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How Digitalization Can Accelerate Future Financial Services in the Region

The rapid digitalization of the financial sector in Latin America and the Caribbean is paving the way for agile and innovative solutions that enhance competitiveness, open doors to greater financial inclusion, and drive the region's development.

Un hombre revisa balances financieros

Digitalization is changing the rules of the traditional financial sector, positioning itself at the core of entities' strategies to gain competitive advantages and avoid obsolescence in the face of new competitors. Digital acceleration in the financial sector is critical for maximizing its impact on the region's development in financial inclusion (from both savings and credit dispersion perspectives), energy transition, and business development.

 

As a result, many entities in the sector are investing in new technologies such as artificial intelligence, cloud, cybersecurity, and big data to reduce operational costs and impact new customer segments. This helps address one of the sector's main challenges: promoting financial inclusion and banking.

 

Although there has been some progress in the region, approximately 1.7 billion people worldwide are unbanked, representing one-third of the adult population (with unique barriers for specific groups such as women), according to Findex Report data.

 

These investments in new technologies must go along with the capture of digital talent, training programs, and digital career plans that enable effective digital transformation. Only in this way can a digital mindset culture permeate comprehensively, favoring the adoption of agile structures and processes to be flexible in the face of new technological and market changes.

 

Technological innovations are shaping sector trends and significantly impacting how financial transactions are conducted. The digitization of products and services and the operations of financial entities is no longer an option; it is critical to survive in a scenario where customers compare digital experiences with those received from non-financial native digital players (e.g., Mercado Pago).

 

Some of the most relevant examples are the automation of activities to improve companies' operational efficiency through Robotic Process Automation (RPAs). Chatbots for customer service, automated digitization of documents with Optical Character Recognition (OCR), and biometrics to streamline the onboarding process are also noteworthy for their adoption levels.

 

Simultaneously, regulators are advancing in developing and approving digital regulations such as digital payments, data, cybersecurity, sustainable finance, and Central Bank Digital Currencies (CBDCs).

 

A special mention is due for Open Banking, a trend driven in many countries in the region by regulations and currently in maturity. As seen in more mature markets, generating Open Banking ecosystems (regulatory or spontaneous) reduces entry barriers. It enhances competitiveness, improving services for customers.

 

The opening of customer information and banking operations allows non-financial entities to complement the industry's value and generate new layers of value. The implementation of Open Banking is accelerating the adoption of Banking as a Service (BaaS) models, where the normalization of the use of APIs (Application Programming Interfaces) enables the commercialization of financial platforms as a service, transforming the need for significant technology investments (CAPEX) into recurring operational expenses (OPEX).

 

In addition to the above, we must highlight the consolidation of the Fintech market, actors who focus their value proposition on technological aspects and who have succeeded in recent years in positioning themselves as a valid alternative for the provision of financial services.

 

Finally, the digitalization of economies has accelerated the expansion and development of digital payment solutions. Emerging technologies have enabled innovations in payment methods that are beginning to gain traction against the use of cash and serve as a gateway to banking. A notable case is peer-to-peer (P2P) payments, which have facilitated users' lives due to their operational ease and other not-so-visible but present benefits such as nonexistent or minimal fees and real-time transactions.

 

The perfect example is PIX, which has revolutionized how payments are made in Brazil and helped bank millions of people. This method already has more than 150 million users and more than 14 trillion reais in transactions.

 

Undoubtedly, BID Invest has the opportunity to support and boost credit in the sector to strengthen the productive fabric of SMEs and accelerate the digital transformation of the financial ecosystem, promoting the inclusion and banking of citizens. An example of this support is the line to Konfío for SME loans.

 

In conclusion, it is relevant to highlight how digitalization plays a fundamental role in promoting financial inclusion in the region. By breaking down geographic and economic barriers, digital technologies have democratized access to financial services for millions of previously excluded people. Furthermore, the normalization of automated processes has allowed these new customers to be a very relevant opportunity for the industry, including new players who currently have contact with these customers. Innovation in financial services is allowing more and more people to take control of their financial health, and the industrial fabric is using digital financial services as a catalyst. These advances empower not only individuals and businesses but societies as a whole.

Authors

Jan Eskildsen

Jan leads the Financial Institutions Team for Central America at IDB Invest, which he joined in 2017. He is responsible for originating and structurin

Guillermo Mulville

Guillermo leads the Telecommunications, Media and Technology (TMT) Team at IDB Invest, which he joined in 2016. He is responsible for developing bu

Luis Olmedo

Luis Olmedo is Partner in charge of the Strategic Value area for the Americas at NTT Data. With 14 years of experience in strategy projects, he has ha

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