Master Thesis Traditional Financial

TILBURG UNIVERSITY LLM INTERNATIONAL BUSINESS LAW (2018-2019)

MASTER THESIS

TRADITIONAL FINANCIAL INSTITUTIONS VS. FINTECH FIRMS: A CASE FROM COLOMBIA

NAME: MARIA JOSE ARIZA FRANCO ANR: 216342 SUPERVISOR: ERIK P.M. VERMEULEN PLACE AND DATE: TILBURG, THE NETHERLANDS - AUGUST 29 2019

LIST OF ABBREVIATIONS

AML-CFT Anti-money Laundering-Combating the Financing of Terrorism BCBS Basel Committee on Banking Supervision CCIT Colombian Tele-Informatic Chamber (Cámara Colombiana de Informática y Telecomunicaciones) CEO Chief Executive Officer EU European Union Fintech Financial Technology GFC Global Financial Crisis IDB Inter-American Development Bank IIMV Ibero-American Securities Institute (Instituto Iberoamericano de Mercados de Valores) FOGAFIN Fondo de Garantias de Instituciones Financieras KYC Know Your Client LAC Latin America and the Caribbean M&A Mergers & Acquisitions R&D Research and Development RegTech Regulatory Technology SARLAT System for the Prevention of Money Laundering and Financing of Terrorism SEC Securities and Exchange Commission SFC Superintendency of financial institutions (Superintendencia Financiera de Colombia) TAF Term Auction Facility URF Financial Regulation Agency (Unidad de Regulación Financiera) US United States of America

ABSTRACT

This thesis addresses the subsequent questions: ¿Are Fintech firms competing against traditional financial institutions? ¿What is the role of traditional financial institutions regarding the arrival of Fintech? After the entry of Fintech in the financial ecosystem, ¿What’s the future of this ecosystem? Is true that Fintech ecosystem is a global trend that has taken significant steps in some countries such as the United Kingdom, The Netherlands, Abu Dhabi, Malaysia, and Singapore. But, LAC is evolving really fast, and now startup incubators, accelerators, and early- stage deals are looking at that direction. In the case of Colombia, this new business landscape is offering digital results for consumers in a more effective and low-cost solution. Additionally, Colombia is considered a place to watch as the industry is taking advantage of the unbanked citizens that looks to the informal sector due to the lack of accessibility. Nowadays, traditional financial institutions are looking to expand their services through open banking as a reaction to the digitalization banking industry. However, they are also starting to fishing Fintech firms to increase their customers, adopt innovative technology, and achieve revenue growth. What began with a threat is becoming an opportunity for traditional financial institutions as well as for Fintech firms who are seeking capital, scale, and the most essential desire regulatory support. Eventually, all participants will become digitalized. Therefore, Neobanks will be a trend in the financial ecosystem.

Keywords: Fintech, financial institutions, fishing for Fintech, fintegration, financial regulation, Neobanks.

TABLE OF CONTENT

1. INTRODUCTION ...... 1 2. BACKGROUND OF FINTECH ...... 4 2.1. HISTORY OF FINTECH ...... 5 2.1.1. UNITED STATES CRISIS – 2008 ...... 6 2.1.3. COLOMBIA CRISIS – 1997 TO 2012 ...... 8 2.2. FINTECH FIRMS IN COLOMBIA ...... 9 2.3. FINTECH SEGMENTS IMPLEMENTED IN COLOMBIA ...... 13 2.4. CURRENT REGULATION FOR FINTECHS IN COLOMBIA ...... 15 2.5. DILEMMAS OF REGTECH IN THE FINANCIAL SERVICES ...... 16 2.6. POTENTIAL REGTECH IN FINANCIAL SERVICES THAT SHOULD BE IMPLEMENTED IN COLOMBIA 18 3. ARE FINTECH FIRMS COMPETING WITH TRADITIONAL FINANCIAL INSTITUTIONS AND VICE VERSA? 23 4. OUTCOME ...... 24 4.1 THE BIRTH OF UNKNOWN ORGANIZATIONS ...... 24 4.2 FINTEGRATION AS A TEMPORARY SOLUTION ...... 25 4.3 WHAT IS NEXT? ...... 33 5. CONCLUSIONS ...... 37 6. BIBLIOGRAPHY ...... 38 6.1 JOURNAL PAPERS, ARTICLES, PRESENTATIONS, WEBSITES BIBLIOGRAPHY ...... 38 6.2 FIGURES ...... 41

“The best way to predict the future is to create it.”

- Abraham Lincoln -

1. INTRODUCTION

One year ago, I was working for the first Ibero-American law firm with global reach and presence in Chile, Colombia, and Peru advising clients in banking, finance, and capital markets matters. As part of a leading banking, finance and capital markets practice in Colombia, I took advantage of the direct discussions with financial authorities which gave me a first-hand approach to the most up-to-date developments in the financial regulation.

Having up-to-date information resulted in the need for innovative thinking and vanguard solutions to clients since I was required to research and create arguments that would support the recent developments both in law and regulatory considerations. For that reason, I decided to stop my professional career in Colombia and moved to the Netherlands to learn from others. What surprised me since the first day I arrived, was the emphasized and importance of moving forward to a digital transformation thinking, by using technology to transform daily activities into something significantly exceptional. It was not only the use of technology to change service but, the ability and capacity to be able to change an ecosystem and why not an entire economy. With this in mind, I started to realize and understand how new technologies were affecting human beings and how important it is to keep ahead of technology.

In this respect, it is to mention that technology is changing all industries as everyone is seeking to improve the way things get done. For instance, governments, corporations, and institutions are willing to stay profitable, ahead of the competition, concentrate on productivity, attract clients, and maintain reputation. However, to achieve these goals in this era, it is mandatory to adopt the same common denominator: the use of technologies.

Due to technology, the practice of law is changing as well, the way lawyers are thinking, reviewing documents, doing legal research, and helping clients are permeated by innovation. But, innovation is moving faster than everything, and regulation is not the exception.

In fact, in the latest years, regulation has been cataloged as reactive rather than preventive. Every time that a scandal appears the regulator will come up with legislation to clear up the situation and prevent future crisis. This is the case of the US with the Sarbanes-Oxley Act of 2002, which was issued as an answer to the fraudulent financial report and misappropriation of assets that managers and employees from corporations were doing; or the Dodd-Frank Act of 2010, which was a response to the reaction to the GFC and also an endeavor to protect consumers.

The situation is not different in countries located in LATAM. In the case of Colombia, several precedents support a reactive regulation. The most illustrative develop is the creation of the Colombian government financial institutions guarantee fund known as FOGAFIN that was introduced in 1985, to protect depositors in case a financial institution goes into liquidation. Nowadays, this entity is part of the

Colombian financial safety-net and have several functions assigned. Another example is the issue of Decrees 4334 and 4335 of 2008 issued under a state of social emergency as a consequence of Ponzi schemes. When individuals, started to take advantage of the lack of financial inclusion to create models that were interpreted as unauthorized fundraising known in Colombia as “captación masiva y habitual de dineros públicos.”

For instance, governments in all levels have been engaged with the progress and evolution of regulation, as a response of the losses, obstacles, risks and even the financial crisis that the world has been facing. Nevertheless, at the same time, humans are always looking for gaps and loopholes in regulation to implement new activities or adapt the existing ones as far as that gives them higher revenues and they are capable of doing it in a fastest and low-cost way.

The previous situation has become more complicated when we add to the equation, the entrance of new participants that are trying to take advantage of this juncture, by promoting financial inclusion for ordinary consumers and established a considerable spectrum of channels, products, and services, all economically speaking and in a technological way. This is the case of Fintech firms that provide financial services in a jurisdiction or around the world.

Fintech firms are becoming more and more dominant as they are not thinking exclusively on how to become more profitable but also, in how to customize products and services and meet financial needs in a low-cost alternative. In particular, Fintech firms in Colombia are growing really fast as they are providing a range of solutions for different business segments. The main segments positioned are payments and remittances, lending, and enterprise financial management.

In essence, traditional financial institutions are not ready to respond to financial innovation that is happening, as several issues might attempt this revolution. For instance, financial institutions might need to redesign their structure by including among other things, innovations labs and startup incubators and accelerators departments. Along with the structure, it is necessary to adjust their organizational culture and persuade their employees to focus mainly on innovation. Additionally, it is indispensable to solve the miscommunication and collaboration issue within the different departments of the financial entities, as in most cases, there is no overview of the products that customers have and the ones that are willing to acquire. Without a doubt, all change point in the same direction: enhance customer service and customized. In this sense, ¿How financial institutions are tackling this evolution? ¿Will Fintech firms able to disrupt traditional banking?

Right now, the financial ecosystem is living an era of M&A. It is obvious that developed countries started this process a few years ago, others, like Colombia, are just entering into this era. The ideal scenario is that both players, financial institutions, and Fintech firms coexist and compete or collaborate between them. This will give the opportunity to individuals to choose the best providers of banking services that are more suitable for them, in terms of charging lower fees, having loyalty and reputation in the market, provide high-quality customer care, offered innovative products, use well-developed technology, among other criteria’s that can affect customers minds and decisions.

Inclusive, let the door open for any other participants that appear in the future and want to contribute to the financial industry.

It is absurd to pretend nothing is happening and remain as spectators when the financial ecosystem is changing dramatically. These new technologies might be able to change not only this field but also, the way individuals are doing businesses, the customer experience implemented, the relevance and inclusion on infrastructure and innovation and the most impressed, the way individuals are living in a faster and accessible way.

This thesis is divided into 6 chapters. Chapter 1 gives a brief introduction of how technology is affecting all industries, particularly the financial sector and how Fintech firms are taking advantage of this conjuncture to achieve a dominant position in the industry, while, financial institutions are not able to respond to innovation at all.

Chapter 2 is divided into six sections. The first section will introduce how Fintech firms appeared and how they become a global trend in the US, EU, and Colombia. The second section will explore the current situation of Fintech firms in Colombia. The third section will announce the Fintech segments that are implemented in Colombia according to studies of the International Development Bank, Finnovista, and the URF. The fourth section will discuss the current regulation that applies to Fintech firms in Colombia. The fifth section will address the dilemmas that are facing this ecosystem according to the reinvention of the financial services, and finally, the sixth section will mention the framework that should be implemented in the short and medium period in terms of Fintech.

In chapter 3, I will discuss how Fintech firms are competing against traditional financial institutions and vice versa and what are their main priorities and blueprint to succeed. Later on, Chapter 4 I will point out the outcome of the entrance of new participants like Fintech firms, by explaining why financial institutions tendency will end up with the mergers, acquisition or shutdowns of Fintech startups. Also, explaining why fintegration would become a better solution for all parties and what customers should expect with the reinvention of the financial ecosystem as a consequence of digitalization.

Chapter 5 I will indicate the conclusions and underline the future of the financial ecosystem. Followed by Chapter 6 that lists the bibliography I used to support my thesis.

2. BACKGROUND OF FINTECH

Fintech is defined by the Financial Stability Board as “technologically enabled financial innovation that could result in new business models, applications, processes or products with an associated material effect on financial markets and institutions and the provision of financial services.”1

There are different theories of when was the term Fintech used for the first time. The most accurate and deniable used was either on August 11, 1980, when the editor from the Sunday Times called Peter Knight published an article named “Telecom’s open secret” or in 1993 when Citicorp today’s Citigroup decided to use the term to designate a consortium known as Financial Services Technology Consortium.

The most relevant milestones of Fintech that are real indicators of the progress and development of this field are the following:

 1838: first electric telegraph system was introduced.  1866: first transatlantic cable contributed to financial globalization.  1871: Introduction of money transfer by Western Union.  1918: The Federal Reserve Wire Network connected banks and the US treasury by telegraph.  1958: Bank of America launched the first credit card known as BankAmericard.  1967: Barclays bank opened the first ATM machine.  1995: Wells Fargo offered for the first time an online checking account by using the World Wide Web.  1998: Confinity was founded nowadays, PayPal.  1999: Alibaba Group was launched in China as an e-commerce market site.  2007: M-Pesa was launched in Kenya as a mobile banking service.  2008: GFC that affect individuals in all aspects.  2009: Bitcoin was released as the first cryptocurrency.  2013: Google introduced Google Wallet as a way to make purchases using mobile phones.  2014: Apple Pay was launched as a way to make purchases and send/receive money without using a physical card.  2014: Visa started host card emulation as an easy way to do transactions between mobile devices and other devices.  2014: The US Fintech called Lending Club was the first company to register an offer with the SEC for $1Bn

As can be seen, there are several milestones for the evolution of Fintech, however, nowadays, it is a term that is more tangible and significant than before. The point is not the relation between financial services and technology cause as it was mentioned above, it started a long time ago, but what is entirely new is

1 www.dka.global. (2018). FinTech for Social Good. [online] Available at: http://analytics.dkv.global/data/pdf/Fintech-for-Social-Good/Fintech-for-Social-Good-Full-Report.pdf [Accessed 3 April. 2019].

who is applying the technology within the system. In essence, it is to say that what really stimulates and propagate the Fintech ecosystem were the consequences that left the GFC. Specifically, the lack of trust. “High distrust should be seen as an opportunity to innovate in the financial sector. The global trend is an increase in distrust, especially for the less educated population:2

Source: SFC - Una mirada práctica al Fintech en Colombia

2.1. HISTORY OF FINTECH

As it was mentioned in the previous chapter, Fintech firms diffuse promptly as a reaction of the worldwide financial crisis (particularly in the US and Europe) resulted from the lack of prudential rules in the financial system and the absence and failure of governments managing this type of crisis.

2 Castano Gutierrez, J. (2019). Una mirada practica al Fintech en Colombia. Foro Universidad Externado de Colombia Departamento de Matemáticas. Bogotá D.C., Available at: https://www.colombiafintech.co/publicaciones/una-mirada-practica-al-fintech-en-colombia [Accessed 8 May 2019].

2.1.1. UNITED STATES CRISIS – 2008

The GFC started in 2008 after the US investment bank Lehman Brothers went bankrupt because of the exposure to sub-prime mortgage3 markets. The sub-prime loans were converted into securities that were traded on different financial markets around the world.

In 2006, this securitization that was propagated really fast due to the reduction of credit risk lost their value as a consequence of the highest interest rates that affect the real estate industry. Financial institutions decided to cut these services that end up with an inter-banking crisis, as the financial institutions were avoiding this mortgage-backed securities and not lending to each other. The Federal Reserve is America’s central bank acting in its role to maintain the stability of the financial markets implemented the TAF to increase liquidity in the US market and became the only bank pleased for lending money. The findings reveal that the TAF has reduced liquidity risk premiums paid by banks.4

Other measurements from the Federal Reserve was to expands its lending to troubled financial firms and agrees to help finance JPMorgan Chase's salvage of the largest casualty, Bear Stearns.5 The US government also decided to help other considerable banks as they were seen as too big to fail, with the “Big Six” US banks – JP Morgan Chase, Citigroup, Wells Fargo, Bank of America, Goldman Sachs, and Morgan Stanley – collectively having 43 per cent more deposits, 84 per cent more assets, and triple the amount of cash they held before the 2008 crisis. Essentially, they have doubled the risk that felled the banking system in 20086.

The secretary of the US Treasury Department also had an essential role on the crisis when the US Congress authorized them to purchase up to $100 billion senior preferred stock and sub-prime securities from the Federal National Association. The Treasury also nationalized Freddie Mac, a government-owned corporation that used to buy mortgages and resell them on the secondary market.

In mid-2010, the US federal law enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act to promote risk-taking and autonomy decisions but also risk management and financial discipline.

Two years later, the Jumpstart Our Business Startups Act – JOBS Act was issued as a mechanism to combat unemployment and encourage the use of online services to invest in small companies and sell securities through accessible public platforms.

3 Housing loans granted to borrowers that have low credit scores or no credit history as a consequence of delinquencies activities, low income, unemployment, among others difficulties that affects the repayment schedule. As it is stated in the name this type of loans carry higher interest rates as the risk of default is higher than traditional mortgages. 4 Wu, T. (2010). The Term Auction Facility’s Effectiveness in the Financial Crisis of 2007–09. Available at: https://pdfs.semanticscholar.org/24a2/e00a204377a64db44d71c42159e438c5d2d9.pdf [Accessed 9 June. 2019]. 5 New York Times. The Fed’s Actions in 2008: What the Transcripts Reveal. February 21, 2014. Available at: https://www.nytimes.com/interactive/2014/02/21/business/federal-reserve-2008-transcripts.html [Accessed 14 March. 2019]. 6 Prins, Nomi. Collusion: How Central Bankers Rigged the World. New York: Nation Books, 2018. P.p. 2.

2.1.2. EUROPEAN CRISIS - 2009

The crisis commenced when countries such as Ireland, Greece, Spain, Portugal, and Cyprus were incapable of paying their government debt as a consequence of the abovementioned crisis. It is known, as the “European Debt Crisis.” Every region experienced different causes, however, implementing the euro as a currency union beyond fiscal policies affected directly the capacity of repayment or refinancing the debt. In 2009, the majority of the EU members were in a recession. The EU, through the European Central Bank and the International Monetary Fund, decided to bail out the affected economies. One year later, the European Commission conceived the European System of Financial Supervision to set a framework for financial supervision in the EU. Likewise, the European Parliament and the Council of the EU created the European Systemic Risk Board, which primer objective was to prevent and mitigate the systemic risk. Nowadays, this independent body is part of the European System of Financial Supervision.

Also, the EU created the European Financial Stability Facility as a temporary measure to arrange financial assistance. Initially, this cooperation was provided to EU member states such as Ireland, Greece, and Portugal. The European Financial Stability Facility, which was established by the euro-area Member States as a temporary mechanism, has a total adequate lending capacity of EUR 440 billion. Loans are financed by the European Financial Stability Facility’s bond and other debt instruments on capital markets and are guaranteed by the shareholders (euro-area Member States).7

It has been seen that there was no sufficient framework in which financial institutions were armed to identify these risks. Regulators were facing all these problems, but, as it was a systemic risk, the damage was already there, and people were losing their houses, jobs and even their savings to survive to this phenomenon. For instance, financial institutions decided to take a passive role in the financial market and instead, considered a sufficient capital to use it whenever they faced a future threat. In fact, those financial institutions are not likely nor bared to systemic risks, but as a prudential measure, financial institutions reduced cross-border banking activity. Since 2007, gross cross-border capital flows have fallen by half in absolute terms:

Figure 1.

Source: Mc Kinsey & Company

7 European Parliament. (2018) Financial assistance to EU Member States. Available at: http://www.europarl.europa.eu/ftu/pdf/en/FTU_2.6.8.pdf [Accessed 13 March. 2019].

In response to the GFC, the BCBS introduced a series of rules known as “Basel III” to encourage international standards for all financial systems. The regulation focused on the following rules:

a) Risk-based capital: set a minimum capital to protect customers, investors as well as the economy, in case any operational issue affect the entity. b) Leverage: include a ratio to reduce the risk whenever is a deleveraging period. c) Liquidity standards: introduced a coverage ratio that obliged banks to hold reserves for handling a liquidity scenario and net stable funding ratio as an incentive for banks to fund their products and services in a more stable practice.

These reforms have demonstrably helped to strengthen the global banking system. Since 2011, the Tier 1 leverage ratio of major internationally active banks has increased by over 65% (from 3.5% to 5.8%), while their CET1 risk-weighted ratio has risen by over 70% (from 7.2% to 12.3%). The bulk of this change was achieved by an increase in banks’ CET1 capital resources (from €2.1 trillion to €3.7 trillion). There has also been a corresponding reinforcement of banks’ liquidity: holdings of liquid assets have increased by 30% (from €9.2 trillion to €11.6 trillion)8.

2.1.3. COLOMBIA CRISIS – 1997 TO 2012

In the latest 1990s, the government declared an economic emergency, as a consequence of specific regulatory measures that were adopted in the latest ’80s. In essence, Colombia experienced one of the worst financial crisis in LATAM. For this reason, the government decided to intervene in bail-outs and capitalizations in some of the principal financial institutions, to the point that the number of financial institutions operating was reduced dramatically. In 4 years, the number of financial institutions was decreased from 110 to 57.

According to FOGAFIN, between 1998 and 2004 more than 16.2 Billion Pesos were designated to the financial system, 54% to public financial institutions, 13% to private financial institutions, 12% to financial cooperatives and 21% to mortgage holders.9

As a whole, the Colombian economy was not dramatically affected by the economic crisis. However, for those regions depend on remittances, the effects were dramatic.10 Indeed, in 2009, the growth rate decreased noticeable, as it can be seen as follows:

8 Bank for International Settlements. Speech by Stefan Ingves, chairman, Basel Committee on Banking Supervision. Keynote speech at the Institute for Law and Finance conference on “Basel III: Are we done now?” Available: https://www.bis.org/speeches/sp180129.pdf [Accessed 26 March. 2019]. 9 Argaez, Carlos and Urrutia Miguel. Historia del sector financiero colombiano en el siglo XX (History of the Colombian financial system in the XX Century). 2006. P.p. 149. 10 United Nations Population Fund – Colombia The Global Financial Crisis in Colombia and the International Conference on Population and Development (ICPD) Agenda. 2011. P.p 1.

Figure 2.

Source: United Nations Population Fund

Since 2012, Colombia started to implement Basel III rules by modifying specific capital adequacy requirements for Colombian financial institutions as outlined in Decree 1771 of 2012. Indeed, was the same regulation the one that promotes the development of Fintech firms, as financial institutions were focused only on their compliance with Basel III rules.

Without a doubt, the GFC was propagated to other countries generating the following effects and consequences:

a) Contagion crisis: the fallout affected not only the financial industry but also, the construction sector and the labor market in specific areas such as manufacturing, transportation, and wholesale and retail trade. b) The framework that was introduced to prevent future crisis started to affect the highest number of financial firms. c) Reputation on financial institutions affected all generations but primarily affects new generations.

In summary, the financial services industry since 2008 has been affected by a “perfect storm,” economic, political and public in its source, allowing for a new generation of market participants to establish a new paradigm known today as Fintech.11

2.2. FINTECH FIRMS IN COLOMBIA

Colombia ventured into the Fintech ecosystem approximately since 2012. Today, according to the II Colombia Fintech Annual Meeting dated on April 2 of 2019, the financial superintendent Jorge Castaño Gutierrez stated that Colombia has reached 180 Fintech startups.

11 Arner, Barberis and Buckley. The Evolution of Fintech: A New Post-Crisis Paradigm?. University of Hong Kong Faculty of Law. Research Paper. P.p. 18.

Figure 3.

Source: SFC

The recently elected government included four pillars in the 2018-2022 National Development Plan (Plan Nacional de Desarrollo) called “Pact for Colombia, Pact for Equity,” document which sets the public policies and the road map that the executive power should follow for the following four years. Those pillars are:

a) Strengthen in the access to financing to entrepreneurs and SME’s. b) Encouraging the implementation of new technologies and innovations in the financial services industry. c) Optimize, integrate, and generate synergies in the regulatory framework for the development of science, technology, and innovation activities. d) Prioritize digital financial inclusion.

Indeed, Article 189.24 of the Colombian Constitution states that the President of Colombia is the ultimate authority responsible for the supervision, surveillance, and control over anyone carrying out financial activities or activities involving securities markets or insurance, as well as, any other activity related to the management, use or investment of resources obtained from the public. Notwithstanding the above, the first governmental entity that reacted to the Fintech industry boom was the SFC. In 2017, this entity which has both regulatory and supervisory financial duties launched the Working Group of Financial and Technology innovation. The purpose of this working group is to act as facilitators for innovation in the financial sector conducting the following main tasks: a) Do research on emerging Fintech trends to facilitate financial inclusion. b) Promote clear and defined norms for the various actors of the financial and Fintech ecosystem in the country. c) Experiment with viable new and viable to implement business models, with suitable controlled testing environments. d) Support the use of modernization technology within the Superintendence of Finance to optimize internal processes and reduce regulatory burdens to surveilled entities.

Nowadays, the Working Group of Financial and Technology innovation has three main objectives, first, the Fintech Hub, as the environment in which potential participants meet the regulator to answer questions about the existing regulation and the do’s and don’ts that will apply to them if they intend to become Fintech firms. Second, the supervisory sandbox, where financial institutions and other entities can test their technologies in a controlled habitat and third but not less critical, RegTech, is a space where participants leveraging technological evolutions to establish technological developments in the SFC.

Due to Fintech Hub, more than 87 innovators appeared. The SFC received 20 requests for the use of sandboxes; however, 3 projects are working on the regulatory landscape through the implementation of sandboxes (UALET, Tpaga – AcciVal, and Tecnipagos) and other 5 firms are in process, these firms focus on the insurance, KYC and crowdfunding segments. Regarding, RegTech, only 5 participants had taken advantage of this guidelines.12

But for others, topics like blockchain and cryptocurrencies are not welcome in the financial industry. One example, is the case of Buda.com, the South American cryptocurrency exchange that ceased its operation in Colombia in middle of 2018 when local banks (Bancolombia, Davivienda S.A. and BBVA) decided to close the accounts as a consequence of the absence of guarantees. After all, Buda.com requested its reopening by explaining the importance of this type of services and the relevance of being part of Industry 4.0. Industry 4.0 is the next revolution in industrialization. The premise is to take all the individual processes and computing that factory machines perform in their siloed systems and import them into the cloud, meaning the workflow, upkeep, and management of every single machine and series of devices can be done remotely.13 In fact, the CEO of Buda.com petitioned the current president Ivan Duque Márquez to support the platform and intervene against the local banks. Buda.com took advantage from President Duque, who remarked how blockchain technology and big data will be implemented to overcome corruption: “I want mobile applications to be a mechanism from which the state can begin to think about how to facilitate citizens’ access to services. I am, therefore proposing to use big data and blockchain as tools. Big Data in health, agriculture, infrastructure, technology, and security. If we want to make the bidding processes in the state more transparent, blockchain technology has to help.”14

Besides, since August 2018 President Duque announced at the International Congress on Information and Communication Technologies held in Cartagena, his proposal to exempt of the payment of the Income Tax, to all enterprises that focus on virtual currencies and blockchain: “We want companies to be formed so that Colombia can be a great player in the sector, but many times the country’s tax policy has been

12 SFC, Presentation “Una mirada practica al Fintech en Colombia” Financial Superintendent Jorge Castaño Gutiérrez. February 28, 2019. Pg. 15. 13 SalesForce Blog. (2016). What is Industry 4.0?. (https://www.salesforce.com/uk/blog/2016/09/what- is-industry-4-0.html 2016. by Juergen Brixel) [Accessed 13 March. 2019].

14 Crypto News Monitor. (2018). Ivan Duque: The President Who Trusts in Blockchain to Fight Corruption. Available at: https://cryptonewsmonitor.com/2018/06/23/ivan-duque-the-president-who-trusts-in- blockchain-to-fight-corruption/ [Accessed 26 July. 2019].

designed to make this type of approach an obstacle course for entrepreneurs. That is why I want us to take forward the exemption from income tax for five years for all companies that are set up for these sectors and generate a minimum number of jobs in the country”.15

In 2016, the majority of the 140 existing Fintech companies in Colombia, joined forces and created an association called Colombia Fintech. This association is focused on developing a Fintech Ecosystem in Colombia. Currently, Colombia Fintech among other activities acts as a spokesman of the Fintech industry towards the government and discuss with the relevant governmental institutions about the need to complement, amend and improve current regulatory framework following the pillars described in the National Development Plan.

Also, in April 2017, local banks, Asobancaria, and the CCIT announced their cooperation to encourage and promote the integration of the financial system with the latest technological innovations. Their first publication is called “Fintechgration: an opportunity for a truly inclusive financial system.” The purpose of this study is to introduce the latest innovations and trends in the disruption of financial services and how daily-basis activities related to the financial system affect individuals.

On June 30 of 2018, the SFC signed the collaboration agreement proposed by the IIMV to discuss and exchange information and experiences on topics related to Fintech projects. Supervisors of countries such as Argentina, Honduras, Paraguay, Peru, Portugal, Dominican Republic, and Spain are also involved in these debates.

The current government from Colombia at the head of President Ivan Duque announced in May of the present year, his aim to transform Colombia into the next Silicon Valley. For this goal, the Government invests USD$20 million to launched C Emprende, an initiative that seeks to advise entrepreneurs that wanted to innovate and grow. The same month, Duque visited the headquarters of Cisco Systems, Inc. in Silicon Valley where he signed a memorandum of understanding with the technology conglomerate to initiate a strategic relationship that will be focused on promoting the entrepreneurial ecosystem and developing cybersecurity. Also, Duque signed another memorandum of understanding with 500 Startups to aids the development of Colombian startups ecosystem. For these meetings, the Colombian government choose 14 local startups to participate in the dialogue and suggests ideas for this alliance. One of the startups that participated was Movii, a startup that seeks to reduce inequality by providing access to the banking system digitally.

As it could be evidenced, in Colombia right now government, regulators, supervisors, and entrepreneurs are making the best possible contributions from their positions and moving forward with the only purpose of developing the best Fintech environment possible. Other participants taking an active role in this

15 The Global Crypto Press Association. (2018). Colombia's president tells the cryptocurrency industry - come here, and we'll even waive your taxes!. Available at: https://www.globalcryptopress.com/2018/08/colombias-president-tells.html [Accessed 25 July. 2019].

development is the IDB through its initiative Regional Public Goods – RPG16 in which Colombia together with Argentina, Chile, Mexico, El Salvador, Peru, Paraguay, and Uruguay participated and won the proposal to be financed in 2018 named as Regulatory Convergence for a Regional Fintech Ecosystem.

2.3. FINTECH SEGMENTS IMPLEMENTED IN COLOMBIA

According to the organization Finnovista the largest Fintech network in LAC and Spain, Colombia is the third-largest Fintech ecosystem in LAC after Mexico and Brazil.

Based on the Report “Fintech in Latin America 2018: Growth and Consolidation” the chief business segments that are implemented in LAC are the following: (i) Payments and remittances; (ii) Lending; (iii) Enterprise Financial Management; (iv) Personal Financial Management; (v) Crowdfunding; (vi) Enterprise Technologies for financial institutions; (vii) Digital banks; (viii) Scoring, identity and fraud; (ix) Insurance; (x) Wealth Management; and (xi) Trading and capital markets.

In Colombia, mainly, the most significant segments positioned are payments and remittances with 48 startups, lending with 36 startups and enterprise financial management with 25 startups.

Figure 4.

Source: Finnovista – Fintech Radar Colombia 2019

16 The Initiative focuses on the potential to generate significant shared benefits and positive spillover effects. Spillover effects can be expressed in terms of scope (benefits extend beyond the originally targeted sector in each country) and/or scale (benefits extend beyond the original group of countries). International Development Bank. Available at: https://www.iadb.org/en/sector/trade/regional-public- goods/home [Accessed 26 July. 2019].

For over 50 years, Colombia has been plagued by poverty, violence, and inequality resulting from the protracted internal conflict. As a consequence, people have been moving to other countries to search for better opportunities and send remittances to their families back home. Remittances in Colombia increased to 616.60 USD Million in December from 583.50 USD Million in November of 2018. Remittances in Colombia averaged 399.10 USD Million from 1996 until 2018, reaching an all-time high of 944.50 USD Million in December of 2004 and a record low of 162.44 USD Million in June of 1998.17

Regarding consumer lending, people try to look for different options, as traditional banks requirements still complex for borrowers. Indeed, 62% of adults over 15 years are “unbanked”18 as the access to the financial services is high cost, people do not trust the financial system, and the coverage is not broad.

The main reasons why financial institutions reject loans are because of the client’s ability to pay, in this sense, Fintech is taking advantage of this situation by using electronic platforms to joint prospective borrowers with lenders and facilitates all credit activities.

Figure 5.

Source: Iupana

Also, enterprise financial management system is taking force as it provides the maximization of firms by implementing daily the use of electronic invoicing, digital accounting, business performance, and payment

17 Trading economics. Available at: https://tradingeconomics.com/colombia/remittances [Accessed March 28. 2019]. 18 World Bank Group. Available at: https://globalfindex.worldbank.org/sites/globalfindex/files/chapters/2017%20Findex%20full%20report_ chapter2.pdf [Accessed March 29. 2019].

collection. After all, these activities will affect the firm's operations, the management decisions on profits and cash flows, and economic stability.

2.4. CURRENT REGULATION FOR FINTECHS IN COLOMBIA

Colombia does not have a unique framework for Fintech industry, for that reason, this industry is claiming to the financial regulator to introduce clear rules and regulations that apply to them. Nonetheless, Colombia’s Fintech sector grew 60% between 2016 and 201719, this means that even regulation is not upfront, firms are complying with general regulations, taking into consideration, that Fintech firms are not allowed to do whatever they want, and specific activities are exclusively for authorized financial entities.

Nowadays, general dispositions such as financial regulation, financial protection regime, digital tax regulation, intellectual property rights, labor law, foreign exchange regulation, among others, apply to them. However, the financial regulator in the head of the SFC and URF is trying to solve this problem by issuing independent acts as follows:

a) The Congress enacted Law 1735 of 2014, to create a new type of financial institution known as Sociedades Especializadas en Depósitos y Pagos Electrónicos or “SEDPES” to offer electronic deposits and payments to generate financial inclusion. b) The Government enacted Decree 1357 of 2018 to regulate crowdfunding platforms. The act outlines the obligations that need to follow the entities that want to provide these services. Additionally, it defines the requirements and limitations for investors and fundraisers. This is also covered in Decree 2443. c) The Ministry of Finance and Public Credit issued Decree 661 of 2018 to set the requirements for Robo-advisors technology in the security market as an alternative to protect investors from human errors an instead advised them based on the use of algorithms.

However, authorities do not have a unanimous position. For instance, certain employees of the Central Bank and the Colombian Tax and Customs National Authority have issued individual opinions against these Fintech developments by saying that crypto-assets are not considered securities, as Law 964 of 2005 do not make any reference to them or that Bitcoin is not currencies as the central bank do not support them. Additionally, the SFC has warning individuals to do not trade with virtual currencies as there are not guarantees contemplated. With this in mind, it is necessary to modify the current framework where individuals feel free to use, invest in, intermediate and operate with cryptocurrencies, as well as other innovations for the financial services industry.

Indeed, cryptocurrencies are not the only activity that should be contemplated by the government to regulate. Also, other activities require the input of the supervisor based on the products and services

19 Article More unbanked and underbanked consumers and businesses of Colombia are entering the system and pushing Colombia forward as a Fintech leader. Written by Diego Caicedo, Co-Founder and CEO of OmniBnk

offered, the type of information involved, and the collection of money from the public by the new participants.

2.5. DILEMMAS OF REGTECH IN THE FINANCIAL SERVICES

‘RegTech’ is a contraction of the terms ‘regulatory’ and ‘technology’ and describes the use of technology, particularly information technology (‘IT’), in the context of regulation, monitoring, reporting, and compliance.20

But, ¿why Regtech should be implemented within the financial industry? According to Article 335 of the Colombian Political Constitution, financial activity is considered an activity of public interest. Therefore, financial authorities must look after the benefit of all participants that are involved in the financial industry. Also, regulators must safeguard transparency and confidence within the system and avoid any current and potential risks derived from any financial product and/or service. In other words, financial regulation becomes crucial as financial institutions or any other firm that provides financial services attracts savings from the public and transform it into investments affecting economic growth.

Having said this, two interrogations come into my mind.

The first interrogation is ¿who should regulate the financial industry? The answer will be the governments. However, the capture theory of regulation states that at the end, governments served to firms instead of customers, which means that rather than advocate for customers benefit, governments will look for individual firm’s contributions. On the other hand, some individuals defend the public interest theory of regulation, considering that regulation provides protection and aid on the community’s interest. To avoid this dichotomy, it would be more efficient to let firms to contribute to the regulation process. “The key is to harness the same creativity and inspiration that built Facebook and other tech giants to build the regulatory systems of the digital age, rewarding for-profit and nonprofit innovators who can come up with better regulatory tools.” In fact, this cooperation is already happening. For instance, Microsoft Corporation issued worldwide standards for cybersecurity, as cybersecurity is transcending territorial boundaries. Therefore, all countries need to cooperate effectively between them and standardized international cybersecurity norms.

The second interrogation is ¿to what extent RegTech is necessary for financial services? RegTech in financial services is essential but only to certain activities, processes, and applications. As overregulation, is considered a significant problem that could generate problems in the applications due to formalisms and compliance of different requirements. The perfect scenario is to move forward and promote financial inclusion for individuals by accepting new innovations for the financial ecosystem, which means the use of different products, services, and channels. Also, it would be cost-effective to understand what is coming, is not to predict the future but to do conjectures of the possible situations, effects, responsibilities, difficulties, and modalities depending on the individual and their location and take into consideration the possible exceptions that should be contemplated. With this in mind, participants such

20 DW Arner, J Barberis and RP Buckley, “Fintech, RegTech and the Reconceptualisation of Financial Regulation”, p.p. 37 Northwestern Journal of International Law and Business (forthcoming 2017).

as regulators, firms, associations, financial institutions, startups, individuals, among others, will build a broad framework where all individuals coexist and benefit.

For instance, the use of microchip implants as a method of payment. The questionings that regulators should bear in mind are the following:

a) ¿How the microchip will work as a method of payment? b) ¿Who can provide the service and to whom? c) ¿How to prevent any crime related to microchips? d) ¿Which part of the body can the microchip be introduced? e) ¿Who can have access to the data collected? f) ¿Where the data is stored? g) ¿Who is and should be responsible for any collateral effect, infection or reaction of the immune system as a consequence of the microchip? h) ¿Is there any threshold to its use? i) ¿It is mandatory/optional to involve an insurance company? j) ¿What exceptions in terms of individuals and situations must be contemplated? k) ¿What happens if the individual has a chip and want to change the provider? ¿It would be necessary to take out the existing one? l) ¿How will the customer service be?

What is true is that Regtech in financial services cannot be ignored. Regtech is not comparable with Adam Smith’s invisible hand theory, where regulation is not necessary as all participants can compete in a free market. There are no regulations involved, and competition is what matters, although customer protection is not a priority at all. But, as technology is moving too fast and is continuously changing, it is necessary to correct deficiencies and close regulatory gaps expeditiously that can provide certainty for the financial industry and comfort for the public.21 New technologies ‘do not arrive fully mature,”22 which means that it is necessary to explore the technology and test it, until it is developed, but requires trial and failures. The same happens with regulation.

Participants like Fermín Bueno co-founder of Finnovista, mentioned, “It is not easy to regulate innovation, but it is possible to create a framework so that all aspects are gradually regulated. The governments of the region should do it, the fintech cannot be disoriented, they cannot be committing illegal acts, they must be regulated”.23

21 Brownsword, Roger and Goodwin Morag. Law and the Technologies of the Twenty-First Century. Cambridge University Press. 2012. Regulatory connection I: getting connected. P.p. 383. 22 James H. Moor. Why We Need Better Ethics for Emerging Technologies. Information Technology and Moral Philosophy (Cambridge: Cambridge University Press. 2008) P.p. 26. 23 Revista Dinero. ¿Peligran los bancos con el crecimiento de las ‘startups’ fintech? [online] https://www.dinero.com/emprendimiento/articulo/la-competencia-entre-los-bancos-y-las-startups- fintech/256630 [Accessed 10 July. 2019].

Despite the Regtech dilemmas, the financial industry expects the regulator and all players from the financial ecosystem still engaged and dynamic in the legislative agenda towards Fintech and furthermore, experienced a smooth implementation for the sake of all participants that are involved in this industry.

2.6. POTENTIAL REGTECH IN FINANCIAL SERVICES THAT SHOULD BE IMPLEMENTED IN COLOMBIA

Traditional financial entities are usually divided into banks, insurers, or asset management, and each industry is supervised by the respective national authority. Is very similar to Fintech firms, but supervision could come afterward depending on the activities they are developing. For instance, Fintech firms are more difficult to monitor as regulators are not capable of grasping their corporate structure nor their operations. The supervisory sandbox is considered the closest approach. However, it is only set for a defined period.

As new regulation could end up in backwardness for the financial ecosystem, regulators must also take into consideration how technology has been developed and what are the tendencies. Regulators will turn to technology, too, as the use of technology and its implications are not limited to financial institutions.24 In essence, regulation should be congruent with technology how fast this one is going. Additionally, it is necessary regulators consider the current risks as well as the potential ones.

Indeed, studies have shown that risk management is one of the RegTech solutions for risk monitoring activities. Without thinking about the economic sector, risk management is considered part of the business practice of a company. All companies should take into consideration the 5 necessary risk management process steps: i) Identify the risk; ii) Analyze the risk; iii) Evaluate and rank the risk; iv) treat the risk, and v) Monitor and review the risk. Going back to the financial sector, Fintech startups appear to contribute to the management planning, the quantitative and qualitative risk analyses, the risk handling, the identification, and the monitoring, among others.

Nevertheless, risk management is not the only solution that Regtech is penetrating. Deloitte has mapped more than 200 RegTech companies offering various solutions for different categories including, but not limited to risk management. The other categories corresponds to compliance, identity validation, transaction monitoring, and regulatory reporting.25

Nowadays, the financial industry is dealing with several risks as a consequence of the variety of products and services that are available in the market, but also, as a result of the smart technology that it is

24 PWC. Financial Services Technology 2020 and Beyond: Embracing disruption. P.p 30. Available at: http://rada.wib.org.pl/uploaded/technology2020-and-beyondPWC_Disruption.pdf [Accessed 13 July. 2019]. 25 Deloitte. (2008). Ising Regteh to transform compliance and risk from support functions into business differentiators. P.p. 5. Available at: https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/risk/lu-using-regtech-to-transform- compliance-and-risk-from-support-functions-into-business-differentiators.pdf [Accessed 11 June. 2019].

implemented within the ecosystem. Thanks to technology, hackers regularly experience and develop new maneuvers to steal, destroy, or alter data from individuals, especially if those individuals are using any product or services related to the financial sector. The primary issue of cyber-attacks is the lack of resources that firms and financial institutions have to counter to prevent these attempts. As technology is moving really fast and the financial security system is vulnerable, whenever regulators or even the institutions figure it out a solution, hackers are going ahead with sophisticated methods that can bypass the security standards of financial institutions.

In 2018, Positive Technologies, one of the global providers of security solutions for vulnerability and compliance management, concluded that the principal weaknesses of banks were mainly caused by the following:

a) Web applications; b) Server configuration flaws; c) Failure in the user account and the password management; and d) Inadequate network security26.

Another risk that is affected by technology and is more present than before is compliance risk. Compliance risk, is the risk of legal or regulatory sanctions, material financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organisation standards, and codes of conduct applicable to its banking activities (together, “compliance laws, rules and standards”)27. The compliance function not only helps to determine and manage any violation but also, clarify the guidelines of an organization and promotes trust, as analogous situations must be carefully judged with the same standards and the new conditions will be analyzed according to the pre-established regulatory sanctions. In other words, under compliance requirements and the instruction of the AML-CT programs, there is no space for unforeseen decisions from the compliance officers, the corporate organs, and the employees. Nevertheless, technology is affecting the compliance function not only as a useful tool to modernize compliance and detect risks (automatic detection) but to the affectedness of basic principles like KYC.

Currently, financial institutions applied KYC as a mandatory regulatory requirement to identify and verify their customers, but with the incorporation of new participants in the financial ecosystem, it would be accurate to migrate from KYC to Know-Your-Data as part of the due diligence process for AML-CFT. Indeed, the financial superintendent announced at the Colombia Fintech Associations annual meeting dated on April 2 of the current year that the regulators were already working on those changes. Now, global

26 Positive Technologies. (2018). Report Bank Attacks. P.p. 11. Available at: https://www.ptsecurity.com/upload/corporate/ww-en/analytics/Banks-attacks-2018-eng.pdf 27 Basel Committee on Banking Supervision. Compliance and the function in banks. April 2005. P.p. 6. Available at: https://www.bis.org/publ/bcbs113.pdf [Accessed 11 April. 2019].

financial institutions are under pressure from regulatory bodies, with differing expectations, across more jurisdiction with cross-border impacts than ever before. This requires a firm to be digitally and technologically savvy to be dynamic in managing compliance with new and existing regulatory requirements28.

Considering data sources as a new approach to manage information in the future for all types of organizations. However, in the financial system, data acquired relevance as the value of data creates a 360 overview of customers, clients, investors, and intermediaries. For instance, data generates a more in- depth insight of individuals in terms of their behaviors, preferences, personal communications, transactions, trends, among others patters that are relevant to determine any suspicious activity or risk derived from individuals, or even to help financial institutions or Fintech enterprises to offer or approach individuals to acquire new products and services. Nevertheless, there are essential topics derived from data to regulate, starting from privacy regulation, going by collecting, manipulating, storage and processing data, and finalizing with data analytics and data sovereignty.

Apart from the previous suggestions. Due to globalization and the boost of cross-border transactions, the following activities are destined to be regulated in the short-term period:

Cryptocurrencies

As it was already announced, there is a necessity to regulate crypto-currencies as a new form of money that provides efficiency of cross-currency payments without bypassing the intermediation of traditional financial institutions, which means a decentralized control. Therefore, there is no traditional financial institutions or authorities where users can rely on. Crypto-currencies are well-known as blinded money as it contains blinding algorithms to secure the units of currency.

To avoid any doubt regarding the use of digital currency as a new payment method, it is indispensable to regulate the activities involving crypto-currencies as it is crucial to restrict the use of electronic money for illegal activities like AML-CT. Bitcoin is the most common crypto-currency. A research study conducted by the University of Sidney concluded that approximately one-quarter of all users (26%) and close to one- half of bitcoin transactions (46%) are associated with illegal activity. Furthermore, approximately one-fifth (23%) of the total dollar value of transactions and approximately one-half of bitcoin holdings (49%) through time are associated with an illegal activity using our algorithms29.

Also, it would be fundamental to specify the activities involving crypto-currency for taxation purposes. According to other jurisdictions like the UK, Israel, and Mexico, there is not a similar regulation on this

28 KPMG. Leveraging technological innovation to establish a more effective regulatory ecosystem. Part two of a series on the power of RegTech solutions. October, 2017. Pp. 3. Available at: https://advisory.kpmg.us/content/dam/advisory/en/pdfs/leveraging-technological-innovation.pdf [Accessed 16 June. 2019].

29 Foley, Karlsen and Putniņš. Sex, drugs, and bitcoin: How much illegal activity is financed through cryptocurrencies?. P.p. 3.

matter. For instance, the UK issued on December 19 of 2018 a new tax regime for crypto-assets, stated that individuals should pay capital gains tax, corporations have to pay corporate tax and unincorporated businesses must pay income tax. In the case of Israel, crypto-currency are taxed as assets. On the contrary, Mexico has not decided if crypto-currency is recognized as a property so that it is subject to 16% VAT or if it is classified as a currency where VAT does not apply.

Another reason why supervisors must regulate crypto-currency obey to consumer protection, market transparency, accounting standards, and mitigation of risks associated.

Payment systems

Also, Regulators must be focused on payment systems. Technology is affecting how consumers have pay for goods and services. As a matter of fact, some companies are run out of the older payments methods, like personal checks. An example of this situation is the Starbucks Corporation. More than an antiquated payment system is a nightmare for businesses as firstly, there is no way for them to determine if the customer provides sufficient funds to pay. Secondly, it affects their immediate liquidity. Thirdly, demands time to process the deposit. And finally, disturb other customers as they might need to wait for the customer to fill out and sign. Thus, it is unavoidable to follow a framework that applies to the innovative and cost-efficient payment methods that are happening nowadays like, e-wallets Alipay in China, WebMoney in Ukraine and Russia and Skrill all over Europe. Examples of e-wallet in Colombia are 2Checkout, Interpagos, and Stripe.

An exemplification of regulation for all payment service providers is the Payment Service Directive known as PSD2. The directive was created to homogenize the payment services in the EU, to incentivize cross- border payments and to allow new entrants into the market, as non-financial institutions were permitted to act as payment services providers with the previous license to operate.

Open Banking

This financial service appeared as a necessity to enhance the retail banking and financial services in the UK primarily. Is design for consumers that can share information to third parties who use APIs to offer innovative services. The term API means Application Programming Interfaces. In simple words, is what allows the software applications to communicate and transfer data.

Lastly, open banking has become more relevant, and Fintechs are planning to invest in open banking initiatives. “Eight out of 10 financial firms are adopting or planning to adopt Open Banking, or are interested in doing so”30. As the chart shows, the vast majority of those who have adopted (or are planning to take) Open Banking services see the data they’ve collected as a result as either valuable or precious:

30 Transunion. (2019). The Evolution of Open Banking. P.p. 2. Available at: https://www.transunion.co.uk/media/4013545/transunion-open-banking-report.pdf

Figure 6.

Source: TransUnion

Since data is an essential feature of this service, it is crucial to regulate customer privacy and data security so that information remains confidential and saved. Additionally, it would be efficient to control who can have access to API’s and how the API infrastructure should work in terms of security and safety.

AI and the use of robotics

The financial ecosystem is more likely to use AI and robotics to develop their operations, manage their risks, and provide efficient customer service. With this technology, corporations can diminish employees and physical locations. Also, it will help to reduced human mistakes since the robots will be working without any human intervention.

Furthermore, it is crucial to think in the medium-term period to regulate innovative methods like nanotechnology. Nanotechnology is also known as “nanotech” that is the science that deals with the manipulation of matter on an atomic, molecular, and supramolecular scale – in other words, much smaller than what the naked eye can see.31 Currently, countries like Sweden are using this type of technology within the financial industry to speed up specific processes and activities like the replacement of cash and credit cards as a method of payment. Also, as an alternative to storing a considerable amount of information.

In this way, it is fundamental to regulate the consequences and effects that nanomaterials could cause to individuals in terms of safety and performance. In essence, it is mandatory to analyze the regulation that

31 Money Crashers. What Is Nanotechnology Examples, Future Applications & Risks. [online] Available at: https://www.moneycrashers.com/nanotechnology-examples-future-applications-risks/[Accessed 28 July. 2019].

other countries are embracing and learning from them the best way to enter and implement this framework in Colombia. Obviously, Sweden is not comparable to Colombia, so the financial industry might need to evaluate and resolve a structure that is applicable, in terms of culture, education and socio- economic background, before the following suit.

3. ARE FINTECH FIRMS COMPETING WITH TRADITIONAL FINANCIAL INSTITUTIONS AND VICE VERSA?

Unquestionably, Fintech firms have been disrupting the financial ecosystem as they are providing the same services as financial institutions do, but, effectively for customers. Fintech mission statements are usually directed to provide excellent customer service, they aim to understand customer needs and expectations. Ultimately, for Fintech to succeed in most developing economies, its developers and providers must begin to familiarise themselves with some different and unique customer journeys.32

On the contrary, customer care was not a priority for traditional financial institutions only until the regulator started to protect consumer’s interests as a reaction to the injury caused derived from the financial crisis. In the case of Colombia, the regulator realized the importance to protect consumers as it was having an impact on the economy and the quality life of the Colombians.

Instead, traditional financial institutions used to have the power to attract customers as there were not more options to acquire financial products at a lower and efficient cost. Indeed, in most cases, the agreements that were entered into banks and customers were adhesion contracts. As their name stated, adhesion contracts are agreements drafted only by banks where customers were not capable of negotiating their terms and conditions and need to stick to what banks offer. At some point, some of the clauses were considered unconscionable and abusive. For this reason, the government issued Law 1328 of 2009 to set regulation for the protection of financial consumers. Individually, article 11 of Law 1328 settle that financial entities under the surveillance of the SFC must avoid any abusive clauses like absolving, reducing or limiting the financial entities liability whenever they subscribe an agreement with a financial user.

Additionally, the SFC has decided to penalize any abusive, unfair, or deceptive acts or practices that financial institutions were causing to consumers. Primarily, this situation was happening as a consequence of the lack of information that consumers were receiving from the financial entities. For this reason, SFC demanded in September of 2011 that all entities under their control and surveillance must provide to their corporate organ, as well as, to the SFC all agreements that were intended to subscribe with financial users before January 1 of 2012.

On the other hand, Fintech firms are adopting a new corporate culture when working, cultivating innovation, and people who can bring creativity and new ideas into the table. This description matches 100% with young professionals that grew up in a digital world, and technology is in their DNA. Instead of

32 Buckley and Webster. University of New South Wales Law Research Series. Fintech in Developing Countries: Charting New Customer Journeys. P.p. 19

looking for stability and spend the entire life in a company, millennials are thinking for the moment and for their benefit. Moreover, are looking for employers that are not resistant to changes as we are living in a digital world that is always changing and they need someone who approves and accepts their ideas otherwise they will feel frustrated, and frustration is a prohibited word that is not part of their daily life.

The previous description is not the case of traditional financial institutions in which employees have been in the same position for several years without even getting a promotion of their current position. Usually are workers that cannot have an out-of-the-box-thinking, which means, that any change or difficulty that is not contemplated daily procedure becomes a nightmare for them. This is happening as a consequence of globalization and the availability to new and updated forms of technology.

For instance, more than 1/3 of Fintech firms designate at least 80% from their business budget for innovation, while, 70% of controlled financial institutions designate approximately 10% of their budget.33 Innovation is vital to success today. Without innovation, an organization will not be able to grow and advance in the products and services they provide. That’s why Fintech firms started to flourish and grow since they captured the importance of innovation by fixing what other organizations were not capable of doing accurately and satisfactory for the public. At the end, Fintech firm’s intentions are: seeking to solve consumer needs, but also, using technology to change and improve the business models of firms and/or entities, reduce costs by using IT infrastructure and finally, but no less critical, attracting investors which at the end, contributes with the macroeconomic situation of the country where it is implemented.

4. OUTCOME

The reaction of financial institutions with the arrival of Fintech firms can be divided into 3 phases: firstly, the threat for traditional financial institutions derived from unknown organizations. Secondly, the era of “Fintegration” resulted from the M&A processes. Lastly, the coexistence of financial institutions and fintech firms and the future of the financial ecosystem.

4.1 THE BIRTH OF UNKNOWN ORGANIZATIONS

After the GFC, individuals around the world started to create new business models for the financial ecosystem leaving aside the formalities that the regulator was asking to financial institutions. At first, the main areas that Fintechs focused on were lending, payment systems, money transfer, and digital currency. Rapidly, the non-traditional players started to acquire respect from the public, when they began to switch to these new players as they were receiving low-cost services simply and in a transparent way.

33 Fuente: Superintendencia Financiera, Encuesta sobre Innovación Financiera y Tecnológica 2018 (muestra representativa de 45 entidades vigiladas por la SFC y 20 emprendimientos Fintech).

The boom of Fintechs also evoked relevance when investors support startups. “Like other disrupters from Silicon Valley, “fintech” firms are growing fast. They attracted $12 billion of investment in 2014, up from $4 billion the year before.34

After Fintechs shows results, traditional financial institutions felt the threat and immediately, tried to launch innovative products and services and to use technologies to migrate into new markets. However, this wasn’t that easy for them, due to higher costs and the difficulty to implement updated technology into their infrastructure.

Notwithstanding the above, since 2013, some traditional financial institutions, together with several Fintechs, began to know each other and communicate the possibility of join forces and work together. Indeed, on May 9th of 2015, The Economist published a report named ‘Slings and Arrows’ to mentioned that “Most of these startups will fail, and even successful ones will be little more than pinpricks for a banking mastodon with trillions in assets. Yet in combination they may amount to something more substantial”.35

4.2 FINTEGRATION AS A TEMPORARY SOLUTION

Initially, traditional financial institutions were aware of the accelerated propagation of Fintechs firms and the imposing impact that was doing to the financial ecosystem. Notably, the changes to the market structure. Market structure refers to the interrelation of companies in a market that impacts their behavior and their ability to make profits. Market structure is characterized by such factors as the number and size of market participants, barriers to entry and exit, and accessibility of information and technologies to all participants36.

According to EY Fintech Adoption Index 2015, the index adoption of consumer’s Fintech was 16%, percentage that was duplicated within two years. The latest report shows that 64% is the average of consumer Fintech adoption. The research shows, Colombia is part of the top 5 countries with higher adoption of Fintechs. The survey was based on more than 27,000 interviewers located in 27 markets across all continents, as follows:

34 The Economist. (2015). The fintech revolution. Available at: https://www.economist.com/leaders/2015/05/09/the-fintech-revolution [Accessed 11 June. 2019]. 35 The Economist. (2015). ‘Slings and Arrows’. Available at: http://www.spainfinancialcentre.com/sites/default/files/international_banking._the _economist_report._mayo_2015.pdf [Accessed 5 June 2019].

36 Financial Stability Board. (2019). Fintech and Market structure in financial services: Market developments and potential financial stability implications. P.p. 3. Available at: https://www.fsb.org/wp- content/uploads/P140219.pdf [Accessed 16 May. 2019].

Figure 7.

Source: Ernst and Young

The proliferation of Fintech enterprises is part of their ambitions as well as their capacity and modernized products and services that need to be updated regularly. Indeed, since 3 years ago, Fintech firms started to merge and acquired other Fintechs, as a new strategy of influence, dominance, and expansion in the financial industry. The following chart will show the 5 largest global Fintechs deals in the latest years:

Figure 8.

Date Acquirer Target Amount Announced

Fidelity National Information Worldpay March 2019 $33.5 billion Services

Fiserv First Data January 2019 $22 billion

Thomson Reuters' Investor group led by Blackstone financial and risk January 2018 $17.3 billion Group business

Ultimate Software February Private investor group $11.0 billion Group 2019

Vantiv Inc Worldpay Group August 2017 $9.8 billion

Source: The Motley Fool

The previous deals were justified on different reasons, but mainly, on the necessity to expand into broader markets, the possibility to seize market shares and the opportunity to increase their revenues by using other employees for the day-to-day operation.

Colombia has not yet started this accelerated process of M&A between Fintechs as it has been done in the US or the EU. However, the industry is getting ready for this scenario that is about to start. Evidence of this is what the CEO of Customer Index Value, an expert in markets is mentioning "It is likely that a phase of acquisitions and mergers of Fintechs in Colombia will come. It is a natural and necessary process to purify the market, because it is a way in which these companies can accumulate critical mass to become more robust and sustainable".37

The financial industry is also facing M&A processes between Fintechs and traditional financial institutions. Likewise, what started as a threat have been changing with time when financial institutions such as commercial banks, began to analyze how to respond to this hazard caused by Fintech enterprises, and instead of attacking them, decided to be more advantageous and joined them. And so, banks started to hunt Fintechs as a measure to stand out and grow.

37 El Espectador. Se acercaría la fase de las compras y fusiones “fintechs” en Colombia. March 14 2019. Available at: https://www.elespectador.com/se-acercaria-la-fase-de-las-compras-y-fusiones-Fintechs- en-colombia-articulo-845006 [Accessed 1 July. 2019].

The following chart, shows examples of this new era of M&A between commercial banks like BBVA, Goldman Sachs and BNP Paribas and certain Fintechs located in the EU and the US:

YEAR FINANCIAL FINTECH TYPE FEEDBACK INSTITUTION ENTERPRISE Acquisition of “BBVA’s digital investments and acquisitions play a fundamental role in accelerating 2014 Simple for USD117 BBVA’s transformation strategy” – BBVA.38 million. “The biggest change is that now we will have the support of a global banking group with

$820 billion in assets that shares our passion for innovative technology and customer Simple is a US digital experience." –Joshua Reich CEO of Simple.39 banking service platform

that advice customers to

save money.

Acquisition of “Big data is an area of great potential for BBVA and Madiva strengthens our capabilities 2014 Madiva Soluciones. from day one” – Carlos Torres Head of Digital Banking BBVA.40 “We wanted to be part of the company that has best understood the potential of what we Spanish startup specialized do” – Juan José Divassón, CEO of Madiva.41 in big data and cloud

computing.

Merger. BBVA has a “Atom Bank is not competing against banks with branches. We’re competing for 2015 39% stake in Atom customers who don’t need them” – Mark Mullen CEO of Atom Bank.42

UK bank for mobile devices. Bank.

38 BBVA. BBVA’s digital investments and acquisitions. February 2019. Available at: https://www.bbva.com/en/infographics-bbva-digital-investments/ [Accessed 11 July. 2019]. 39 The Verge. Spanish banking group BBVA acquires Simple for $117 million in cash. February 2014. Available at: https://www.theverge.com/2014/2/20/5429916/bbva-acquires-simple-117-million-cash [Accessed 11 July. 2019]. 40 BBVA. BBVA acquires big data startup Madiva. December 2014. Available at: https://www.bbva.com/en/bbva-acquires-big-data-startup-madiva/ [Accessed 11 July. 2019]. 41 Ibid. 42 BBVA. Atom Bank or the mobile bank that does not compete for the traditional user. March 2016. Available at: https://www.bbva.com/en/atom- bank-or-the-mobile-bank-that-does-not-compete-for-the-traditional-user/ [Accessed 11 July. 2019].

A partnership “Anthemis experience both in UK, Europe and increasingly across the US makes them the 2018 between BBVA and best possible partner for this project”- Ian Ormerod Head of New Digital Businesses Anthemis Group. BBVA.43 The main objective to “BBVA shares our passion for transforming financial services for the Information Age” – establish a Fintech startup Amy Nauiokas founder of Anthemis Group.44 studio in London. Merger. Goldman “We are delighted to increase our investment in Financeit and help support the company 2017 Sachs has the in its development and growth” - Anthony Arnold Managing Director of Goldman Sachs.45

Finance provider for home majority stake in “Today marks an important milestone for Financeit. The increased support from our improvement, retail, Financeit. existing shareholder, Goldman Sachs, reflects their continued confidence in our leadership

vehicle, and enterprise team, our business model, our platform and the ability to grow our service” - Michael 46 solutions. Garrity, CEO of Financeit. Acquisition of “Meanwhile we will be making every effort to help Compte-Nickel improve the customer 2017 Compte-Nickel for experience and foster its growth, while remaining true to its concept”- Thierry Laborde €200 million. COO of BNP Paribas.47 French service bank account alternative.

43 BBVA. BBVA and Anthemis partner to build the next generation of financial services startups. October 2018. Available at: https://www.bbva.com/en/bbva-and-anthemis-partner-to-build-the-next-generation-of-financial-services-startups/ [Accessed 12 July. 2019]. 44 Ibid. 45 The Pe Hub Network. Goldman Sachs takes control of Financeit in recap financing. December 2017. Available at: https://www.pehub.com/2017/12/goldman-sachs-takes-control-of-financeit-in-recap-financing-2/ [Accessed 12 July. 2019]. 46 Ibid. 47 BNP Paribas. Compte-Nickel and BNP Paribas join forces to strengthen commercial partnership with the Confédération des Buralistes de France. April 2017. Available at: http://www.bnpparibas.co.uk/en/2017/04/04/compte-nickel-and-bnp-paribas-join-forces-to-strengthen-commercial- partnership-with-the-confederation-des-buralistes-de-france/ [Accessed 12 July. 2019].

In the case of Colombia, the hunt of Fintech companies started since this year. The most recent examples are:

YEAR FINANCIAL FINTECH TYPE FEEDBACK INSTITUTION ENTERPRISE 2017 Partnership “We declare innovation as an opportunity to challenge what's conventional. That's why we're presenting InvesBot as a clear alternative to show

how we can put technology at the service of our Software that clients to deliver superior experiences” - Juan Felipe 48 provided advice Giraldo president of Valores Bancolombia. to financial investments and monitored them 24/7. 2018 Partnership "We are proud to announce Bancolombia as a partner and as one of our key members for our global entrepreneurship network. This provides our startups the opportunity to expand their presence in Colombia A platform that and Latin America" - Scott Robinson, VP, and Founder connects the best of Plug and Play Fintech.49 technology “Joining Plug and Play is an opportunity to continue startups and the supporting entrepreneurs, develop partnerships and world’s largest seek innovative solutions that facilitate the lives of corporations. their customers” - Gabriel Di Lelle, Innovation and

Digital Transformation Vice President of Bancolombia.50 Partnership “The alliance will help provide better services to SMEs and users that seek to buy products and services in a faster and more efficient way’” – David Peláez CEO of Vlipco.51

48 Citywire. Colombian group Bancolombia joins robo revolution. June 2017. Available at: https://citywireamericas.com/news/colombian-group-bancolombia-joins-robo-revolution/a1028724 [Accessed 12 July. 2019]. 49 Cision. Bancolombia signed a Partnership with Plug and Play Fintech and are creating a presence in Silicon Valley. February 2018. Available at: https://www.prnewswire.com/news-releases/bancolombia-signed-a- partnership-with-plug-and-play-fintech-and-are-creating-a-presence-in-silicon-valley-300592683.html [Accessed 12 July. 2019]. 50 Ibid. 51 LATAM List. Bancolombia partners with fintech startup Vlipco. April 2019. Available at: https://latamlist.com/2019/04/13/bancolombia-partners-with-fintech-startup-vlipco/ [Accessed 12 July. 2019].

Provide e- “It’s an undertaking that will change the relationship commerce and between banks and Fintechs, and will contribute digital payments. significantly to the country’s development, since it not only responds to the needs of new businesses and users, but also to the challenges faced by these companies that need institutions like Bancolombia to believe in their potential for growth” - Juan Carlos Mora President of Grupo Bancolombia.52 Partnership “Davivienda is one of the most innovative banks we 2019 know in Latin America. We are proud to collaborate with them in their digital initiatives. The implementation process of STRANDS has been Develops successful thanks to the easy collaboration and personal finance teamwork together with multiple areas of the bank” - management. Leandro Gimeno, Global Head of Sales of STRANDS.53 “The feedback we have received has been very positive. Our clients appreciate the possibility of having a more complete vision of their finances, knowing what they spend and being able to organize more for the future” - Hair Muñoz director of Mobility and Digital Channels of Davivienda.54 Partnership “Money transfers are expected to be as easy as 1-2-3” - Simón Borrero CEO of Rappi.55 “The purpose of the collaboration is to provide easily A delivery startup accessible financial services to Colombians” - Efraín that is also Forero President of Davivienda.56 providing digital banking.

Nonetheless, it is relevant to review these alliances as it has been proved that the primary cause of why Fintechs failed in LAC is not the lack of capital, but, the discussions between partners as a consequence of the disagreements on ideas and the way they are implemented and the absence of

52 Ibid. 53 Strands. Davivienda and STRANDS: Pioneers of PFM in Colombia. June 2018. Available at: https://strands.com/davivienda-and-strands-pioneers-of-pfm-in-colombia/ [Accessed 12 July. 2019]. 54 Strands. Davivienda and STRANDS: Pioneers of PFM in Colombia. June 2018. Available at: https://strands.com/author/aoife/page/2/ [Accessed 12 July. 2019]. 55 Contexto. RappiPay allies with Davivienda in Colombia. Mayo 2019. Available at: https://www.contxto.com/en/colombia/rappi-allies-with-davivienda-to-launch-rappipay/ [Accessed 12 July. 2019]. 56 Ibid.

passion and hard work. “Conflicts among partners are one of the most sensitive and important issues to deal with. In fact, Noam Wasserman published the book The Founder’s Dilemmas: Anticipating and Avoiding the Pitfall That Can Sink a Startup, in which he had collected and analyzed information from almost 10,000 founders of the technology and life sciences sector. The results show that 65% of startups failures were attributed to problems with the founding team.”57 Incompatibility of the team could be even worse if we take into consideration that millennials want the company to adapt to their business views as the innovation doesn’t come from the business but from them.

¿What can financial institutions and Fintechs offer, respectively? Established financial institutions can provide trust and recognition in the market as they have been in the financial ecosystem for a sufficient time, that the public will be able to recognize them easily.

Additionally, financial institutions are capable of contributing to their client base, their well-established networking, and the full range of products that they offer regularly. In terms of regulation, it is essential to take advantage of the rigid and complex regulatory compliance that they need to satisfy as well as the convenience of holding a license to operate. Finally, and what it is more significant for Fintech is the access to capital, since

In the case of Fintechs, everything they offer revolves around technology and its effects. For instance, the IT infrastructure they possess is the latest and modern in the market; this helps them to provide cost-efficient services to the financial market. Besides, their products and services are well-known for been consumer-friendly. Since they use high-level technology, customer data analytics experts are required to manipulate their products and services. In this sense, it is characterized to have a technological blueprint culture in the workplace.

After all, the fintegration strategy will generate a win-win scheme to financial institutions and to Fintechs, and what is more important, the sum of both will represent advantages and convenience to the financial ecosystem and their recipients. For instance, the cost of products and transactions will be lower and faster as they will join their forces to launch their services and benefit together. As one, they will be able to use expertise individuals with different knowledge and backgrounds to improve their IT infrastructure and adopt technological advances. Also, they will focus on customization, as nowadays, it is significant for the financial ecosystem to strengthen customer loyalty, increase customer satisfaction and diminish any complaints related with the services, product or channels they provide. Ultimately, fintegration will drive the monetization of business models. The idea is to implement a culture of collaboration where all participants involved can work as a team, take risks and learn and experience from the others, a culture of innovation where new ideas and solutions are taking into consideration and a culture of customer care where customer experience is the main objective. The

57 Ruth Raventós. Anticipating Conflicts With Your Partners In Your New Startup. April 20, 2017. Available at: https://neliosoftware.com/blog/anticipating-conflicts-with-your-partners-in-you-new- startup/ [Accessed 28 July. 2019].

previous assets of fintegration will challenge the financial ecosystem with higher intensity, and at a greater scale as together, they can provide a multi-product portfolio.

To sum up, the following figure will show the advantages of fintegration:

Technological advances

Monetization Costs of business model

Fintegration

Consumer centric Challenging perspective banking system

Agility

4.3 WHAT IS NEXT?

In sum, the arrival of Fintech into the financial services industry was a call for financial institutions to wake up and digitalized their workplace to keep leading the market or at least keep competing in the market at a decent level. Now, the question is: ¿To what extent have financial institutions done anything to match or outdo Fintech?

In the latest years, financial institutions, especially commercial banks, have to deploy efforts to launch innovative well-designed products, services, and processes until they reach a high level of competitiveness. For instance, banks have initiated subsequent customer-centricity products:

FINANCIAL INNOVATIVE INSTITUTION PRODUCTS Nequi: a 100% digital banking model, where customers can transfer/pay money from their savings account to other (accounts – banks). Also, it offers a digital debit card and has an alliance with PayPal Colombia to transfer money from their PayPal Colombia account to their Nequi account. In the short-term is planning to lend small amounts of money at a low-interest rate.

Ahorro a la mano: simplified savings account that users can open for free from their phones, without asking for any documents or references.

Crédito a la Mano: offer small loans to customers who hold a simplified savings

account. Emilia the robot: financial advice chatbot that was developed together with the Fintech Juntos. Daviplata wallet: e-money platform designed for cash-out, remittances, payments, and POS sales. Pay Key: access to the account balance, enable peer to peer payments, and prepaid top-up airtime.

Red Cerca: is an alliance with VTU of Colombia and AVVillas, situated in the main cities of Colombia to perform financial operations such as payments. Immediate credit offices: access to a loan of maximum COP25 million in 2 hours.

Digital savings account and credit cards: access to savings accounts and the use of digital credit cards. Lab Digital: innovation labs to seed ideas and evaluate new technologies for financial services.

Aval Pay Wallet: a mobile wallet that creates mobile payments solutions.

Fabrica digital: quality innovation and service center responsible for evaluating and developing the offer of products through digital banking. CDT digital: access to a certificate of deposit in 5 minutes. Digital savings account: access to open a savings account in 10 minutes El Pulso: a system that measures the level of customer satisfaction and provides solutions through the use of quick responses. Nico: a robot that assists the entry and use of banking products and services

Having said this, it looks like financial institutions like commercial banks are trying to stay relevant and transform their business models into a digital world. For instance, traditional financial institutions might need to think in accomplishing the following 3 objectives, in case they want to succeed and remain in the ecosystem: firstly, to focus on automated their operations as this will permit banks and end-users to provide and received respectively smooth and straightforward products and/or services. Secondly, allocate on innovation and R&D as this might help corporations to be at the forefront of the financial system and toward transformative and disruptive innovation that the financial ecosystem is facing. For instance, it is fundamental to dedicate money and people to R&D activities as they will be in charge of creating new products or updating the existent ones. Lastly, migrate to a digital transformation. Therefore, it is necessary to establish a new mindset where individuals have access to

information, can learn and develop new skills according to the technology, move out from their comfort zone and what is most important migrate to a system where users can trust and feel secure. This approach that will happen sooner or later will be materialized through Neobanks.

Neobank is a type of direct bank that is 100% digital and reaches customers on mobile apps and personal computer platforms only.58 This is happening as a consequence of the innovative technology that has been used in the financial ecosystem. Today, Neobanks are functioning thanks to artificial intelligence and machine learning technologies that are contributing to change, not only the way the service is provided to end-users but, also the shift of products and services per se. For this reason, currently, Neobanks are built from scratch.

It is essential to clarify that commercial banks are not considered Neobanks only because they have digital products and services in their portfolio. As it was mentioned above, the criteria are the use of digital technology in its entirety, which means there are no physical branches involved. Nevertheless, the moment commercial banks become fully digital, they can be considered Neobanks.

The rise of digital banking is allowing the entrance of new players into the financial system like Fintechs and now, Neobanks. This last player is acquiring market power as they will also enhance customer experience, boost the fiduciary relationship as users will trust them, offered the new trending products and/or services as a consequence of the latest technologies, the possibility to access to real-time balances and been user-friendly.

“One of the most innovative and groundbreaking segments in financial services is that of digital-only banking or neobanks. Neobanks present the financial services ecosystem with an exciting proposition for growth through partnerships. It allows the digital transformation of banks without the need for large investments or acquisitions, and at the same time, neobanks can gain access to capital and larger customer bases. Today, neobanks partnering with financial institutions is an increasingly common phenomenon, and this is only expected to increase.”59

In certain countries, this approach could take time, as it depends on how a country is developed concerning innovation, financial inclusion, and financial stability. Also, how governments and policymakers are aligned with this type of mindset, how people resist to changes, and how mild individuals are financially educated. Here is the list of some of the most notable and well-established NeoBanks in the current Financial and Fintech market:

Figure 9.

Neobank Region

58 Wikipedia. Neobank. Available at: https://en.wikipedia.org/wiki/Neobank [Accessed 27 June 2019]. 59 Medici. (2019). From Competition to Partnerships: Banks, FinTechs, and NeoBanks. Available at: https://gomedici.com/from-competition-to-partnerships-banks-fintechs-neobanks [Accessed 27 July. 2019].

Tyro Payments Australia

Volt Bank Australia

Xinja Australia

Koho Canada

Lunar Way Denmark

Dopay Egypt

Hello bank! France

Holvi Finland

Xpence Gulf (U.A.E)

NiYO India

Soldo Italy

n26 Germany

Jibuan Bank Japan

Kakao Bank Korea

mBank Poland

Tinkoff Bank Russian Federation

Rocket Bank Russian Federation

Atom Bank United Kingdom

Monzo United Kingdom

Revolut United Kingdom

Starling Bank United Kingdom

Simple United States

Chime United States

Banco Original Brazil

NuBank Brazil

MYBank China

Neat China (HongKong) Source: Neobanks Market

The previous precedent shows that this is happening in develop countries where the progress of Fintech is well-develop and regulators are involved constantly in this ecosystem.

5. CONCLUSIONS

After the GFC, the financial sector has been disrupted by new players that are trying to take advantage from: the lack of regulation, the mislaid of trust and reputation, the necessity to update infrastructure and the shift to a customer experience approach. Although regulators and policymakers around the world tried to prevent catastrophic situations by suggesting capital buffers and implementing leverage ratios standards, the damage caused, was high intense and fatal that the financial stability was on exposure. In fact, these crises happen as regulation is not ex-ante to control what individuals are doing.

At the beginning of the arrival of Fintechs, traditional financial institutions began to feel the pressure and the necessity of doing something else. Even, their reaction was not amicable, as users, started to shift to Fintechs industry and most of the unbanked individuals were also attracted by them, as part of their aim is to enhance financial inclusion. However, through time, financial institutions like commercial banks realized the necessity to collaborate with Fintechs that were proving financial services to increase their revenues, reduced costs, focus on customer-centric perspective and provide products and services with the latest technological advances. The fintegration phase between Fintechs and also between financial institutions such as commercial banks, proof the inevitability from players to support each other and cooperate together to succeed.

For instance, Fintechs create solutions to the financial ecosystem by providing a service with the latest technological advances and infrastructure and focusing on consumers’ needs in a transparent and cost- efficient way. On the contrary, commercial banks offer a large number of clients, brand recognition, and reputation in the market, the knowledge regarding regulatory compliance, and the adequate capital that characterized them.

It can be said, there is no unified and homogenized financial ecosystem around the world, each country has had a tendency towards the adoption and performance of Fintechs. In emerging countries like Colombia, the financial ecosystem is living the M&A process by enabling relationships and develop the financial sector. Nonetheless, established financial institutions become alert and begun to hired developers, engineers, mathematics, among other careers, to focus on R&D and innovation. As a result, commercial banks and investments banks have been launching digital products and services turning innovation into a market differentiator.

In sum, there is no doubt the financial industry is being transformed, as individuals are linked to technology in their daily activities and routines and financial activities are not the exceptions.

Right now, Fintechs are disrupting the financial ecosystem, but ¿what would happen in the future? ¿Are Fintechs being disrupted by other players? What is coming for the financial ecosystem is the entrance of players like Neobanks or digital banks. Thus, startups seem to be the best players for assuming this role, as everything is built from scratch, due to the essentiality the market requires to

use innovative technology and high-tech infrastructure. Nonetheless, commercial banks could become Neobanks, only if the products and services become 100% digital and physical branches disappeared.

Players in the financial ecosystem will last, only, if they remain competitive, and they can offer to end- users high-tech and cost’ effective products and services that are aligned to individual needs and mindset. Ultimately, is indistinctive who provide the financial services and/or products as long as individuals have financial inclusion within the financial ecosystem, counts with financial stability, confidence, and consumer protection.

6. BIBLIOGRAPHY

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https://www.globalcryptopress.com/2018/08/colombias-president-tells.html [Accessed 25 July. 2019].  The Pe Hub Network. Goldman Sachs takes control of Financeit in recap financing. December 2017. Available at: https://www.pehub.com/2017/12/goldman-sachs-takes-control-of- financeit-in-recap-financing-2/ [Accessed 12 July. 2019].  The Verge. Spanish banking group BBVA acquires Simple for $117 million in cash. February 2014. Available at: https://www.theverge.com/2014/2/20/5429916/bbva-acquires-simple- 117-million-cash [Accessed 11 July. 2019].  Trading economics. Available at: https://tradingeconomics.com/colombia/remittances [Accessed March 28. 2019].  Transunion. (2019). The Evolution of Open Banking. P.p. 2. Available at: https://www.transunion.co.uk/media/4013545/transunion-open-banking-report.pdf  United Nations Population Fund – Colombia The Global Financial Crisis in Colombia and the International Conference on Population and Development (ICPD) Agenda. 2011. P.p 1.  www.dka.global. (2018). FinTech for Social Good. [online] Available at: http://analytics.dkv.global/data/pdf/Fintech-for-Social-Good/Fintech-for-Social-Good-Full- Report.pdf [Accessed 3 April. 2019].  Wikipedia. Neobank. Available at: https://en.wikipedia.org/wiki/Neobank [Accessed 27 June 2019].  World Bank Group. Available at: https://globalfindex.worldbank.org/sites/globalfindex/files/chapters/2017%20Findex%20full %20report_chapter2.pdf [Accessed March 29. 2019].  Wu, T. (2010). The Term Auction Facility’s Effectiveness in the Financial Crisis of 2007–09. Available at: https://pdfs.semanticscholar.org/24a2/e00a204377a64db44d71c42159e438c5d2d9.pdf [Accessed 9 June. 2019].

6.2 FIGURES

Figure 1. McKinsey & Company. Financial Services. A decade after the global financial crisis: What has (and hasn’t) changed?. August 2018. Executive Briefing. Available at: https://www.mckinsey.com/industries/financial-services/our-insights/a-decade-after-the-global- financial-crisis-what-has-and-hasnt-changed?reload#part4 [Accessed 8 March. 2019]. Figure 2. United Nations Population Fund – Colombia The Global Financial Crisis in Colombia and the International Conference on Population and Development (ICPD) Agenda. 2011. P.p 9 [Accessed 9 March. 2019]. Figure 3. SFC. Presentation. II Colombia Fintech Annual Meeting. El Sector Fintech desde la Vision del Supervisor. April 2019. [Accessed 14 June. 2019]. Figure 4. Finnovista. Fintech Radar Colombia 2019. Colombia’s Fintech ecosystem consolidates its maturity and position as the third largest ecosystem in the region. March 2019. Available at: https://www.finnovista.com/fintech_radar_colombia_2019/?lang=en [Accessed 31 May. 2019].

Figure 5. Iupana. CHART: Lack of financial data limits Colombian bank lending. October 2018. Available at: http://iupana.com/amenidad_post/chart-lack-of-financial-data-limits-colombian-bank- lending/?lang=en [Accessed 7 March. 2019]. Figure 6. Transunion. The Evolution of Open Banking. January 2019. P.p. 2. Available at: https://www.transunion.co.uk/media/4013545/transunion-open-banking-report.pdf [Accessed 12 June. 2019]. Figure 7. Ernst and Young. Global Fintech Adoption Index 2019. As FinTech becomes the norm, you need to stand out from the crowd. Available at: https://assets.ey.com/content/dam/ey-sites/ey- com/en_gl/topics/banking-and-capital-markets/ey-global-fintech-adoption-index.pdf [Accessed 17 June. 2019]. Figure 8. The Motley Fool. The Biggest Deals in Fintech History Are Happening Right Now. April 2019. Available at: https://www.fool.com/investing/2019/04/14/the-biggest-deals-in-fintech-history-are- happening.aspx [Accessed 7 April. 2019]. Figure 9. Neobank Market. List of Active NeoBanks – Region Wise. https://neobankmarket.com/list- of-neobanks/ [Accessed 31 July. 2019].