Bogotá, Colombia, a city of ten million people boasting a strong middle class, is the commercial center of Colombia, the fourth largest economy in South America. The business dynamic is dominated by SMEs (small and medium-sized enterprises), which here are defined as companies with revenues of 10 million USD and below. I visited Bogotá in August 2019 with LendIt’s president, Joy Schwartz, as part of our Fintech Roundtable series. As we walked the streets of Bogota, enjoyed meetings with many Colombian entrepreneurs, and experienced the culture first-hand, the genuine warmth of the people of Bogota stood out as one of its strongest attributes.
The oligarch’s dilemma
Colombia is subject to one of the most concentrated banking oligarchies in the free world, with three banks (really just two) commanding more than 90% of all banking activity. What’s more, these banks are controlled by family interests. Imagine, North Americans, a situation where our two choices were the Bank of Rockefeller and the Bank of Vanderbilt. How would that shape our economy, our society? This analogy is not unfitting of the situation in Colombia.
Now, in a world where Open Banking is taking shape, and bank APIs are beginning to peek out from behind curtains of opacity, I am beginning to allow myself to think of the major banks around the world as bank utilities. In this view, bank utilities serve as core systems through which complex transactions may occur securely. These bank utility systems achieve profitability through transaction fees, revenue sharing agreements, and product enhancements they provide to their customers through applications that are built (by fintechs) on top of their platforms. These applications function like apps in the App Store, but in this case the platform is not a phone’s operating system but a bank’s operating system.
In a future where Open Banking takes hold, the banking system is reinvented without being scrapped altogether. Another version of the future involves the wholesale toppling of the towering financial monoliths we know today, due to mass customer flight. This is the version of the future that N26 and Monzo may cherish. We can argue about which future is more likely, and which is preferred, but In either case we will end up with platform-and-app based banking, and a superior financial future. But one thing is certain: we will have a revolution in finance. Resistance is futile, so they say. But is it, really?
¿Puedo abrir una cuenta bancaria, por favor?
During our fintech roundtable dinner in Bogotá, three of our nine guests reported that, within the past month, they had been denied basic banking services because they were running fintechs. One was deemed to be a cryptocurrency trader (they weren’t) and their accounts were frozen. Two others were denied checking account services because they were viewed as competitive to the bank. The bankers were brash enough to say that, yes indeed, they were being denied services because “they didn’t want to assist a competitor.”
The Colombians will rise
In my assessment of the Colombian fintech scene, one thing sticks out as completely unresolved. I left the country quite upbeat about the prospects for innovation in financial services. However, as my travels in Latam progressed and I became more acutely aware of the vagaries of regulatory reform in these sovereign nations, I began to doubt my own initial assessment. In the video captured during my visit to Bogota, I proclaim optimism about a future where Colombian fintechs find hospitable regulations. And I stand by what I say: if the regulations are hospitable, the entrepreneurs will rise.
What has to happen for legislators to produce changes, such as open banking, crowdfunding and regulatory sandboxes, that are hospitable to fintechs? Under some circumstances I might say that the will of the people is enough. But in a country where just two banks — two families — control virtually the entire banking system, what then? Allow me to suggest that without strong leadership at the very highest levels, meaningful regulatory reform cannot be achieved. In such a case, the economy of Colombia will suffer.
Still, I have a sneaking optimism about these Colombian entrepreneurs with whom we met. I admit I have much more to learn, and I hope this post begins — or continues, rather — a fruitful debate that spawns meaningful regulatory reform. Let’s work together to embolden the legislative and regulatory leadership across Latam by showing them how positively fintech can impact an economy and a nation.