[caption id="attachment_4058" align="alignleft" width="360"] FinTechs represent an opportunity for financial institutions and SMEs[/caption]

Moreover, the region’s business owners face a variety of challenges in their day-to-day operations, ranging from sending checks to suppliers to applying for credit. Traditional financial transactions take time, require some technical knowledge, and are subject to strict time frames.

Companies using software to provide financial services, known as FinTechs, address these challenges through innovative solutions.  Here are five reasons why they represent an opportunity for financial institutions and SMEs in Latin America and the Caribbean:

1. FinTechs facilitate financing for SMEs

FinTechs have led to the creation of crowdfunding platforms that currently offer a viable financing alternative for SMEs. Companies such as Kubo Financiero, Afluenta, or Funding Circle put SMEs with growth potential in direct contact with funding sources that are prepared to invest in them. These platforms leverage digital technologies to offer more flexible loans than traditional banks, with attractive return rates for crowd investors. As a result, such platforms represent both a threat and an opportunity for banks.

2. FinTechs boost growth of the banking sector

In the region, there are more cellphones than people with bank accounts, according to World Bank data, and more than 300 million people are connected to the internet, according to Digital in the Round. The widespread growth of new technologies has also made way for  e‑commerce.

According to the Latin America e-Readiness Report 2014, e-commerce will grow 13% annually in Latin America and the Caribbean between 2013 and 2018 given the increase in internet connectivity and the number of cellphones.

This will enable SMEs to grow their businesses and increase their productivity by expanding their reach into new markets. In addition, digital technology provides financial institutions with more efficient systems and more accessible services, which its SME clients can use 24 hours a day, from a personal computer or even a cellphone.

3. FinTechs  generate useful data on their clients

Connectivity generates a large amount of information, called big data, which can be digitally analyzed to reveal patterns of behavior. This has revolutionized the business world, changing the way sales are done and marketing campaigns are conducted.

Big data provides SMEs, financial institutions, and FinTechs with much more information on their clients. This allows for personalizing  campaigns based on the target audiences.

4. FinTechs innovate in credit risk analysis

FinTechs have played a fundamental role in developing new, cost-effective methods for banks to rate credit risk. For example, Entrepreneurial Financial Lab (EFL) uses psychometric parameters, similar to those used by human resources departments, to analyze  potential clients’ likelihood and ability to repay.

These alternative methods enable banks to provide credit to SMEs that have no credit history—or a limited credit history—based on other types of measurement that make it possible to assess whether an individual will meet loan payments. In addition, they make it possible to access sources of information different from those used by traditional banks.

5. FinTechs provide liquidity with greater flexibility and efficiency

Seeking liquidity is a fundamental task for SMEs, previously taking up large amounts of their time. FinTechs offer an easy solution through on-line factoring and other services that provide more efficient and flexible ways of keeping the cash flow. This mechanism makes it possible to collect payments within a short time frame and digitally.

Financial technology companies have become a driving force behind the development of the banking industry, whether they are a service provider or an intermediary between banks and their clients. This is why it’s necessary to create spaces for dialogue where these new trends can be promoted so that both public and private sector stakeholders can work together to increase financial inclusion in the region.

For more information, visit the FINPYME Forum website, the first forum on innovation in SME financing in the region, which will be held in Medellín, Colombia, on September 21-22.

About the author

Greg Da Re is Chief of the Strategy and Innovation Division at Inter-American Investment Corporation (IIC). He has worked at IIC for the past 10 years supporting its mission to expand its capacity to offer financing and other assistance to SMEs in the Latin America and Caribbean region. Within the IIC, Greg is responsible for the IIC’s strategic planning and innovation agendas, which include developing the IIC’s business strategy as well as designing and overseeing the launch of new innovative programs and services such as the InvestAmericas platform and the IIC’s online knowledge and learning content.