Fintech and insurtech: ally or foe of companies established in their sectors?

Serving segments not covered or underserved, filling spaces that the financial industry is not occupying, and using technology to respond to challenges.  Fintech and insurtech, are increasingly bursting out in front of the entities of the Finance system.

Fintech is characterized by using technology to reduce cost in financial and banking transactions. On the other hand, insurtech generates technological innovations, designed to generate savings and efficiencies, in a conventional insurance industry, through disruptive models and digitized processes, which usually focus on an aspect of the value chain process.

In the Latin American context, the current concern is how much these high growth technology-based companies and disruptive business models will be developed as competition, or in collaboration, with consolidated companies in their industries, in order to aim at developing new solutions, markets,  and opportunities, by using high doses of innovation, at local, regional, and global levels.


Here to stay

To begin to answer this question, the World Economic Forum recently pointed out that the success of the new ecosystem fintech is leveraged in aspects such as accessibility to information of potential customers, democratization, in order to reach segments that traditional banks do not address, affordable prices, accompanied by flexible payment methods, and the speed with which they can develop their operating models.

The McKinsey 2016 Banking Report, 'A Brave New World for Global Banking', assured that the operational cost of fintech is twice as less, than that of a traditional bank, and that its acquisition costs per customer is 22 times lower.

In this respect, consolidated companies, in the banking and financial sector, have invested in programs to promote start-ups, working with them on open innovation models and, thus, incorporating exponential capabilities and technologies, to enhance their portfolios of products and services.

"Whether individuals, or small and medium-sized companies, that play a critical role in productive development (...) is a good sign in a region characterized by high levels of exclusion from the formal financial system, including all income levels, by reducing the financing gap," said Juan Antonio Ketterer, Head of the Connectivity, Markets, and Finance Division of Banco Interamericano de Desarrollo (BID).

Also, the Risk Rating Agency, Moody's, has also highlighted how banks and financial groups have sought to partner to promote and support these innovative companies, before seeing a threat in fintech.

However, the Agency cautions that a more comprehensive legal framework is needed to establish rules, so that banks can invest in advanced technology companies and provide support to information security online.

Not without justification, the Pacific Alliance published a report on fintech, at the beginning of this year, where it gives signal to move towards a regulation, that gives way to technology, while taking into account its risks and financial consumer protection schemes.


Challenges of insurtech

In the particular case of the new forms of insurance, posed by insurtech, are more flexible than current regulations, according to Maria del Pilar Galindo, formerly responsible for the la Alianza del Pacífico (Pacific Alliance), on behalf of the Colombian government.

For this reason, and many more, insurtech cannot deploy operations, "unless it is in accordance with the traditional insurers, including those through collaborative schemes with the same."

From this perspective, the Unidad de Regulación Financiera (URF), or the Financial Regulation Unit, of Colombia, formed an intersectoral commission, with the participation of trade associations such as Asobancaria, Colombia Fintech, Fasecolda and Cámara de Comercio Electrónico (the Electronic Chamber of Commerce), who considers insurtech as models for people to be able to collaborate with each other, in order to facilitate their own insurance or that of their assets.


A ways to go

On the other hand, digital financial technology services companies, in Latin America, yearn for the direct investment of the traditional financial sector, according to Finnovista, an organization that accelerates the development of this type of company.

In the rest of the world, up to 30% of the financing, received by fintech and the like, comes from financial services entities, according to CB Insights, while in the region, this organization detects few of these leveraged companies, from the sector.

A recent joint investigation, by Banco Interamericano de Desarrollo (BID) and Finnovista, identified 703 fintech young companies, located in 15 countries, in Latin America.

Brazil provides the largest number of enterprises to this census, with 230, followed by Mexico, with 180.  Colombia ranks third, with 84, followed by Argentina, with 72, and Chile with 65.  In total, these five countries account for almost 90% of that activity, in the region.

In this context, Moody's points out that the great challenge is access to the financing of these new financial services companies, taking into account that in the region, "financial backers, such as venture capital and private equity funds, are less abundant, than in more developed markets."