FinTech companies, with simple products, lower banking service costs, but also a trendy marketing campaign aimed at a younger crowd, have the potential to reshape the banking industry globally. The FinTech business is shaking the pillars of traditional banking, but the increasing competition from digital players can also provide advantages to banks through partnerships with FinTech startups, which could lead to lesser costs, low redundancy, solid technical know-how, and increased efficiency. This could help reduce the cost of credit for the system as a whole. Moreover, the FinTech business has the potential to foster financial inclusion. In contrast, an unregulated development of FinTech businesses could bring additional risks, namely governance and process controls, cyber risks, third-party reliance, contagion, and pro-cyclicality.
Chile is not an exception to this trend. On February 11, the Chilean Commission for the Financial Market (CMF; the financial markets regulator) published a paper titled "General Guidelines For The Regulation Of Crowdfunding And FinTech". Although regulations are currently at an early stage, we view their rollout as a positive development in order to reduce potential risks that could arise if the digital players suddenly begin jeopardizing the financial system as a whole.
S&P Global Ratings currently views FinTech as the new competitor on the block, but not yet a game changer for the banking system. However, we believe it will increasingly become a force to be reckoned with, and the impact will depend not only on how banks respond to the new competition and the particular vulnerability of their business models, but also on the response by authorities and regulators to FinTech's growing clout.
What Can FinTech Offer To The Sector?
FinTech holds many potential benefits including bolstering financial inclusion through increasing access to finance among lower income individuals and small businesses. Small- and medium-size enterprises (SMEs) are crucial for economic growth and job creation, but securing the financing that they need to survive and prosper can often be difficult. FinTech can offer solutions that are efficient and effective at lower scale, which could benefit SMEs and provide them with greater access to a wider range of funding options. Innovative FinTech products can be better tailored to their needs. FinTech is allowing banking customers to conduct transactions through their mobile devices, improving efficiency and the customer experience. Data aggregators can synchronize financial data from various sources and integrate bank accounts from different financial institutions, reducing the costs for business. By reducing information asymmetry in the marketplace, FinTech is not only improving the ability to match investors, lenders, and borrowers, but providing a more level playing field that allows retail investors to have greater participation in the market. FinTech intermediaries could also help bring additional liquidity to the market.
The New Regulations Are Step In the Right Direction
The proposed framework follows the discussion and analysis that CMF carried out in 2018 with market participants. Authorities considered not only the experiences of other Latin American banking industries such as those in Argentina, Brazil, and Mexico, but also of peers in Australia, EU, and the U.S., as well as the principles and recommendations issued by international organizations.
The CMF expects that the publication of this report will serve as a basis for the formulation of comments and additional clarifications of guidelines for FinTech in the banking sector. This will allow the CMF to design the regulatory framework that encourages innovation, competition, and greater participation in the financial system, while protecting investors and users from potential risks. The regulation also intends to protect integrity and stability of the financial system as a whole, without creating unnecessary obstacles to the development of the sector.
The scope of financial services covered by the proposal are:
- Collective financing platforms;
- Financial advisors;
- Channels providers for processing of purchase orders or payments;
- Alternative transaction systems; and
- Custodians of financial instruments.
The proposal is based on the following pillars:
1. Proportionality: establish differentiated and proportional requirements according to the risks inherent to the particular activities carried out by each entity.
2. Neutrality: the new framework doesn't create regulatory asymmetries between those entities that are intensive in the use of technologies, as opposed to those that are not, or that are regulated based on the use of a particular technology.
3. Integrality: the regulation applicable to crowdfunding not only addresses aspects of the activity itself, but also regulates services and related aspects, in order to allow companies to generate economies of scale or scope, and improve their competitiveness at the local and regional level.
4. Flexibility: allow the coexistence of various business models and that these can change over time without the need to constantly adjust this regulation.
5. Modularity: recognize that there may be service providers that only perform a component of the value chain, which is why the requirements that the entity have a direct relationship with the offered component.
Regulation Will Help Chile Catch Up With Regional Peers In Terms Of The FinTech Growth Rate
According to Finnovista's and BID's partnership in investigating FinTech's evolution in Latin America, 84 of such entities are currently operating in Chile, representing only 7% of the region's total enterprises. The front runners are Brazil (33%) and México (23%). Moreover, the growth pace of FinTech in Chile is not comparable with those in the larger economies. Although we do see the favorable trend in this segment, Chile is one of the few cases with less than 50% annual growth of FinTech businesses. The reason could be the lack of regulatory framework (until now) that held investments amid operational uncertainties, high barriers to entry, and greater access to financial services in Chile than among regional peers.
The FinTech business in Chile is distributed as follows: Around 30% of entities are offering payment and remittances services, followed by enterprise financial management (16%), crowdfunding (14%), lending (9%) and the remainder in multiple businesses (personal financial management, scoring, fraud identification, wealth management, insurance, among others).
Could FinTech Pose A Threat To Traditional Banking In Chile?
The unique nature of banking may offer some protection against the digital players. The business is tightly regulated, and the barriers to entry are high. In addition, customers typically build a long-term relationship with their banks, with whom they entrust their money and personal information. Major concerns among bank clients are over payment transfers, data confidentiality, and controls to avoid fraud. They don't yet perceive banking services as a commodity, like other businesses, so we expect traditional banking entities to remain the core players in the Chilean financial system.
But this can change. Customers have yet to start changing banks frequently, because clients don't view lenders as easily replaceable as digital providers. However, we believe a shift could occur in the medium term as the new legal framework eases banking mobility while the younger generation is more open to the change. With that in mind, FinTechs' strategy is to provide high-quality services at a competitive cost. But given that they don't typically offer the full range of traditional banking products and services, they need to convince clients of the value of their currently narrow range of offerings. This is why, in our view, the FinTech business has not yet expanded as quickly as its potential may suggest.
However, banks are aware of the danger of a sudden change, given technological "disruptions" in other industries. Banks are mindful that the future of banking is on the digital front, and will definitely influence the future of Chilean's large, traditional banks. All of them are looking to steadily rein in high costs by reducing manual processes, centralizing back office operations, increasing the number of standard operations carried out online or via mobile devices, and widening the use of their branches for higher-value activities. But these initiatives require larger investments and the changes take time, given that traditional banks need to adjust their existing systems while maintaining the service levels and protect their data.
For the moment, we view FinTech as the new competitor, but not yet a game changer for bank ratings. Moreover, banks could benefit from the digital developments through partnerships with FinTech startups, which could reduce costs and redundancy, enhance technical know-how, and increase efficiency.
However, we believe FinTech will increasingly become a force to be reckoned with. The eventual impact on banks' credit quality will depend not only on how banks respond to the new competition and the particular vulnerability of their business models, but also on the response by authorities and regulators to FinTech's growing clout.
- The Future Of Banking: Is Orange Changing The Color Of Banking In France?, Dec. 11, 2017
- The Future Of Banking: How FinTech Could Disrupt Bank Ratings, Dec. 15, 2015
|Primary Credit Analyst:||Cynthia Cohen Freue, Buenos Aires +54 (11) 4891-2161;|
|Secondary Contact:||Rafael Janequine, Sao Paulo (55) 11-3039-9786;|
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