Colombia is the fourth-largest economy in Latin America and 37th largest economy in the world in terms of GDP which is $ 330.97 billion. The trends are promising and the economy is expected to grow further in the 3.0% – 3.5% range till FY 21. According to Finnovista, Colombia has seen many burgeoning fintechs in sectors related to Payments and Remittances, Business & Consumer finance, and Crowdfunding.
Colombia is an emerging hub for increased Fintech investments and has been getting attention as countries like Brazil & Mexico get increasingly crowded. One of the major reasons for the moderated growth of financial inclusion in Colombia is the reluctant acceptance of digital financial processes and heavy reliance on cash. However, in recent times we have seen an explosion in fintech players like RapiCredit, Lineru, Kredicity, Nequi or Presta En Línea, and also global groups like Credissimo, etc. who are offering digital loans of around 1 million COP. Their success seems to have been limited by a considerable low customer base..
Additionally, the regional banks are focused on a small percentage of prime customers and seem occupied in competing in the traditional market instead of shifting focus on the larger opportunity by targeting the underbanked population. Some banks such as Bancolombia have started efforts to target this underserved market by launching initiatives like Nequi Préstamo Salvavidas (‘Life Vest loan’), which is a loan deposited into a mobile wallet.
In terms of the regulatory scene, there is a cap on the effective interest rate that can be charged which is around 30% for micro-loans. Given the high risk in micro-finance, this cap acts as a hindrance for microfinance companies to expand their portfolio and cover a more underserved population. There have been little measures to avoid usury and customer over-indebtedness by the regulators. There has been abysmal penetration of the debit/credit cards, which too, has an adverse effect on the overall credit scenario. Other factors such as charges for ATM withdrawals, credit card annuities, high overdraft rates, etc has affected the financial coverage negatively.
Often this pushes a significant portion of the population to borrow funds from non-institutional sources such as loan sharks for various essential consumption reasons like health and medical, educational, etc reasons. These loan sharks charge them exorbitantly high percentages of interest rates often resulting in the borrowers risking their own and families’ lives by falling prey to these mafias. The digital acceptance by businesses is further made tough by high rates on payments received along with POS terminal rental fees. The local family lenders then come in the picture where they mainly target low-income people who are in the commercial search, and who need immediate money and charge them at their point of sale.
Undoubtedly there is a dire need to have alternative credit resources which can certainly be fulfilled by Fintech. There has been rapid growth in this sector with a number of alternate credit startups entering Colombia. As per the Inter-American Development Bank (IDB) reports, multiple such initiatives have been started in Colombia. Fintechs like Yabx which have been active in other geographies are trying to find innovative solutions to provide less expensive and more cost-effective lending products than those offered by traditional banks to people who have been traditionally underserved.
However, these initiatives have faced certain roadblocks like lack of regulatory support and streamlined digital KYC procedures. An association known as Colombia Fintech is working along with the Government and regulatory authorities toward building a structure where the hurdles to a strong financial inclusion are cleared. The consumer protection agreements are been considered that will provide transparency on rates, costs, and improvement on the fees that should be charged. A new law has been proposed that aims at regulating the operation of the alternative finance industry aimed mainly at small and medium-sized companies. The Government is also trying to examine the International standards and best practices and imbibe them in the way E-commerce transactions are done in Colombia.
All-in-all the overall outlook looks attractive for the Colombian fintech market, as respective stakeholders are working on building a sustainable ecosystem for enhanced credit inclusion.