Abstract
Chile is a regional leader in financial inclusion, but it still lags behind its OECD peers. Developments in the fintech sector have the potential to further enhance financial inclusion in Chile by providing financial services to unbanked entities, lowering financial service costs, and creating more suitable financial services. The Fintech Law aims at fostering the fintech sector by bringing transparency and resiliency to the sector with new regulations, and by establishing an open finance system that reduces information asymmetry.
Fintech and Financial Inclusion in Chile1
Chile is a regional leader in financial inclusion, but it still lags behind its OECD peers. Developments in the fintech sector have the potential to further enhance financial inclusion in Chile by providing financial services to unbanked entities, lowering financial service costs, and creating more suitable financial services. The Fintech Law aims at fostering the fintech sector by bringing transparency and resiliency to the sector with new regulations, and by establishing an open finance system that reduces information asymmetry.
A. Challenges in Financial Inclusion
1. Chile has already achieved relatively high access to financial products and services, but coverage is not yet complete. About 85 percent of Chileans had access to accounts at financial institutions and used digital payments compared to around 50 percent in 2011 and 2014 (Figure 1). Also, disparities in access based on gender, age, and income levels are minimal. However, individuals with lower education levels, those residing in rural areas, and those not currently in the labor force are less likely to have access to these products and services.
2. The actual use of savings and loans lags behind OECD peers. A notable gap persists in comparison with OECD averages. As discussed in 2021 FSAP, the discrepancy between consumer preferences and the available financial products and services in the market, coupled with a lack of financial literacy among consumers,2 may contribute to this gap.
3. The authorities have deployed several initiatives to enhance financial inclusion. Historically, the state-owned bank Banco Estado has played a crucial role in improving financial inclusion in Chile by providing accounts to large segments of the population (Gershenson et al., 2021). In 2006, the bank introduced Cuenta RUT, which is a demand account featuring simplified opening procedures, no income prerequisites, and no maintenance fees. Today Banco Estado provides about 14.5 million Cuenta RUT accounts (equivalent to about 95 percent of the adult population). Other initiatives for more financial inclusion are, for example, the publication of the National Financial Education Strategy by the Advisory Commission for Financial Inclusion,3 and the ongoing development of a national financial inclusion strategy. Furthermore, on the financial policy front, the authorities introduced regulations, including to simplify the transfer between service providers and regulate payment card interchange fees.4
Financial Inclusion
Citation: IMF Staff Country Reports 2024, 042; 10.5089/9798400266591.002.A003
Sources: World Bank and IMF staff calculations.Note: “OECD” represents the averages in the groups. The responses are individuals aged over 15. The numbers for Mexico in 2021 are those in 2022. “Used a Digital Payment”, “Borrowed From a Financial Institution”, and “Saved At a Financial Institution” are usages of the products and services in the last year.Financial Inclusion
Citation: IMF Staff Country Reports 2024, 042; 10.5089/9798400266591.002.A003
Sources: World Bank and IMF staff calculations.Note: “OECD” represents the averages in the groups. The responses are individuals aged over 15. The numbers for Mexico in 2021 are those in 2022. “Used a Digital Payment”, “Borrowed From a Financial Institution”, and “Saved At a Financial Institution” are usages of the products and services in the last year.Financial Inclusion
Citation: IMF Staff Country Reports 2024, 042; 10.5089/9798400266591.002.A003
Sources: World Bank and IMF staff calculations.Note: “OECD” represents the averages in the groups. The responses are individuals aged over 15. The numbers for Mexico in 2021 are those in 2022. “Used a Digital Payment”, “Borrowed From a Financial Institution”, and “Saved At a Financial Institution” are usages of the products and services in the last year.B. Role of Fintech in Financial Inclusion
4. The authorities have deployed several initiatives to enhance Fintech could improve financial inclusion in various ways. In general, the development of the fintech sector is regarded to enhance consumers’ financial access by providing tailored financial product and services (Feyen et al., 2021), decreasing asymmetric information using a larger amount of data (Philippon, 2019 and Yang and Zhang, 2022), and lowering cost of financial services by strengthening competition (Bakker et al., 2023).
5. The Chilean fintech sector is rapidly growing. According to Fintech Radar Chile, as of 2023, there are 300 Chilean fintech companies, marking a significant increase from 179 in 2021 (Figure 2). Regarding segment distribution, payment, and remittances fintech is the largest, followed by enterprise financial management. There also exist 78 foreign (e.g., Colombian, Mexican, and Argentinian) fintech firms operating in Chile. Around one third of fintech firms in Chile target consumers as customers, while the rest targets businesses. In terms of size, the distribution is grouped into two main bands: (i) the range from 1 to 100 thousand USD, and (ii) the range from 1 to 4 million USD. The technologies utilized by these firms are mainly open platforms and APIs, followed by cloud computing and artificial intelligence and machine learning. About 70 percent of Chilean fintech firms have raised capital from third parties, including angel investors, family, and friends.
6. Fintech firms are reaching out to unbanked people, and they could contribute to financial inclusion by supplying lower-cost and more tailored financial products and services. In Chile, because Banco Estado provide bank accounts and digital banking to majority of the people, products and services targeting unbanked individuals and SMEs are rare (8 and 4 percent, respectively). Nonetheless, according to Montoya and Celedon (2021), more than half of Fintech companies reported having unbanked or underbanked5 individuals or companies among their clients and believe that they contribute to financial inclusion by providing lower-cost financial products and services that better suit their customers’ needs. Moreover, according to the report by Cambridge Center for Alternative Finance, Chilean alternative finance market, primarily composed of invoice trading6 and facilitated by fintech firms through online platforms, has been growing.7
Fintech Industry
Citation: IMF Staff Country Reports 2024, 042; 10.5089/9798400266591.002.A003
Sources: Cambridge Center for Alternative Finance, Finnovista, and IMF staff calculations.Note: As of 2023.Fintech Industry
Citation: IMF Staff Country Reports 2024, 042; 10.5089/9798400266591.002.A003
Sources: Cambridge Center for Alternative Finance, Finnovista, and IMF staff calculations.Note: As of 2023.Fintech Industry
Citation: IMF Staff Country Reports 2024, 042; 10.5089/9798400266591.002.A003
Sources: Cambridge Center for Alternative Finance, Finnovista, and IMF staff calculations.Note: As of 2023.C. Fintech Law
7. The Fintech Law aims at fostering the fintech sector and could further enhance financial inclusion. The law, which became effective in February 2023, also aims to promote competition and financial innovation, improve customer protection, data protection, and cybersecurity, and prevent money laundering and financing of terrorism. It consists of three key elements: (i) regulating fintech activities, (ii) establishing an open finance system, and (iii) regulating crypto assets.
8. Firms engaging in fintech activities are regulated by the CMF. Specifically, under the new Fintech Law, the CMF issues regulations, including licensing, required risk management, disclosure requirements, and data protection measures of the following five types of fintech activities: (i) platforms for collective financing of loans or investment (crowdfunding), (ii) alternative trading systems, (iii) custody service of financial instruments, (iv) credit and investment advisory services, and (v) trading of financial instruments, and transaction routing.8 These regulations aim to foster the fintech sector by enhancing transparency and resiliency within the sector. They also have the potential to attract more investment into fintech firms, which heavily rely on funding from third parties. The CMF will also issue regulations to establish information requirements for the supervision of fintech activities.
9. The operation and implementation of the open finance system will be mainly regulated by the CMF.9 The law enables customers to share their financial information (with banks, payment card issuers, etc.) with new service providers, including fintech firms (information-based service providers and payment initiators), while retaining greater control over their financial data. The CMF will issue regulations covering areas such as risk management, cybersecurity, technical standards, cost distributions, payment initiations, and consents. Additionally, the CMF will actively participate in determining technical specifications and manuals. Payment initiators that temporarily hold clients’ money in their operations will also be subject to regulation by the BCCh. The open finance system has the potential to address information asymmetry and streamline the development of new financial products and services.
10. Financial services related to crypto assets will be regulated by the CMF while stablecoins will be subject to the BCCh regulations.10 The law stipulates that crypto assets, exchanges, and related intermediaries will be subject to regulation by the CMF. In contrast, stablecoins (crypto assets whose value is pegged to specific currencies, such as the U.S. dollar) are treated as a payment method and fall under the BCCh regulation, as long as they are issued in Chile by entities supervised by the CMF.
11. The authorities have started the implementation of Fintech Law, which came into force in February 2023.11 Regarding regulation of new financial activities, based on feedbacks from interested parties during the consultation phase, in January 2024, the CMF issued the regulations for fintech companies and related services, which imposes a variety of requirements on fintech firms such as registration, authorization, information disclosures, risk management, and prudential measures. The regulations will be effective in February 2024. In terms of the open finance system, in October 2023, the CMF started consultation roundtables, aimed at establishing the operational and legal design of the system and technical standards as well as regulatory guidelines including risk management. In July 2023, pursuant to its Payments regulatory Agenda, the BCCh published its proposal to update prudential regulations on payment cards, to incorporate new business models that participate in the system. Going forward, relevant regulations to fully implement the law must be issued by the CMF within 18 months or by July 2024, and the CMF estimates that approximately 70 regulations will be issued through this process. After that, participants of the open finance system are expected to implement the system by the first half of 2027.12 In turn, in 2024, the BCCh plans to issue regulation on payment initiation services, in line with rules to be defined by the CMF for the open finance system.
12. A thorough communication is crucial for smoothly implementing the law. Throughout the implementation process, the authorities are striving to ensure it is public, transparent, and participative, utilizing various avenues such as consultation roundtables. This is crucial due to the potential for conflicts of interest among entities in the financial sector arising from the implementation of this law. For example, while the financial stability risk posed by various entities, such as banks and fintech firms, may so far differ, regulations should ensure a level of symmetry to foster fair competition in the market and bolster the resilience of the financial system amid future developments in the fintech sector. Furthermore, establishing and maintaining an open financial system could entail additional costs, making fair cost-sharing among participants essential.
References
Bakker, B., B. Garcia-Nunes, W. Lian, Y. Liu, C. Perez Marulanda, A. Siddiq, M. A. Sumlinski, Y. Yang, and D. Vasilyev, 2023. “The Rise and Impact of Fintech in Latin America.” International Monetary Fund, Fintech Notes No 2023/003.
Feyen, E., J. Frost, L. Gambacorta, H. Natarajan, and M. Saal, 2021. “Fintech and the Digital Transformation of Financial Services: Implications for Market Structure and Public Policy.” BIS Papers, No 117.
Gershenson, D., F. Lambert, L. Herrera, G. Ramos, M. Rousset, and J. Torres, 2021. “Fintech and Financial Inclusion in Latin America and the Caribbean” IMF Working Paper No. 2021/221.
Montoya, A. M., and R. Celedon, 2021. “Guidelines for the Development of an Open Finance Framework in Chile, with a Focus on Competition and Financial Inclusion.” Chilean Ministry of Finance, 2021 August.
Philippon, T., 2019. “On Fintech and Financial Inclusion.” National Bureau of Economic Research Working Paper Series, No. 26330.
Yang, T., and X. Zhang, 2022. “FinTech Adoption and Financial Inclusion: Evidence from Household Consumption in China.” Journal of Banking and Finance, Volume 145,106668.
Prepared by Tatsushi Okuda. The author would like to thank the BCCh and CMF staff for helpful information.
Financial literacy scores in Chilean students tend to be lower than OECD averages (OECD, 2018; OECD 2015).
The National Financial Inclusion Council, established in 2014, coordinates policymaking and advises the President on the National Strategy for Financial Inclusion and Consumer Protection.
Among others, in 2020, the Financial Portability Law was implemented, simplifying the process for individuals and businesses to transfer between service providers for financial services, including bank accounts, credit cards, mortgages, and loans. Additionally, in 2021, the Market Agents Law was enacted, establishing new transparency requirements, and reinforcing the responsibilities of market agents, with the aim of promoting competition and enhancing financial consumer protection. In parallel, the Interchange Fee Law was implemented to regulate payment card interchange fees.
“Underbanked” refers to individuals who have access to some basic financial services or a bank account but lack access to a complete suite of financial offerings.
Invoice trading allows companies to borrow money from investors using unpaid or overdue invoices as collateral. Facilitated by Invoice Trading platforms, companies can sell these invoices to online investors for financing.
This segment is still marginal at less than US$1 billion in 2020 compared to bank loans of around US$ 250 billion in the same year.
They order buying or selling financial instruments for third parties, or channeling said orders to alternative transaction systems or stock or product brokers.
For details, see Montoya and Celedon (2021).
Regarding the presence of crypto assets in Chile, Chainalysis reports that the usage and adoption level of crypto assets are estimated to be limited and lower than those of regional peers.
Regulation on crypto assets, exchanges and related intermediaries are included in those for fintech activities. In terms of the stablecoins, they are subject to the BCCh regulation only if the respective issuers are established in Chile, and thus developing a new regulatory framework for them is not a BCCh’s priority in the short-term while the bank will continue to review international experiences and hold meetings with private sector actors.
Open Finance System Forum includes members from the financial sector and is consultation body to the CMF. It will provide proposals on technical specifications and manuals.
