We brought together local experts to discuss the region’s biggest financial inclusion challenges

Starting this month, our team at Village Capital Latin America is running our first-ever regional program: for entrepreneurs working to increase financial inclusion in Mexico, Colombia, Argentina, and Chile.

Before launching the program, we needed to make sure we understood what financial inclusion challenges really mean on a local level in each country. So, as we do before every program, we convened experts to determine the programs’ “problem statement” — the specific set of problems that we believe Fintech entrepreneurs are best-positioned to solve.

For a more in-depth version of this process, read our full white paper.

I’ve written before about the financial inclusion challenges in Mexico. Now, as we opened our first cross-continent program, we needed to broaden our scope.

The World Bank’s Findex shows that the financial statistics across Mexico, Colombia, Argentina and Chile are consistent, and they’re worrying. In each country:

  • Less than 63% of the population has a bank account,
  • Less than 15% has access to formal savings, and
  • Less than 16% has access to formal borrowing.

The current financial system has gaping holes in it. But there is hope. Entrepreneurs across Latin America are emerging quickly to address problems in financial inclusion.

On May 23, we gathered 26 experts in Mexico City to join us for the Village Capital FinTech: Latin America Roundtable, including entrepreneurs, investors, financial institutions, foundations, policy-makers, and other thought leaders.

We asked the experts: what financial inclusion challenges do Mexico, Colombia, Argentina and Chile have in common? Where can fintech entrepreneurs help?

We paired this convening with one-on-one conversations and surveys by thought leaders in each country. Over the course of an afternoon, we identified the three biggest financial inclusion challenges that entrepreneurs can address.

Financial inclusion experts and practitioners gathered in Mexico City

Challenge One: Lack of Specific Offerings

Currently, there are a lot of fintech products in the region that are focused on the needs of large businesses and micro-businesses, but few that are designed for the specific needs of medium-sized businesses and segments of society like women and minority groups. Possible solutions include:

  1. Incentivize people to share (or even sell!) their personal information to better meet know-your customer (“KYC”) compliance measure and be able to produce better credit scores. Manage and share that data through encrypted databases or networks of data. One way to manage this information could be through “hashes” on the blockchain.
  2. Study the market and create products for large, widely unattended segments. For example, in Mexico there are 80,000 reported small businesses with 11 to 50 employees, and most financial products are only designed for micro-business or large established ones.
  3. Identify the needs of particular segments of their target market (e.g. small businesses or women), develop products that understand those needs, and partner with existing banks and other financial solutions to help them scale the solutions.

Challenge Two: Lack of consumer education

Since financial products are often designed for specific segments of society, most products aren’t designed to properly educate those that don’t have a basic understanding of interest rates, long-term savings options, and other financial concepts. Possible solutions include:

  1. Incorporate strong user experience and educational components into the development and distribution of financial products to increase financial literacy.
  2. Build websites and other services that break down fees and interest rates to help people understand their options.
  3. Take advantage of existing distribution channels and points of sales to collect data and learn more about those who are making transactions, as well as educate at the point of purchase of financial products.

Challenge Three: The cash economy is still king

Many prefer to keep it simple and just stick to what they’re familiar with: informal cash transactions, rather than cards or technology. Possible solutions include:

  1. Provide digital payment options for no additional fees or at subsidized rates until reaching a mass of users. For example, Facebook, Whatsapp, and many other technology companies that don’t charge, but aim to acquire millions of users to monetize on data or through other means. Maybe we could copy this model for the finance industry.
  2. Pay out social services, entertaining prizes, or other valued services through a mobile wallet to encourage technology adoption. For example,Paytm draws people in India to adopt a mobile wallet to make top-up their cell phone minutes; a model that undostres is demonstrating can work in Latin America, too.
  3. Have existing channels enable mobile money transactions. For example, in Mexico, Farmacias Similares pharmacies, OXXO convenience stores, and many other points of service already allow cash deposits for select services, like paying bills. Why not accept cash deposits for mobile wallets?

After identifying and analyzing major problems during the Roundtable, we developed the following problem statement that will guide our efforts to find, train, and invest in ventures with solutions to improve the lives of Latin Americans underserved by the current financial system:

Across Latin America, the financial system lacks specific offerings that meet the needs of particular groups, such as small businesses and women. Because most traditional credit, savings, and other products available are focused on the needs of large businesses and high-income individuals, people and companies outside of these well-served groups in both rural and urban communities lack access to quality financial products and the information that could empower them as consumers. The lack of specific offerings and financial education restricts underserved consumers to the informal “cash economy”, which further limits their ability to graduate to formal credit, savings, or other more secure financial products.

Latin America needs a multi-pronged solution to address these financial health challenges and the problems associated with them. Village Capital believes that local entrepreneurs who understand these problems first-hand are best positioned to increase access to affordable financial products and services, in particular those that:

Include strong financial education components and transparency around product features to address the needs of specific populations, helping them make better informed decisions when selecting financial products, including insurance, pension plans, and other forms of savings;

Enable financial institutions to adopt technology and better gather data to identify users and meet know-your-customer (KyC) compliance, through databases, networks of data, and application of blockchain and related technologies;

Formalize financial operations through digital banking and other strategies;

Innovate in credit scoring to increase access to more affordable loans for people who previously did not have access to credit; and

Improve or build upon existing distribution channel infrastructure for financial institutions to serve rural and urban un- and under-banked populations.

The final step: recruit and train entrepreneurs that are solving these challenges.

Along with PayPal and supporters BlackRock and Citibanamex, our team is running the Village Capital Fintech: Latin America 2017 program to deliver Village Capital’s award-winning process, centered around personalized content and peer-learning. At the end of the program, participating entrepreneurs will rank each other to choose the top two companies solving major problems in financial inclusion in Mexico. These two peer-selected companies will be offered $75,000 USD investment each, from VilCap Investments.

Do you have a Fintech solution to these financial inclusion challenges? Learn more about our Latin America programs here.

Thank you to the Financial Inclusion Roundtable participants:

Adriana Peon, PayPal; Alberto Bucardo, FOMIN/MIF; Alejandro Guízar, Billpocket; Alex Martin, ePesos; Alma Gutierrez, BlackRock; Brenda Zayola Olvera, PRONAFIM; Gabriela Zapata, Independent Consultant in Financial Inclusion; Gicela Castillo, Federación de Cajas Solidarias; Hernán Fernández, Angel Ventures Mexico; Jackie Hyland, Silicon Valley Bank; Jonathan Lewy, Investo; Jorge Del Valle, BlackRock; Jorge, Gutierrez, Gentera; Jorge Rubio Nava, Citi Inclusive Finance; Josu San Martin, FinTech México; Juan Luis Cardenas, Secretaría de Hacienda y Crédito Público; Laura Hernández, PayPal; Manuel Silva Martinez, Santander InnoVentures; Nalleli Garcia, Fundación MetLife; Pedro Solana, Citibanamex; Rebeca Azaola, Afluenta; Rubén Galindo Ávila, SWIFT; Sofía Del Mazo, Bancomext; Tania Rodríguez, CO_ Capital; Tracy Garcia, Fundación MetLife; and Ana Vanessa González Deister, Citibanamex.

Thank you to the Village Capital team for your support: Daniel Cossío, Mariana Márquez, and Ben Wrobel.