How Colombian startups are leapfrogging traditional banking to reach the unbanked
Copyright Finnovista 2016
For the uninformed, Colombia may not be the first place that comes to mind when they hear the term ‘FinTech.’ But for the past few years the conflation of different conditions has pushed the country’s growth in this space a great deal. Here are some interesting facts:
With a GDP of $700bn, the country is now the 4th largest economy in Latin America and 31st largest in the world.
Poverty levels have declined from 65% in 1990 to under 30% today. The growing middle class has created an attractive market for financial solutions.
75% penetration of banking services amongst adults, which is low compared to OECD countries and even other countries in the region.
High penetration of smart phones, with virtually every adult having access to a smart phone and a network that provides access to 100% of the population. This provides the ideal context to leapfrog non-mobile forms of banking.
Growth in electronic payments has been mainly driven by the national government, to pay for large contracts and distribute social welfare funds. Business to business electronic payments are also growing, making small and medium size enterprises and consumers the next target for electronic payments.
Heavy regulation and dominance by incumbent banks has slowed down innovation by new entrants. As a result, about 40% of FinTech solutions have focused on the unbanked.
VC investment doubled from 2016 to 2017, exceeding $1bn in annual investments. By the end of the first quarter in 2018, over $600m in new investments made it into the country.
Here are some of our favorite innovations in digital payments and financial transactions coming out of Colombia in the last few years:
Aflore provides loans through informal financial advisors to users who fall outside the formal banking system. Based in Colombia, the company now serves consumers throughout the entire region. In 2014 Aflore was nominated as one of the most promising socially responsible startups in Latin America.
Agribi is a virtual marketplace developed by Corporación Colombia Internacional. It nudges small farmers to join the formal financial system by enabling them to form collectives or clusters for the purpose of eliminating intermediaries and negotiating better prices directly with buyers. Farmers can also use the platform to access credit and buy supplies at competitive prices.
Agruppa empowers small fruit vendors in low-income neighborhoods, who sell 70% of the food consumed in the country, by putting them in direct contact with producers, allowing them to negotiate wholesale prices. This idea started as a submission by a group of students at the London School of Economics for the Hult Prize, the world's biggest engine for the launch of for-good for-profit platforms emerging from universities, which they won in 2013.
Bancuadra, a finalist of the 2016 Bloomberg Philanthropies Majors Challenge, is a peer-to-peer lending platform. The city of Medellin launched this solution to overcome the challenge faced by over 400,000 unbanked people in Medellin, who often fall into a cycle perpetuated by loan sharks who charge up to 700% in annual interests. It is a network of neighbors who pool their money to provide credit and loans to members without the complexity or requirements of a regular bank. Users can make withdrawals at authorized locations in their neighborhoods and track their transactions through a mobile platform that sends updates via text message. After a second pilot test, repayment rates have been at over 98%, much higher than those of traditional banks.
Daviplata is a person-to-person payment app developed by Davivienda, one of the largest banks in Colombia. What makes this solution stand out is that users don’t need to have an account with this or any other bank to use it, making it an appealing solution for users who traditionally transact in cash. Thanks to Daviplata, the remote town of Concepción became the first in the world to go fully cashless. It is also being used by the national government to make disbursements to beneficiaries of a social program called “Familias en Acción.”
Rappi is an on-demand delivery service that allows users to pay in cash or with a card for goods and services. Although initially intended for food and beverage deliveries, offerings have expanded; and users have even hired the services of delivery staff for pet walking. Their popular cash withdrawal feature allows users to get cash delivered in person by a Rappi agent, making them a direct competitor of ATMs. With financing of $300 million, a valuation of over $1bn, and backing from the likes of Andreessen Horowitz and Sequoia, Rappi has become one of the fastest growing companies in Latin America. Check out this great post by Ashley Lukasik that talks about Rappi in greater detail.
Some of the themes I see emerging from these examples are:
Government and large businesses have pioneered electronic payments in the country. The current move, led by many startups, is towards empowering the underbanked and unbanked. There is still significant opportunity to serve small and medium size enterprises.
The informal economy remains sizable. Many solutions provide the option to turn cash into electronic payments without collecting personal information or requiring a bank account.
Public private partnerships have been essential in providing access to FinTech solutions for the unbanked, leapfrogging traditional solutions like credit cards and bank loans.
Disintermediation and access to markets have given negotiation power to otherwise disadvantaged sellers, such as small farmers, and disadvantaged buyers, such as fruit vendors.
trans:form:ed 2019 participants will have the opportunity to interact directly with the innovators behind some of the solutions emerging from Colombia in the areas of social impact, FinTech and sustainable agriculture amongst others.