Back Matter
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund
  • | 2 https://isni.org/isni/0000000404811396, International Monetary Fund

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Annex I. Fintech: Potential Financial and Operation Risks

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Source: FSB, 2017, “Financial Stability Implications from Fintech.”
1

Paper prepared by WHD Fintech working group. We are grateful for comments by Alejandro Werner, WHD country teams, IMF reviewing departments, country authorities, and Inter-American Development Bank, and separately by Gabriela Andrade, Irving Aw, Vikram Haksar, Diego Mauricio Herrera Falla, Masaru Itatani, Manasa Patnam, Kristel Poh, Andrea Presbitero, Borja Gracia, Herve Tourpe, and Christophe Waerzeggers. Dan Pan provided outstanding research assistance. We are grateful to Patricia Delgado for excellent administrative assistance.

2

Different definitions of fintech have been used by international bodies and national authorities. This paper adopts the terminology used by the Bali Fintech Agenda: The advances in technology that have the potential to transform the provision of financial services spurring the development of new business models, applications, processes, and products.

3

271 startups have already been identified focusing on SMEs with poor or no access to financial services.

4

For instance, Hau and others (2018) discuss how fintech can mitigate local credit supply frictions in China and Jagtiani and Lemieux (2018) demonstrate that fintech lending reduced the cost of credit for some borrowers.

5

Data used in this section draws on the reports prepared by the IDB and Finnovista (2018) and Cambridge Center for Alternative finance (2018b). We are grateful to Sylvia Gabriela Andrade and Diego Mauricio Herrera Falla for sharing data and their comments.

6

CBInsights reports total investment of $1.4 bn. This includes all equity financing into fintech companies. Funding covered by this source must be put into venture capital-backed companies, which received funding from at any point from venture capital firms, corporate venture groups, or super angel investors. The total amount of investment deals was significantly higher in Brazil with a cumulative financing raised of $4.2 billion from 2012 until June 2018, followed by Argentina ($600 million) and Mexico ($570 million). Examples include Nubank in Brazil, a financial services startup that raised $605 million across ten rounds of funding (currently valued at more than $1 billion), and Decolar, startup that provides online travel agency services in Argentina, that raised $270 million of financing in 2015 (valued at 1.7 billion in 2017Q4). Source: “Latin America Tech Booms as Brazil Dominates and Regional Investors Grow. (Jul 18, 2018), CBInsights, https://www.cbinsights.com/research/latin-america-tech-funding/.”

7

For example: Goldman Sachs (together with Fortress Investment Group) invested $455 million in Nubank in August 2017, while US$ 180 million was invested in October 2018 by Tencent a Chinese multinational investment conglomerate. Scotiabank (Canada) and QED Investors (USA) undisclosed investment in Colombian online credit provider Zinobe.

8

Finnovista and IDB 2018.

9

Around 21 percent of survey respondents received funds from parties other than friends or family, 9% from investment accelerators, while financial institutions played a minor role (5.3%). The share of firms with external funding also varies widely across countries, with 88 percent in Chile, 78 percent in Brazil, and ranging between 65 and 70 percent in Venezuela, Mexico, Argentina, Peru, Colombia, Uruguay, and Ecuador. Honduras, El Salvador, and Paraguay report not having had access to external financing.

11

See IMF (2016) for more detailed discussion on DLT and cryptocurrencies.

12

Please see Cambridge Center for Alternative Finance, 2018b for a detailed discussion on alternative financing in Americas based on a comprehensive survey of the firms in Americas.

13

Key innovations in processing power, and smart algorithms, Application Programming Interfaces (APIs) that allow different software components to interact, artificial intelligence, machine learning and availability and use of large data sets.

14

Some fintech companies have access to nontraditional data from borrowers’ digital footprint, including mobile payment history, internet browsing patterns, social media behavior, and government records (Costa and others (2016), Berg (2018)).

15

The World Bank and the Inter-American Development Bank have been providing support for some of these regulatory initiatives.

16

For example, Aruba, Belize, Curacao and Sint Maarten, the ECCB, Jamaica, Peru, Trinidad and Tobago.

17

The special authorization may only be granted for a period of two years, and at the end of the second year, the fintech firm must obtain the applicable permit, authorization, registration or concession.

18

Under the new legislation, these firms must act exclusively via electronic platforms, be incorporated as corporations, and have minimum paid-in capital and net worth of BRL 1 million. These firms may also provide other services, such as credit analysis, loan collection and electronic money issue.

19

Prepared by Hui Miao (IMF).

20

In addition, key AML/CFT measures and fit-and-proper requirements are typically not permitted.

21

A central bank digital currency can be defined as a digital form of central bank money that is different from balances in traditional reserve or settlement accounts (BIS, 2018).

22

See Claessens and others (2018) and IMF (2017, 2018b) for a more specific discussion.

23

See Beaton and others (2017) for an overview of historical emigration from the region and remittances received by LAC. Despite the importance of intraregional migration, LAC countries are not large senders of remittances, particularly when compared to the remittances they receive.

24

While the market for MTOs includes many smaller operators, Western Union and MoneyGram are by far the largest players, operating in 99 and 92 percent of country corridors included in the World Bank’s Remittance Prices Worldwide (RPW) database.

25

The cost of sending remittances includes a transaction fee and a currency conversion fee, both typically paid by the sender, although some remittances-service providers may also require the recipient to pay a fee.

26

Remittance corridors with larger remittances benefit from lower costs: the weighted average total cost, which accounts for the relative size of remittances sent between countries, is lower than the global average at 5.1 percent.

27

According to the World Bank’s Global Findex Database, the percent of both senders and receivers of remittances that use mobile money for remittance transactions is low compared to most other regions. While the Global Findex Database focuses on domestic remittances (rather than cross-border), the low take-up of mobile money services for domestic P2P transfers, which tends to develop before cross-border transactions, is an indication that such services are also underutilized for cross-border transactions.

28

See BIS (2018) and IMF (2017b) for a more complete discussion of these channels.

29

Global remittance hubs connect remittance service providers to facilitate transfers. Existing hubs include HomeSend, MFS Africa, TerraPay and TransferTo.

30

DLT-based systems for cross-border remittance transfers may also have the same benefit if banks are able to bypass correspondent banks and transact directly.

31

60 percent of the Asociación de Supervisores Bancarios de las Américas reported that remittances to LAC have been affected by the withdrawal of global banks from correspondent banking.

32

See US Department of the Treasury “A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech and Innovation”.

33

See GSMA “Licensing mobile money remittances providers: Early lessons” (https://www.gsma.com/mobilefordevelopment/programme/mobile-money/licensing-mobile-money-remittance-providers-early-lessons-2/) for more detailed discussion of potential barriers to development from licensing requirements.

34

According to the World Economic Forum’s Global Information Technology Report 2015, “most countries in the region fall within the bottom half of percentage of citizens who are Internet users.” Even the large economies only fall in the middle of the pack with only 45% of Mexicans being internet users and only one in three households having internet access. Much of Central America fairs even more poorly on Internet usage and access rates.

35

The GCI is published by the International Telecommunication Union (ITU), the United Nation’s agency for information and communication technologies. In the survey, 134 countries responded to the questionnaire. A group of experts then weighted the questions and constructed the index. Countries that did not respond to the survey were given the opportunity to validate the ITU’s own estimates of the countries’ commitment to increase cybersecurity.

36

The table gives z-scores [0;1] for each sub-index of the GCI, averaged over all countries in a region.

37

For cybersecurity please see the Central Bank of Resolution 4.658/2018. On data protection, a draft law was approved in Parliament last year (“Projeto de Lei 13.709”, see http://www.planalto.gov.br/ccivil_03/_Ato2015- 2018/2018/Lei/L13709.htm) to strengthen data protection. The law will enter into force in 2020.

38

There may be further measures that have been taken by countries but are not reflected yet in the GCI.

40

As of August 30, 2018, the following LAC countries ratified the Budapest Convention: Argentina, Chile, Costa Rica, Dominican Republic, Panama, Paraguay. In North America, only Mexico has not ratified the Convention.

41

See Council of Europe (2004). Brazil, for instance, uses three different Computer Emergency Response Teams (CERT): the national CERT, a government CSIRT and a sector specific SCIRT (see ITU, 2017). The Brazil Federal Police participates in the I-24/7 global police communications system developed by Interpol to connect law enforcement officers, including cybercrimes.

42

Leapfrogging refers to the adoption of the latest form of a technology while bypassing one or more of its antecedents.

Fintech in Latin America and the Caribbean: Stocktaking
Author: Pelin Berkmen, Ms. Kimberly Beaton, Mr. Dmitry Gershenson, Mr. Javier Arze del Granado, Kotaro Ishi, Marie Kim, Emanuel Kopp, and Mrs. Marina V Rousset