By Fermín Vivanco and Lukas Keller
Fermín Vivanco has more than 20 years of experience working on inclusive finance. At the Multilateral Investment Fund, he leads projects that are focused on urban financial solutions and technologies; social entrepreneurship; and savings, including pension savings.
When we think of innovations in financial services in 2016, we mostly think of fintech. Many new innovations in financial services come in the form of new apps for our smartphones, which make it easier to carry out financial activities such as splitting the cost of a gift or sending money to a friend.
However, these apps are almost exclusively designed for customers in the same country, which raises the question: What are the financial services innovations for the more than 230 million migrants in the world? While there are services like Transferwise or Xoom, there seem to be few innovations that aren't linked to the sending of remittances.
A recent study reveals that while 69 percent of migrants from Latin America and the Caribbean in Spain send money to their relatives back home, only 20 percent of these flows are received through deposits in bank accounts. Receiving payments only in cash is costly and limits the opportunities for recipient families to be included in the formal financial system--for example, to save money in a bank account. The use of formal financial products is also limited among Latin American migrants in Spain, according to the study: while 86 percent of Latin American migrants report having a bank account, only 32 percent use it to save.
These findings reveal opportunities to design and market new financial products and services tailored to the needs of transnational clients in Spain and Latin America. Some banks are already offering these types of innovations.
- According to a case study of Bancolombia, one of the largest banks and remittance payers in Colombia, the financial institution offers mortgage loans for the purchase of property in Colombia to Colombian migrants living in the United States and Spain, thereby providing opportunities for the migrants to own assets in their native countries.
- Another development has been to streamline the process of opening checking and savings accounts in Latin America for both remittance senders and recipients. A study about Banco Familiar in Paraguay has shown that users who receive their remittances in checking and savings accounts tend to make only partial withdrawals of this money, instead of collecting the full amount at once, as they tend to do when the remittances are received directly in cash. Therefore, this innovation encourages remittance recipients to better manage their resources, and gives the bank information about their clients' spending habits and short-term savings capacity.
We also know that innovations in products are only part of the strategy to achieve greater financial inclusion of transnational households. Another important element is the establishment of new communications and customer-service channels, which allow financial institutions to raise awareness among migrants and their families about products tailored to their situations, and also make it easier and cheaper for the migrants to access and manage these products from abroad.
An example of an innovative migrant-focused communications channel is a Web platform developed by Bancolombia through which foreign-resident clients can communicate with the bank staff, either through a chat service or by requesting that the bank call them from Colombia. Bancolombia has also been working with the consulates of the United States and Spain to reach potential migrant clients and to offer them financial education videos.
Fintech still has the potential to improve the financial lives of transnational households. Many migrants make direct payments for goods and services on behalf of their family members in their native countries, and fintech innovations already make these payments much faster and cheaper.
But the focus should be on developing and promoting new products in long-term financial services in a region like Latin America, where six in ten people aren't saving for retirement. It is truly a striking fact that nearly two out of every three migrants send money to their parents in Latin America, which means that the remittances are the parents' de facto pension plans. The challenge will be to ensure that remittances don't become their only plan.
Lukas Keller coordinates a Multilateral Investment Fund initiative that promotes the inclusion of remittance recipients in Latin America and the Caribbean in the formal financial system. He has master's degrees in politics and public administration from Rutgers and Konstanz universities.
From the Multilateral Investment Fund Trends blog