Collaboration in financial services is key in Latin America

Opening the Latin American Regional Conference 2018, Juan Martinez, Managing Director, Latin America & the Caribbean at Swift noted how technologies are a tool for providing more and better services for customers. He cited areas such as real-time payments, open APIs and the rise of fintechs as key issues and opportunities, both in Latin America and around the world. Martinez also highlighted cyber security as a key issue for all in the community, commenting that investment in cyber security should be a top priority for banks.

Community collaboration

The importance of collaboration between banks and fintechs was highlighted on a number of occasions throughout LARC 2018. In a panel discussion on day one, Diego Herrera, Senior Specialist in the Connectivity, Markets and Finance Division at Inter-American Development Bank said that his institution has worked on bringing together a variety of partners, from regulators to fintechs, banks and Swift, so that everyone is on the same page for collaboration. He noted that, while fintechs are well known as the disruptors, it is important to remember that innovation is coming from 'traditional' banks as well.

Steven Puig, CEO of Banco BHD Leon agreed with this point, adding that his institution is engaged in a digital transformation. He noted that his bank has a history of collaborating with others in order to develop customer-centric solutions, and added that this is the approach they are taking forward.

Marcela Zetina, Head of Open Innovation with BBVA Bancomer said that she thinks collaboration today is a simpler proposition than it was even a couple of years ago. She gave an example of a project where it had taken 53 weeks to come up with a proof of concept three years ago. But today, she commented, transformation through collaboration has come a long way and that having a regulatory sandbox has been a big benefit in this regard.

Providing a fintech perspective, Guillermo Acuña, Co-Founder & CEO of Mexico at Cumplo explained that his company is always looking for collaborative opportunities. He said that this approach is one that can benefit the financial community, as well as the region beyond that. Acuña also noted that, while banks had tended to look upon Cumplo as competition, APIs offer a way for fintechs to get on the banking system. He says that in the final analysis, everyone is part of the same ecosystem.

One issue for banks is their legacy systems, which might not be as agile as the non-bank vendors they are trying to partner with. Zetina pointed out that, while technology companies originated to develop solutions for everyone, banking infrastructures can be complicated due to M&A processes over years. This needs to be overcome, but it is possible. She also identified the need for there to be a change in mindset across an organisation for it to be able to collaborate on innovation. She noted that innovators in banks need to change the hearts and minds of the board in order to get support for change from the top down.

We were also reminded that transformation through collaboration is not limited to customer solutions, it is also vital in the world of cyber security. In her closing keynote presentation, Diana Kelley, Cybersecurity Field CTO for Microsoft made the important point that criminals share information and monetise it, so those banks and technology companies on the good side of the debate need to be open to sharing and collaborating in order to move fast enough to compete with the aggressive development of cyber threats.

As Acuña had noted, APIs will play an important role in collaboration between banks and non-bank market entrants. APIs were scrutinised in greater detail on another panel discussion on day 1. The journey from the first idea to deploying an API can vary in time, but you need to start with a strategy, advised Gabriel Eduardo Di Lelle, Vice-President of Innovation and Digital Transformation at Bancolombia. He noted that 30% of the development budget can be saved by banks if they deploy APIs efficiently, emphasising the importance of getting the strategy correct at the start. Di Lelle gave an example of a robo-advisor that his institution launched last year, which was released within 32 days. The secret behind this short timeframe was that they worked with a fintech and used APIs, he revealed.

A polling question asked the audience what applications their APIs are enabling. The second most popular response was 'Internal technology', which took 25% of the vote. Then came third-party integration (18%), and business flows (8%). Topping the poll, garnering the vote of almost half of the audience (49%) was 'all of the above'. In response, Rene Schuurman, Global Product Manager for Channel Services at Citi Treasury and Trade Solutions commented that customers want bank agnostic APIs. He said a realistic time frame of 18 months to 2 years is what the industry should need to create a standard for APIs. Schuurman added that this should not stop people from using APIs, but it was important to bear in mind that some APIs may not be open APIs just yet.

Martinez from Swift noted that regulations such as PSD2 in Europe and Open Banking in the UK are forcing banks to open up their back ends to developers. However, he cautioned that these need to be standardised, otherwise there is the risk of ending up with API 'spaghetti'. Martinez commented that Swift is working to provide this standardisation, as well as on the security management side. Data protection is a critical element as APIs sit between numerous front and back ends.

APIs can be used to support innovation, and Di Lelle commented that collaboration with fintechs would have much longer timeframes without them. He said that the industry needs to work together to set the standards that are needed. He made the point that, while of course financial institutions compete with each other, they need to work together to develop the standards rather than to create proprietary offerings that cannot connect with anyone else. Collaboration is critical.

New entrants and technologies

Talk of collaboration at LARC is in response to region's fintech transformation, which Herrera described as "a phenomenon." There are 703 Latin American regional fintechs, around a quarter of which rely on crowdfunding, he explained. Around a half of these fintechs focus on digital payments transformation. In the crowdfunding vertical, the fintechs have raised around US$342m, which Herrera predicted could be doubled over the next year. One issue this growth market faces is that there is a financial gap of US$2.3 trillion in the regional fintech landscape, he notes, adding that while crowdfunding has covered some of this, there is still work to do.

New technologies are also playing a part in the transformation of financial services in the region. A poll question asked the audience which technologies will have the biggest impact on financial services. AI finished on top with 53% of the vote, ahead of blockchain (35%), Big Data (9%), and the Internet of Things (4%). BBVA Bancomer's Zetina noted that AI can help banks offer far better tailored services to customers.

Collaboration and the adoption of new technologies are not just happening in a vacuum, of course. The purpose of undertaking such programmes is to better serve the customer base of banks. Customers who themselves are evolving at a rapid rate, as delegates heard about in a presentation from Amol Selot, Head of Financial Services Consulting, Digital, at Fujitsu America. Selot began his talk with a snapshot of how millennials interact with financial services - 33% are open to switching banks in the next 30 days, 71% would rather visit a dentist than talk to a bank, one-third believe that banks will not exist in 5 years, and 86% are interested in socially responsible investing. Selot notes that these attitudes will clearly have a major impact on financial institutions.

The potential exists for some of the large global technology companies to enter and dominate the financial services market, Selot said. He used the example comparison between Amazon Prime subscribers around the world (110 million) and J.P. Morgan customers (70 million) to highlight this. Selot added that, for banks to thrive in the new world, they need to become their customer’s lifestyle partner. They can do this by understanding the vast swathes of data they sit on.

Every dollar that an enterprise invests in innovation will require an additional US$7 in core execution, Selot commented. He noted that banks are in danger of forgetting this as they rush to invest in innovation. Investment in the core has to be undertaken at the beginning of the process, or you run the risk of paying far more further down the road. In addition, banks need to invest in their business model before they start spending on technology. Digital capability, enabled by a technology is essential to building a new business model, he said. Once you have the business model in mind, it becomes very easy. Selot signed off with a memorable line of advice: "Don't build a digital bank, build a bank for those raised digitally."

Financial inclusion

Technology is ready to help Latin America take the next step to success, according to Marisol Argueta de Barillas, Head of Regional Strategies - Latin America at the World Economic Forum. In her opening keynote presentation, she said that financial institutions are looking to new technologies to expand financial inclusion. Technology such as AI can help banks in this regard, bringing new companies into the financial system and allowing banks to monetise the data they can capture.

The need to tackle financial inclusion in the region is clear from some of the statistics quoted at the conference. Jorge Camus, Co-Founder of Destácame, noted that 250 million people in Latin America are unbanked. In addition, Georgette Jean-Louis, director general and board member at the Central Bank of Haiti cited Norway's 100% rate of financial conclusion, and compared this to Latin America and the Caribbean's rate of 51%. Jean-Louis said that as a member of the central bank, growth is her main goal, and that financial inclusion is an important pillar of this.

The audience heard from Jay Collins, Vice Chairman, Corporate and Investment Banking with Citi, who said that that the private sector needs to partner with governments in order to successfully meet the financial challenges to tackle development of the emerging economies. The aggressive deployment of frontier technology is also critical, he added, citing an MIT competition for innovative service to develop technologies and solutions, where successful projects will be funded to scale. Open innovation models are crucial to bringing ideas like this to drive development. Collins noted that many schemes need to be piloted before they are funded to scale, and that organisations such as the World Economic Forum are crucial to supporting the development of the ecosystems required for this.

When asked what technological development he is most excited about, Collins said taking the development community such as NGOs, etc, and delivering them applied technology. In his opinion, developing these partnerships will help solve most challenges of the unbanked.

Destácame's Camus said that the lack of information available on unbanked people makes it difficult for banks to identify them or their credit data. His company tackles this issue by gathering data on the people, with their consent of course, which they can then share with the banks. It allows the people to understand their data and transfer this to the bank, which makes opening an account much easier. The company has operations in Chile and Mexico, In Chile, Destácame has 600,000 users, and 200,000 in Mexico.

Destácame profiles people to understand their financial health. Camus said that the company's roadmap for the future is a financial ladder, helping people go step by step from the position of a negative credit history to eventually becoming banked. There are two tools the company uses, one of which is utility payment behaviour. This allows the company to build a proprietary credit score for a person. Secondly, they offer graduating loans - perhaps in the region of US$100-200. This gives people the opportunity to build or rebuild their credit history.

Jean-Louis highlighted the benefits fintechs bring to society, including accelerating financial inclusion, connecting millions of people in remote areas to the financial system through their mobile phones, and enabling international money transfers . She noted that registered mobile money accounts grew 9.13% between 2016 and 2017. But she also acknowledged that challenges still exist, primarily that technology and infrastructure in the region needs to catch up with the demands of customers in the region.

The cyber challenge

Cyber security is top of mind for many financial institutions, and as such it was an important area of discussion in Miami. A polling question of the audience found that fraud is the main compliance concern of 31% of delegates, closely followed by correspondent relationships (27%), and OFAC and sanctions (23%).

Cyber security is key in so many areas of banking. Using mobile as a channel to reach the unbanked has certain issues, the World Economic Forum's Argueta de Barillas noted, as some people use old mobile phones that do not have secure connections to the financial system. She commented that these weak links in the system need to be addressed in order to protect the ecosystem.

Security is also key to gain customer trust and adoption of APIs. This point was made by Citi's Schuurman, who cited India's closed-loop system where tokenised data means that customer information does not get exposed to every part of the transaction journey. End-to-end audit control is critical, he noted, saying that you need to apply the right controls and security measures in order to build up the level of trust with customers.

Martin Barrios, Managing Director, Global Transaction Services Head at Bank of America Merrill Lynch Mexico highlighted a challenge for financial institutions, noting that banks have to invest a lot in cyber security, while still pursuing all of their business and innovation goals. In March 2018, Mexico implemented a 'Fintech Law', creating a broad regulatory framework for the industry. Barrios described this as a very inclusive piece of regulation. He also noted that there has been a lot of investment by banks to speed up the payments system in Mexico as well, but this also heightens the cyber threat as a fraudulent payment could be initiated and gone within five seconds.

Payment fraud issues were also raised by Stephen Wojciechowicz, Director, Head of Product Governance and Risk, Americas, at Deutsche Bank, particularly in the cross-border payments space. He noted that, if payments are travelling east across the globe, it is likely the market there will be closed and there should not be a problem contacting them before their next day starts to stop a payment from being made. The issue comes if the payment is moving west to a market that is still open.

Security is important, but it is not why companies are in business, noted Kevin Johnson, founder and CEO of Secure Ideas. Security is a cost, which is where the problem is. Johnson said that user-focused attacks through a fake email, website or wifi network are still considered prevalent forms of cyber-attacks, and that the only way to prevent this type of attack is through education.

Nelcy Martinez Padilla, Director of Information Security and Cybersecurity at the Colombian Stock Exchange shared an experience that supported this call for education to help tackle cyber crime. She explained how three weeks previously in Colombia there was a national crisis drill, and one of the main outcomes was how obvious the lack of knowledge about cyber threats is in senior management of companies. This lack of awareness creates a major gap that can be exploited by malevolent external forces, said Belisario Contreras, Cyber Security Program Manager (Inter-American Committee against Terrorism) at the Organization of American States.

Tackling the awareness issue can bring results. Martinez Padilla recalled how five years ago her organisation conducted a hacking drill that found 33% of the organisation had a virtually identical password. This included people that ran the company database as well as senior management. When she took this information to the president, he said that he wanted a similar report every month from then on. This had a positive result, as that number of 33% trended down, eventually to 0%. Contreras added that cyber security tools can be like a Ferrari, expensive and good looking but if you are not aware of how to drive then you are going to have problems.

Microsoft's Kelley closed LARC with three big drivers for organisations as they try to tackle cyber security. The first was to keep it simple - reduce the number of solution vendors and alleviate friction between security and productivity. Secondly, be smart - speed up detection and response with automation and machine learning. Thirdly, focus on being integrated - built-in security means less to deploy and fewer agents to manage. Don't be scared, but be prepared, Kelley advised.