As a member of Principal’s international team, I have had an amazing and unique opportunity to follow the FinTech phenomenon very closely in various countries around the world. Working at head office in the USA, where FinTech has exploded, and visiting and researching countries like India, Brazil, Chile, Mexico, Malaysia, Hong Kong and China, has given me a unique first-hand view of the state of evolution on financial technology. For the purposes of this chapter, I will concentrate my comments on Latin America (Latam), and more specifically on Brazil, Mexico and Chile, which are the countries where we have operations.

What We Expect for the Evolution of FinTech and WealthTech in Latam

The big banks have fallen asleep. In Latam, the banks own most of the distribution of financial products, especially investment. Accounting for an average of 70% of mutual fund sales, they offer “closed architecture” (they sell only their proprietary funds, normally managed by their own asset management company). They offer poor customer experience and proprietary-only funds often not in the customer’s best interest. When you look to the way FinTech has evolved around the world, especially in the USA and Europe, you see big banks and incumbents applying an approach like that described in Figure 1, clearly trying to maximize their profit-creation products.

It is very easy to understand why incumbents are taking this approach, especially in Latam, where the biggest problem is a debt and overspending culture, where most people don’t have any money to invest and big retail chains have flooded the unbanked customers with credit cards. And please, don’t get me wrong. Banks and retail chains are not evil for doing this; in fact, they have given access to credit to people who never before had the opportunity to afford big purchases, and today those customers are enjoying bigger than they probably need flat-screen HD TVs, enormous refrigerators with ice makers and even cars. The problem is that with great benefits and credit access come great responsibilities too, and here is where the incumbents, big companies and especially customers have not done a good job.

Because of the speed of change, how fast we are learning from international experiences and local adaptation to market products and needs, in Latam we have seen an interesting acceleration of some of these categories in FinTech that don’t necessarily match the US and European evolution. Based on our own exploration and scouting of the markets, we see a slightly different evolution in terms of start-up activity, as illustrated in Figure 2.

Why We Believe There is a Different Evolution of FinTech Activity in the Region

There are a couple of reasons:

• Unbanked population. It is estimated that around 65% of the Latam population is unbanked, making it easier for start-ups to target a segment of the market that is underserved.
• Overspending/debt culture. Banks and retail chains have open lending opportunities to more and more customers, which is a great thing. The bad part is that these opportunities come to a population without the right knowledge, the proper understanding of interest rates and that is extremely financially illiterate.
• Trust. People realize that financial institutions for a long time have offered products and services in their own best interests, ignoring what is best for their customers. FinTech has started to change this, putting the customer at the centre of everything they do. But there is also a trust issue with start-ups, especially critical in wealth management, where a customer may not feel comfortable saving or investing their money with a company that has 10 people and is funded by venture capitalists.
• Privatized pension systems:
  • In Mexico and Chile, with a highly regulated and privatized mandatory pension system, wealth is increasing every month. In these markets, since saving is mandatory, the employer deducts that saving every month out of the employee’s payroll, so people view this more like a tax than their own saving effort. This is a big problem, because people don’t feel this is their money, so they don’t track it or worry too much about it. On top of this, the mandatory contribution rates are not sufficient to generate proper amounts of income in retirement, so people need to make voluntary contributions to their retirement accounts in order to have a 70–80% replacement ratio of their working day’s salary in retirement, but less than 20% of active workers make such voluntary contributions.
  • Brazil is going through a difficult process, where the government is realizing that they cannot afford to pay pensions to all the citizens demanding one as their population ages (traditional social security pension schemes are bankrupt everywhere in the world). Discussions are going on right now to solve this pension crisis. International experience shows that from design, adequacy, integrity and sustainability perspectives, privatized pension systems like the ones used in Chile and Mexico are a better long-term solution. Banks are the go-to place for financial needs.
• Extremely low financial literacy. Money conversations are hard, and most people don’t want to deal with the “hard” part of money, they just like to spend (who doesn’t?). In Latam, too many people don’t want to listen and understand that all the financial decisions we make (or don’t make) today will have an impact on our future, and without the proper education and understanding of how the financial world works, it is very hard to make the right financial choices.

The Opportunity: To Grow Wealth We Need to Grow Financial Literacy First

The biggest challenge that we face in Latam, and probably around the world, is financial literacy. Everybody talks about money, everybody likes money but very few people understand how money works, especially in the long term. I am not even talking about investments, I am talking about basic understanding of personal finance, budgeting and expense tracking, debt management and credit cards, interest and long-term investing. No doubt the world is changing and we are changing as users and consumers too. As an example:

• My 9-year-old daughter does not remember a time when she was not able to talk to her family back in Chile using FaceTime. For her, phone communication is not only about listening to someone but also looking at the faces of her relatives and their non-verbal expressions. In her mind, there is no reason to go somewhere and meet face-to-face, unless it is a play date with one of her friends, but financial education and even financial advisors – when she grows up – are not in the “friend” category.
• My 12-year-old daughter rarely uses pen and paper in her school assignments. Her school (a US public school) uses Google Classroom technology, which allows the teacher to post all the assignments, homework and materials in the cloud, so she can access everything from her phone, tablet or computer, anywhere! The teacher also uploads videos of classes and exercises, so if she is in doubt on any topic, my daughter can always go and review the class. Why would she go anywhere else to get the content and information she is looking for? Financial education should be delivered in the same way, with fun and relevant content, on the platforms we are using today and in a cool way.
• My 15-year-old daughter received her first allowance a year ago. Like my dad did with me, I got her a piggy bank and gave her a bunch of bills and coins. I told her that from now on, she was going to start needing and using money, and I wanted her to start saving a little every time she received some money by putting some bills in the piggy bank. She was surprised, and I thought great, she likes this idea! The surprise was mine when she told me that she needed “digital” money instead, because most of her purchases were made on her phone (apps, music, Amazon, Starbucks… and she was using MY credit card for that!). It seems pretty obvious, but I must be honest, I didn’t see that coming, even with all my research on digital behaviour. So, how do you teach a teenager to save and manage money in a world where she doesn’t see money, where the touch ID button on a phone is used exactly the same way for a US$3 purchase as a US$100 purchase? How do you make them keep track of their expenses and account balance on their cards and accounts if they just erase the bank app every time they need extra space for more photos, videos, music or apps? As you can imagine, I have not solved the problem yet!

So, in order to grow wealth, we need to grow financial literacy. And in order to grow financial literacy, we need to find a way to make it cool, fun, simple, direct and relevant, and as early as possible in life. I am optimistic that technology will help us get there faster, with solutions that are generating some traction in the USA. (For full disclosure, I am not trying to promote any company or receiving anything from the companies mentioned. The examples are just for illustration purposes and to help the reader understand the point I am trying to make):

• Expense management or personal finance management (PFM) apps. A key part of financial education is understanding where your money goes. With people too busy to organize and follow their expenses, this type of app follows your expenses through your current account and credit cards, in one or many accounts, and keeps track of your expenses and budgets in real time with cool graphics and UX, phone and watch apps. Some of them will even send you information comparing your peer group, people on your income level, living in your area and even in your age group (e.g. www.mint.com).
• Robo-savers. There are some start-ups that use artificial intelligence (AI) to keep track of your expenses and money movements in your current accounts. The app will pull money from your current account into a savings account without you noticing the saving effort. In other words, it automates the act of saving, especially for people who say “I don’t have any money to save”. These apps help you find small amounts that add up in the long run. The one I use in the USA has already saved more than USD$500 billion in 4 years for their users (e.g. www.digit.com).
• Micro investing. This type of app is more spread around the world, and they work by basically linking your current accounts and allowing them to round up every purchase you make. You can also add other rules to increase your savings, for example shopping in certain stores, making big purchases or just getting your payroll. Again, the idea here is start small (average weekly savings of USD$5) and show people that progress can be made and that they can save (e.g. www.acorns.com, www.qapital.com or Bank of America’s Keep the Change).

We are going through an amazing time, where technology is changing everything we do and how we do it. I believe, though, that the digital transformation era will not be machines against humans, but more how humans are empowered by technology. Financial advisors and brick-and-mortar branches will not disappear, but tech will absolutely change the way we use them. I am a firm believer that there is an unbreakable relation between money, human behaviour and coaching. So for me, the future of WealthTech has to do with wealth and technology, but most importantly, understanding human behaviour, human interactions and how to coach people to manage their finances better. Whether that will be done in a branch, over FaceTime with an advisor, via an app on your phone or through a voice assistant at home is yet to be seen, but most likely it will be a combination. Only when we understand our relationship with money, expenses, budgeting and saving will we be better positioned to grow wealth in Latam. Technology certainly plays an important role in speeding up the process and shifting our financial behaviour.