial market will adapt to this trend, and it is very likely that models like BasS will become massively popular. We are already beginning to see collaborative alliances between banks and third parties that could follow this model.
What are the biggest challenges you see for the sector in Peru and the region?
In Peru, we have circumstantial challenges, such as: protecting sensitive personal data, consumer protection, cybersecurity issues and implementing the sandbox effectively. But we also have structural challenges, such as overcoming the culture of cash payments because. Until last year, 9 out of 10 Peruvians still used cash for their daily transactions. We also need to address nationwide connectivity, as only 40% of households in Peru have internet connection and only 36% of them have access to a computer. Likewise, we have to increase the speed and bandwidth of the internet, since it barely reaches 27 Mbps. This is 3.9 times less than in Chile (108.17 Mbps). We simultaneously need to strengthen the digital skills of Peruvians and substantially improve financial literacy.
Another challenge is to create greater competition. In Peru, banking accounts for almost 90% of financial assets and its financial groups include the main payment processors, acquirers, trust entities, companies and stockbrokers. This generates a great concentration when providing financial services, which makes it difficult to open new options. To expand and develop the fintech industry, it is important that these innovative companies access the “rails” of the traditional financial system, and so customer accounts from which digital payments must be made.
The fintech industry that we hope will develop in Peru is one that truly provides new and better options to the consumer. We need fintech to grow transparently and responsibly, providing an ideal service, complying with the regulations that govern it, applying healthy market practices and keeping the consumer protected. Regarding the prevention of money laundering and PLAFT regulations, it is essential that a fintech knows its clients and the funds with which it operates, so that, if it requires access to bank accounts, it makes sure not to expose banks to these risks. By following the rules and applying good practices, fintechs will create a very solid and sustainable industry.
