According to Investopedia’s definition, “Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century. Originally, the term applied to technology applied to the back-end of established consumer and trade financial institutions. Since the end of the first decade of the 21st century, the term has expanded to include any technological innovation in the financial sector, including innovations in financial literacy and education, retail banking, investment and even crypto-currencies like bitcoin.”
Banking has historically been one of the business sectors most resistant to disruption by technology and the ubiquity of mobile devices has begun to undercut the advantages of physical distribution that banks previously enjoyed. Consumers have generally been slow to change financial-services providers and that is true in banking and in the remittance sector. As in banking, there are definitively barriers to entry for non-bank Remittance Service Providers (RSPs), regulatory in most cases and now de-risking has laid another moat around the industry.
In a cash-heavy industry like remittances, with migrants even taking cash out of their bank accounts to walk to their neighborhood agent and process a remittance1 – that paradoxically might be sent for deposit in another bank account, the use of technology and the impact of pure fintech companies is not clear cut. But the ‘war on cash’ is definitely helping the digitalization of the industry. The war on cash is true at many levels: banks don’t want to deal with it, governments don’t want to deal or spend money on it and payment processors know that eliminating cash they could make money in every financial transaction. Law enforcement is in it too: the less cash changing hands the better they can trace criminals, from tax evaders, corrupt politicians, smugglers, etc.
Technology and innovation strongly influence the payments system. This innovation creates two potentially opposing effects on cash: 1) increased competition from emerging mobile and other digital payment alternatives, and 2) the ability to automate certain aspects of cash handling. Regulation has been helping banks and traditional licensed financial service providers in many ways and has shielded them form fintech disruptors. Allowing Bank Agents to thrive in some markets have been the way for banks to expand their services and examples like Brazil (close to 200,000 bank agents handling +10% of all bank transactions), Pakistan (close to 20,000 agents), Colombia, Peru, Guatemala, India, etc. have proven the importance of agents for banks, and in the case of remittances, have expanded their distribution networks significantly. But that couldn’t be done without the underlying technology to support agents, make the software easy to use, safe, etc.
Nowadays systems are becoming more open to allow for integrations through APIs; pieces of technology can be added on to replace, automate, speed, make safer, make less risky, make more efficient, our internal systems. Tasks once handled with physical bills, bulky computers, and human interaction are now being completed entirely on digital interfaces. And that is where Fintech is crawling into traditional international money transfer operations.