Colombia Fintech: The COVID-19 Impact

Will the recession crimp Colombia’s fintech growth?

BY FINANCIAL SERVICES ADVISOR
Inter-American Dialogue 

A report last year by Ernst & Young said Colombia had Latin America’s highest financial technology adoption rate, with 76 percent of the country’s population using fintech services. The country’s fintech industry is growing approximately 120 percent a year, the report added. To what extent will this year’s historic economic downturn affect the Colombian fintech sector’s growth rate? Has capital that is needed for industry investments become more scarce, and how much have deals in the sector been disrupted? Will consumer habits change for the sector’s benefit, or will the downturn and lower economic activity worsen the sector’s outlook?

Wally Swain, principal consultant for Latin America at Omdia: Like many technology trends, and like many socioeconomic trends more generally, in a Covid-19 world, Colombia’s fintech will move at two very different speeds. Those who have income have discovered that they can live without cash—cash that can carry the virus; cash that requires leaving the safety of one’s bubble to interact physically with a bank machine or even a teller. But those who lost their formal employment as a result of the economic crisis will experience the opposite. Part of Colombia’s fintech success has been driven by this century’s push for more formal employment. Pay envelopes and checks have disappeared, replaced by direct deposit, simplified bank transfers and debit and credit cards. Successive governments have promoted this partially out of altruism—formal employment brings an employer-financed safety net—and self-interest—eliminating cash makes tax evasion harder. Covid-19 supplementary financial aid requires a bank account, and the Colombian banking industry reports 1.6 million new clients so far this year. But in August, official unemployment was 16.8 percent, and one in five people in low-income groups was without formal employment. A percentage of those with jobs have had to take a pay cut to keep their positions and will be looking for additional work to supplement their income. This will cause the informal economy and the use of cash to grow again. While this will affect the volume of transactions, there will be little impact on investment in fintech. Consumers, retailers, financial institutions and governments have all learned the benefits of this technology.

Clementina Giraldo, founder and CEO of Dots & Tech in Colombia and host of the Voices of Fintech Americas Series podcast: Colombia has about 250 fintech companies, being one of the countries in Latin America with the greatest development of the industry, alongside Brazil, Mexico and Argentina.

Companies offer solutions for digital payments, regtech, digital credit, crowdfunding, factoring, insurtech, wealthtech, blockchain and crypto and neobanks. The adoption of financial technology has deepened with the effects of Covid-19, with a greater use of deposits in electronic wallets as well as payments and money transfers through digital means, offered by the Companies Specialized in Electronic Payments and Deposits (SEDPE), which to date includes five in Colombia: Movii, Powwi, Ding, Coink and Dale. Movii, the fastest-growing one, went from about 200,000 users at the beginning of this year to more than one million users currently. The government has encouraged this growth by using fintech for the delivery of subsidies. If users of the SEDPE are added to users of TPaga and RappiPay as well as banking applications such as Nequi (Davivienda) and Daviplata (Bancolombia), the number of users exceeds 20 million. It’s also important to highlight that digital credit this year surpassed electronic payments, expanding the offer of digital consumer credits through providers such as Lineru and RapiCredit as well as SMEs such as Finaktiva and Sempli, among others. Additionally, there have been decrees issued to promote the development of the payments ecosystem and crowdfunding as well as novelties in the INNOVASFC sandbox, which will undoubtedly promote the scaling of the industry.

Daniel Fajardo, senior counsel at Holland & Knight: The economic crisis caused by the Covid-19 pandemic has generated several negative effects for business, as many companies have had to suspend activities, and many are being forced to close. This has had a serious impact on the finances of companies, especially small and medium-sized enterprises, which have been affected in terms of cash flow. However, the number of fintech companies grew by 26 percent in Colombia last year, and a similar growth is expected in 2020. Before the pandemic, 76 percent of the digitally active population in Colombia used fintech services.

As result of the confinement, the appropriation of these solutions has rapidly and exponentially increased as they allow the use of strategic channels through technology, avoiding commuting and physical money. In 2020, more than 50 new fintech companies have been incorporated, driven mainly by growth in the following segments: business technologies for financial institutions, wealth management, trading and capital markets, loans and financial management. While fintech investors believe that Colombia has high long-term potential, the uncertainty surrounding the pandemic has generated a great deal of investment caution. Colombia’s fintech companies have continued to raise new rounds of venture capital, but the pace is far from the peak reached in 2019.

Furthermore, investors are focusing more on companies with low cost structures and that provide mass services. With the continued popularity of fintech solutions, however, it is expected that funding will return once the worst of the pandemic is over.

Kai Schmitz, partner at Crestone Venture Capital: Fintech in Colombia, like in most of Latin America, is booming. With Brazil leading the way, Colombia has also become one of the fastest adopters, driven by factors that are partially common across the region and in some cases specific to Colombia. The region has a high share of young urban people who are early adopters and so far are underserved with financial services. Bank concentration across the region is high, and limited competition has led to high margins. Banks’ return on equity in Latin America is the highest in the world.

According to research by the World Bank, more than 50 percent of the population has a bank account, but a large share of these accounts are dormant or are only used to receive and withdraw salary. According to Mastercard, just 8 percent of formal retailers in Colombia accept electronic payments (compared to 23 percent across the region and 36 percent in Brazil). These card acceptance services are currently only offered by two providers, both owned by a group of banks. Less than 10 percent of consumers use electronic payment methods.

This pent-up demand is increasingly served by fintech companies, which use technology to offer a more user-friendly, accessible and lower-cost service. Colombia’s central bank is making efforts to increase competition.

New regulation for a payment institution was enacted a few years ago. A new decree to break up the duopoly in acquiring and deregulate of the payment sector is currently being discussed. It should be enacted soon, as it not only addresses a market failure but also ensures equal opportunity for small businesses and removes a critical barrier for their formalization. By comparison, Brazil has shown that deregulating the payment sector will lead to a spurt of innovation in fintech. All indicators show that this trend will continue. Covid has further accelerated the digitization of the market, and fintech presents an opportunity to facilitate a recovery, especially for small businesses.

Digital lenders are efficient enough to offer the small working capital loans small businesses need to grow. Platforms for electronic payments and e-commerce enable small businesses to go online and make use of the opportunity in a booming ecommerce market with almost 400 percent growth.

ERP and accounting software delivered as a service addresses the lack of formality and productivity gap in Colombia. Consumers will benefit from cheaper, more accessible accounts and payment services offered by digital banks and wallets. The new digital account-to-account transfer service offered by the ACH (TransfiYa) reduces the time for an account to account transfer from two days to an instant and cuts the cost from several dollars to cents. Colombia’s government is promoting a digital agenda and has put its money where its mouth is: Covid relief subsidies are being distributed using digital banks and wallets.

Republished with permission from the Inter-American Dialogue's biweekly Financial Services Advisor