By Katie Llanos-Small
Latin America’s rapidly growing middle class offers a huge opportunity for the region’s strengthening corporates, and particularly for its financial institutions. As ever greater numbers of people join the formal workforce, they are also signing up for bank accounts, pensions and insurance.
But the sharply accelerating demographic shift also throws up new problems for Latin banks, insurers and pension fund managers, says David Bojanini, chief executive of Grupo de Inversiones Suramericana. As financial institutions jostle for market share in rolling out services to previously unbanked clients, they need to work out new ways to do so.
“To advance financial services or insurance to the middle class, and the lower-middle class, innovation is needed,” Bojanini tells LatinFinance. “We need to think about the avenues that are not the traditional channels of a banking network, to form connections in ways that are much more economic.
“The costs of very small-sized transactions through a traditional banking network will generate losses. So it’s important to innovate, to find a way to facilitate these transactions for middle class clients so that the costs don’t shoot up.”
Mobile banking, already expanding in Sura’s home market of Colombia, is a good example of that, he says. Technological innovation is also critical to increase market share among small and medium-sized businesses, he says. It is those enterprises where real progress can be made in expanding the client base.
“Where banks still need to penetrate is in the smallest businesses,” he says. “For micro-businesses, SMEs, there are guarantee mechanisms that can allow them to access bank lending at a reasonable cost.”
The financial holding company known as Grupo Sura owns close to 27% of Bancolombia as well as pension fund and insurance businesses in the region. It rose to prominence in 2011, when it bought ING’s financial assets in Chile, Colombia, Mexico, Uruguay and Peru for €2.68 billion ($3.9 billion). In early 2013, it continued its expansion, buying half of BBVA’s Peruvian pension fund.
Despite a trend for international banks – particularly European ones – to retreat from Latin America as they focus on difficulties at home, the presence of global lenders in the region’s markets keeps everyone alert, says Bojanini.
“It’s very important to have international actors in each of the countries. It’s what forces us to be better. Today in many of our countries, the financial sector is led by local companies, they are local companies that have understood that the markets are global and they have prepared for that – they’ve been able to maintain a leadership position in spite of the arrival of foreign competition.”
Globalization – and the commodities boom that has come with it – has been the most important development for Latin American economies over the past quarter century, says Bojanini. And while the commodities supercycle is waning, the conditions for Latin growth are likely to remain – although his view cannot be entirely characterized as “bullish”, he says. Indeed, one of his biggest concerns is that those conditions for growth will fall away.
The region must take advantage of opportunities to advance further, by diversifying away from a reliance on commodities. It also must make sure that the gains are equally shared, he says. “That’s one of the worries: that the growth is sustainable, and that it’s equally distributed,” he says.
Political risk also remains a concern. Many countries have made great strides in cementing strong institutions and fomenting stable regulations. Colombia boasts a solid, strong electoral system, he says.
“However, no country is exempt from political risk. Above all in countries where there is poverty and difficult conditions, it cannot be said that they will not fall into the hands of a leader who will destabilize the regulatory or macro-economic system.
“But in those countries that have a record of being stable and supporting development, it’s more unlikely that this would materialize. I think that, for Colombia, that risk is under control.” LF