TURNING DIGITAL

Colombia 2018 | FINANCE | FOCUS: DIGITIZING BANKING

Financial inclusion and penetration are still big challenges to overcome for the Colombian banking sector.

In Latin America, new technologies focused on allowing cash transactions to be replaced by card or mobile payments are taking over, though some countries such as Colombia still perform low in terms of digitization.

In Colombia, the ICT sector is still underdeveloped, accounting for 1.2% of GDP; less than 2% of the labor force works in this sector. However, the country is slowly transitioning toward a more digitized economy, especially the financial sector. Financial services and tools are at the forefront of a financial revolution that still has to make important steps to reach the levels of its neighbors. The e-wallet and services such as Apple Pay have already made their entrance in the Colombian market, yet there are existing limits on the ability of consumers to use international payment mechanisms. Regarding credit cards and bank accounts, these are indeed the minimum requirements to have full access to online cash transactions.
However, these financial tools are still quite limited in some developing countries, as stated by the World Bank, which outlines how nearly 2.5 billion people still do not have access to banks or credit cards. Specifically, Colombia presents some challenges when it comes to covering its informal economy. Labor informality in Colombia is above the levels of its neighbors Argentina, Chile, and Brazil, where financial penetration is higher.
Colombia's business environment is formed by nearly 95% of SMEs, and it is estimated that only 10% of micro-establishments have access to financial products. Moreover, talking about financial inclusion, as a result of informality and an economy that presents high levels of inequality, only 38% of Colombians possess a bank account, 30% have access to a debit card, and 14% have access to a credit card. In contrast, the financial penetration rate in Brazil is 68%. Limited access to financial services explains the reason why only 6.8% of the adult population in Colombia uses digital payments.
Finally, the lack of digitization and financial inclusion in Colombia seems to have a cultural component. The use of financial tools such as debit and credit cards have been often correlated to high risks of fraud and reimbursement delays. Moreover, the different fees and charges applied to money withdrawals also represent barriers to the use of these financial tools. According to a 2015 survey by the Banco de la Republica, Colombia's Central Bank, 95% of people think that cash transactions are easier and safer than online payments.
Colombia's lack of digitization keeps representing a great obstacle for the country's growth. According to research conducted by Spanish bank BBVA, technological development represents an unparalleled opportunity to boost financial inclusion for Latin American countries. Therefore, the way forward includes the adoption of three pillars: digital development, an efficient regulatory framework, and financial education.
In this regard, Colombia has adopted laws aimed at reducing regulatory burdens on the financial sector. For example, the Financial Inclusion Law 1735 of 2014 regulates the creation of nonbank deposit entities and intends to give individuals access to a saving account and facilitate money transfer. Moreover, innovation is not unknown in Colombia, as companies are seeking to respond to consumer needs and develop demand for digital financial services. However, financial innovation remains low, reflecting challenges such as the above-mentioned informal economy and limited financial penetration.
The Colombian banking sector is slowly forced to undergo one of the most extensive transformations. Digital banking is revolutionizing not only the economy but also people's lives, ensuring a better and safer framework. Banks would be wise to embrace this digital revolution in order to make sure it will work for to the betterment of society, thus addressing challenges related to informality and financial inclusion.