Obstacles to financial inclusion
A lack of financial inclusion sees a significant proportion of the population being excluded from access to credit. Contributing factors include:
- A history of hyperinflation in some areas of Latin America coupled with volatile economies
- Poor credit infrastructure
- Banks tend to charge high levels of interest
- Some institutions require people to be in the top 20% of earners before they will even consider lending to them
- Opening a bank account can be a complex process requiring excessive amounts of documentation
According to a survey carried out by members of the Latin American federation of banks, one barrier to financial inclusion is poor financial education. A lack of financial education means that people are unaware of how financial institutions operate. This means that they often make poor decisions and experience low levels of financial resilience. Some of the other barriers identified by the survey included:
- Economic informality
- Lack of public policy incentives
- High levels of poverty
- Legal restrictions and those caused by regulations
- High costs involved with banking
- A lack of trust in banks
A region of contrast
While there is no escaping that Latin America is diverse in terms of culture, there are other reasons that it can be seen as an area of contrast. Despite challenges with financial inclusion and access to credit, the region is anything but deprived of technology. LatAm is a highly connected region:
The wide-scale use of mobile devices, alongside a growing Fintech community, provides fertile grounds to grow more financially inclusive companies and products. It allows challenger banks to enter the area and to serve those who are perhaps unable/unwilling to engage with traditional financial institutions. It also allows for the possible use of alternative data, as opposed to traditional credit scores, as a way of increasing access to credit throughout the population.
How fintech is dominating the region
Fintech startups are hugely popular across Latin America. In 2018, there were 1166 fintech startups across 18 countries in the region. The most popular focus of these companies was in remittance and payments which was driven by the increase in mobile phone usage across the region. Another common area that fintech startups focused on was lending. Having realised that many were lacking access to credit due to a lack of any history, these companies sought to assist those who were unable to use traditional banks.
The vast number of startups led to high levels of competition. The knock-on effect was nine out of ten startups failing within the first three years of trading. Part of the problem faced by startups, somewhat ironically, was access to credit that would allow them to develop and grow. This highlights how financial inclusion, when pursued across Latin America, will not only benefit individuals but the economy as a whole.
What is alternative data and how does it impact financial inclusion?
Given the number of underbanked people in Latin America, there is a need to explore alternative methods of offering access to credit and bringing people into the financial mainstream. With a lack of credit history making it impossible for individuals and businesses (some 90% of SMEs state that they are unable to access credit) to secure the funds that they need, the solution can be found in alternative data.
Alternative data uses different information than that of a traditional credit score. It is possible, for instance, to look at the way people use their mobile devices to glean insights into their behaviour. There is also the possibility to embrace psychometric tests that allow insight to personality types, character traits and willingness to repay.
By exploring alternative data, financial institutions have an opportunity to expand their customer base and grow portfolio profitability. There is also the very real opportunity to provide an economic boost for the entire region by supporting the growth of SMEs.
With such high levels of the population either being unbanked or underbanked, there are clear challenges for the Latin American region. While some countries have the benefit of being digitally connected and are embracing fintech companies, others lag behind. The issue of digital connection needs to be addressed so that strides can be taken forwards towards financial inclusion.
With a lack of financial education being the driving factor behind the high numbers of unbanked, efforts need to be made to solve this issue. By combining education with a fresh approach, where alternative data is used to assess access to credit, financial inclusion can increase across the region, bringing opportunity for growth and resilience the individuals and businesses alike.