Digital Transformation Is the Way Forward
The approach to banking has changed dramatically since the start of the pandemic. Millions of people are just starting to use the banking system for the first time, with Latin America reporting the highest increase in global adoption.
These new customers are much more likely to demand digital-first experiences. As a result of this influx of new digital-native customers, 86% of banks in Latin America and the Caribbean accelerated their digitalization initiatives during the Covid-19 health emergency, according to the First Latin American and Caribbean Study on Digital Banking, Impact of the Pandemic on the Financial Industry, a survey recently conducted by Infocorp. Net investment in technology also grew by 40% during this period.
However, digital transformation is difficult. Accelerating digitalization is not just a matter of technology modernization. Today’s disruptive forces are also driving a reconfiguration of the industry’s business models. Some of the global trends that are creating disruptive change outside LatAm, are doing the same within the region. These include Open Banking and ISO 20022.
The Role of Payments In Digital Transformation
Digital transformation programmes are frequently driven by customer experience considerations in retail and consumer banking. This is particularly true in Latin America, where, despite the big push for digitalization, the overall penetration of banking services in LatAm remains low. 70% of Latin America’s population remains unbanked or underbanked, compared to only 9% in the United States. So, one of the first priorities for banks has to be to open up access to banking services. This will increase the number of individuals in the banking system, which will then increase opportunities for business and corporate clients as well.
Once these new participants are part of the system, the logical next step is providing services, and payment services are among the most promising next-generation services that can be driven by digital transformation. The reason is opportunity: of the $418 billion USD in total banking revenue in Latin America, over $200 billion, or 48% comes from payments. So payments modernization must be a fundamental part of any digital transformation strategy.
In order to maximize payments modernization efforts, banks are utilizing new advancements in fintech that are helping to free up in-house costs and resources. Volante Technologies’ partnership with Mexico’s Grupo Financiero Banorte is a good use case of this mutually beneficial dynamic.
What Does This Have To Do With Cloud?
The customer experience of the future in Latin America cannot be built on the legacy systems of the past. Banks must free themselves of legacy limitations in order to evolve new ways of doing business and innovating for their customers. Cloud, and more generally, Banking as a Service and Payments as a Service models for financial technology infrastructure, are a fundamental part of the new approach that financial institutions in Latin America must take.
One reason for this is that as a result of COVID, while digital transformation initiatives have accelerated, the budgets required to deliver results have not moved as much, or even shrunk. The pressure to do more with less is a familiar constant for those operating in the financial services sector but is particularly pertinent in the payments space right now. Modernisation and transformation initiatives are tending away from “big bang” approaches and massive IT replacement programs. Instead, more targeted approaches are being taken to modernise architectures, replacing, and upgrading selected systems, focusing on integration, and moving to cloud and “as-a-service” delivery models to improve agility while constraining costs.
A recent survey conducted by Finextra in collaboration with Volante showed that more than half of organisations plan to make changes to the hosting and delivery model of their payments infrastructure within the next 12 months. Based on this we predict that the current 22% of organisations using hybrid cloud and 9% engaging with Payments as a Service providers will only increase.
A recent McKinsey shows that Latin America’s 2019 banking revenue was up at least 12% prior to the pandemic, which is more than twice the growth rate of many other regions. In fact, LatAm is the fastest growing region in banking, making payments in the cloud an essential piece of the region’s strategical growth efforts. While the post-pandemic world inches closer, it is more important than ever to embrace digital transformation opportunities in the LatAm region and beyond.