Banking with a social cause

Latin American banks and fintechs are racing to lower costs and access for the unbanked millions.

Just over half of all Latin American adults now have bank accounts. But credit and debit card ownership and usage lag that in the US and Europe. This has a subsequent effect on e-commerce purchases: 41% of internet shoppers paid cash on delivery last year.

However, an increasingly confident fintech sector that puts simplicity, low cost and social inclusion at the top of the agenda means that digitisation is a tool for improving access and equality in Latin America. Banks have responded by accelerating their digitalisation strategies.

Much of this regional change is being driven by changing customer behaviour and demands—often at a phenomenal pace.

But with over 200m potential new customers also at stake, Latin American banks see a bigger impact coming from new entrants than their peers see in the rest of the world (48% v 36% globally).

However, for the established banks, new payment players are the biggest threat, according to 51% of respondents. This is followed by neo-banks (23%), which offer bank-like transaction services without a full service current account.

Mobile money operators have also taken root in Latin America, with the number of registered accounts growing by 35% in the year to December 2016. Yet, just 10m mobile money accounts were active at the end of that year, leaving many consumers still without the means to make online, mobile or point-of-sale payments electronically. Accordingly, just 21% of Latin American bankers think that non financial firms, such as telecommunications or retailers, could become the biggest competition threat by 2020.

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This report, the fifth in The Economist Intelligence Unit’s series on the future of retail banking, marks a significant shift in the strategic concerns of banking executives worldwide. Previous reports tracked the shift in customer expectations and its likely impact on distribution and product design. Now the focus is firmly on implementing open banking and dealing with its consequences.

Technology and digital are now bigger—and more important—trends than regulation. Changing client demand, the rise of the smartphone and the introduction of new digital technologies have replaced post-financial crisis regulation as the drivers of strategic thinking at banks around the world. Integrating open banking that allows apps to initiate payments and other financial transactions is core to adapting to the digital banking age.   No single digital strategy suits every bank in every market. Respondents say their banks are adopting different strategies. While 61% want to develop niche propositions, others are, to varying degrees, opening up and giving access to new third parties. Some banks will view regulatory and technological change as opportunities to recreate themselves and build new ecosystems, while others may simply comply with emerging norms and regulations by granting access to customer data and payments via competitors’ smartphone apps. Going with the easiest options may leave banks, and their products, at risk of being assimilated, aggregated and unbundled by agile competitors, leading to a loss of brand and product visibility.   Banks must become more agile. The development of agile products requires improved organisational agility as well. According to 52% of survey respondents, product agility is now their top strategic priority. New payment players and the likes of Google, Apple, Facebook and Amazon, collectively known as GAFA, know what their clients want and are able to adapt quickly. Banks have to keep up, restructuring their business models to ensure that new products and features can be integrated quickly across physical and digital channels.   The impact of open banking and tighter security and data rules—and the conflicts between them—do not appear to be fully understood. While 71% of respondents are focusing their digital investment on cyber security, only 17% are concerned about a third-party relationship vulnerability being exploited as a result of open banking. The biggest danger to a sustainable banking model is the loss of valuable data on customers’ lifestyles and needs. Without that insight, all banks will struggle to upsell more profitable loan, investment and retirement products.   Customer and regulator concerns about data security may limit some of the big banks’ ambitions. The larger banks can take the fintechs on by building all-encompassing platforms that offer a seamless interaction with other products, services and comparison tools. Offering greater functionality means banks can learn more about customer needs and tailor new products to match.   Artificial intelligence and chatbots have a role in customer services, authentication and fraud, but banks are taking a cautious line as they do not want to lose their customers’ trust. Just over 20% of respondents think artificial intelligence (AI) will improve the user experience. However, banks need to appease customers’ uncertainty about the security of their personal information and how these data about them may be used. They will need to do this while maintaining a frictionless user experience that still takes into account individuals’ needs.

 

In some instances the impact of this shift will be shaped by local factors, such as demographic changes. In other instances this shift will reflect shared characteristics, as demonstrated by the greater popularity of overseas investing among younger high-net-worth individuals (HNWIs) brought up in an era of globalisation. Whatever the drivers, the landscape of wealth is changing—from local to global, and from one focused on returns to one founded on personal values.

Despite rising economic concerns and a tradition of investor home bias in large parts of the world, the new landscape of wealth appears less interested in borders. According to a survey commissioned by RBC Wealth Management and conducted by The Economist Intelligence Unit (EIU), younger HNWIs are substantially more enthusiastic about foreign investing. The U.S. is a particularly high-profile example of a country where a long-standing preference for investments in local markets appears set to be transformed.

Click the thumbnail below to download the global executive summary. 

Read additional articles from The EIU with detail on the shifting landscape of global wealth in Asia, Canada, the U.S. and UK on RBC's website.