In early October, I moderated a panel at the 19th annual CLAB, a conference on technology and banking organized by the Florida International Bankers Association and the Federación Latinoamericana de Bancos. The title of the talk was “Digital Transformation: Channels, Products and Process,” an absurdly broad topic. I decided to focus the panel on one key question, the answer to which may has profound implications. It was:
“What is the essence of a bank?”
The premise here, of course, is that banks are being squeezed by unlikely competitors, including an army of fintechs, digital platforms like Rappi and MercadoPago, and even Uber, with its soon-to-launch UberPay. What makes a bank a bank? Wherein lies banks’ true competitive advantage that cannot be touched by non-bank competitors, if one exists?
Responses from the panelists varied. One person said, “a warehouse of trust.” Another said, “the best place to store my money.” More utilitarian panelists suggested “an institution that receives deposits and pays interest,” while the fourth, rather passionate, panelist proclaimed, “a highly profitable instrument of exclusion.” During the conversation, I did not get the chance to ask the following decisive question:
Isn’t it true that a bank is only a bank because the regulators call it such?
In truth, it is the governments of Latin America that decide what a bank is. Regulators determine what requirements companies must meet to be granted a banking license. In return for complying with strict regulations, banks—and the deposits they keep— receive special protections. Herein lies both the burden and the privilege of banks.
Security is of utmost importance for most Latin Americans, especially when it comes to their finances. Most Latin American banks are long-standing institutions with deep roots in each country’s collective memories. Their brands are mighty and prestigious. And despite economic and banking crises throughout the region and the general mistrust of public institutions (central banks), the banking system is considered to be the most trusted place to keep one’s money, save under the mattress. A “warehouse of trust” may have been the panel’s best answer.
But what affords institutions such trust? Is it not the very regulators who require banks to comply with certain standards? The mere act of meeting these standards is what make banks trustworthy. Regulations exist to protect consumers and their money, aka to generate trustworthiness. Most certainly, if banks could legally provide financial services without costly compliance requirements (without being trustworthy), they would. This proves that banking regulation is the true essence of a bank, and that this becomes threatened only when regulation changes.
And this is exactly what’s happening now. Regulators across Latin America are beginning to grant permissions to technology companies to capture deposits, pay interest, and use those deposits to lend money, if they meet certain standards. This is the single most influential driver affecting banks’ ability to compete in Latin America. More inclusive banking regulation acts in two ways: it communicates to consumers that regulated companies are safe and trustworthy, and it weeds out those companies that are not, improving non-banks’ reputations for handling citizens’ money.
This is the largest threat to banks, for without permission to do so by regulators, tech giants and other non-traditional companies cannot play in the space. Industry pundits tend to celebrate the development of fintech laws around the region, such as Mexico’s 2018 fintech law, and they are right to do so. But banks are also right to resist it.
As is the trend globally, financial technology in Latin America is ahead of regulation. Non-banks are accelerating their presence in financial services and some non-bank digital platforms are reaching true scale. Just as we witnessed with the arrival of Uber in the region, when a service reaches a certain level of entrenchment, even if it is operating in a legal gray area, regulators have all but lost the battle to keep things under their thumb. As I’ve said in a number of interviews, despite limiting regulation, “technology will find a way to prevail and regulation will have to catch up.”
The truth is, banks are experiencing an identity crisis because the very authorities that deem them banks are having to rework their definitions. As this occurs, and technology companies obtain banking permissions, “banks” may all of sudden be a whole new set of players.
With the rapid technological changes and the emergence of new players in the payments ecosystem of Latin America, it’s more important than ever for institutions to understand market trends, customer preferences and the disruptive impacts of technology. We provide those kinds of insights to clients with customized market intelligence on LatAm payments. So if your team needs a deeper understanding of these issues, hard data on consumer trends, competitive intelligence about rivals or other types of analysis, please contact us.