“It is interesting to compare how Chile, through Transbank, implemented a Sociedad de Apoyo al Giro, a SAG, (auxiliary financial company, in Spanish), that eliminated competition; to how Colombia, through ACH, implemented a SAG that favored competition. This case is crucial because it allows us to understand what was done wrong (…) In Colombia, SAG is in charge of the PSE (a bank transfer network) button but not in charge of selling it. If someone is interested in putting it into operation, they should speak to a bank or other entity. But here (in Chile), banks were allowed to found Transbank to develop the technology – and to sell it. That was the deadly sin we committed”.
The one employing the religious metaphor is Roberto Opazo, CEO of the online payment platform Khipu. Thoughtful and conciliatory in his analysis, Opazo clarifies that he does not believe in the “bad mood” of Transbank. But he does recognize that competing with Transbank was “a heavy burden to carry. Not because Transbank or the banks have done something unfair, but because potential investors have been terrified to invest with this monopoly installed.”
Undoubtedly, Transbank enjoyed the monopoly since the late 1980s, a position strengthened by launching the card Redcompra and the solution Webpay nationwide in 2000, improvements that, paradoxically, brought great benefits to the population. Chileans can receive electronic payments with credit cards, use prepaid methods, and make electronic transfers through most Chilean banks. But considering the country’s Internet and smartphone penetration, the highest in Latin America, the Chilean payments industry is far from it could be.
While the four-part model separates credit, debit, and prepaid card issuers (banks and other types of financial institutions) from the acquiring companies, which operate and generate the technology for payment solutions; the three-part model, in which Transbank was set, allowed it to manage both the acquiring and operation of payment methods for its owners (banks, controlling shareholders such as BICE, Banco de Chile, BCI, Banco Falabella, Internacional, Security, among others). As a payment operator and acquirer, Transbank could process transactions and at the same time partner with merchants so that they accept cards from banks in their POS.
An undesirable three-part system that for Julio Tapia, research coordinator of the CeCo (Centro de Competencia) of the Adolfo Ibáñez University, turned “Chile into a unique case regarding the payment methods industry, in which the acquiring side is practically integrated –, without any competition – with the issuing side.”
But if almost all the banks were partners of Transbank, why stop being a “deadly sinner”?
One step forward, one step back
Chile is slowly opening up its acquiring market and implementing a four-part model – something that happened more than a decade ago in Brazil, spurring a series of innovations, from the spread of POS terminals throughout the country to the rise of fintechs more recently.
The market for payment methods is now busy. Incumbents have raised the tone of the debate, while the COVID-19 pandemic unleashed digital payments. There is too much at stake, and this four-part model is being implemented with the purpose of bringing in new acquirers or processors, unrelated to the issuing party, which will, in theory, benefit businesses and consumers.
However, the regulatory transition to the new model reached the courts. The scheme has yet to convince the industry’s stakeholders, even though Transbank claims to have requested the Tribunal for the Defense of Free Competition (TDLC, in Spanish) to declare compliance with the regulations for the defense of free competition of the charging model implemented by the company since April 1, 2020; and having ended the contracts with the issuers and separately negotiated the licenses with Visa, Mastercard, and American Express, as a new acquirer must do in this modality.
The charging model that Transbank adopted and presented to the TDLC in mid-May “as self-regulation” brings “maximum prices for its services to issuers and a pricing at economical cost” for the services the company wants to deliver to payment processing providers and other operators. This “model” bothered players such as Farmacias Ahumada, Flow, IGT Global, Mastercard, SMU, Unired, Visa, Walmart, Banco Santander – the first bank to announce its exit from Transbank scheme, in 2018 – and the fintechs in general. The industry’s startups alerted the authorities that if the model is approved as it is, the entry of new players won’t be ensured and that the platform will raise the commission charged for each transaction since the cards will increase the interchange fees, now deregulated in the country. The model presented by Transbank is in trials at least until March 31, 2021.
On October 6, TDLC refused to modify the interchange fees, although the Fiscalía Nacional Económica (National Economic Prosecutor’s Office, in Spanish) considered that “while the Executive Power did not take the initiative in the matter, a transitory regulation was essential to ensure an adequate migration to the four-part market.”
Next, the TLDC passed its responsibility to the Ministry of Finance for this authority to urgently enter the bill in which they were working to regulate. An opportunity seized by the government and translated into a statement on July 9, 2020, in which the Minister of Finance, Ignacio Briones, announced that he would send a project that precisely sought to regulate interchange fees.
Patricio Santelices, General Manager of Transbank, doesn’t share the metaphor of the “deadly sin,” but explains that, if he had to play the game of this figure of speech, what happened in the market for payment methods “is a deadly sin that Chile and each country carry; the same in Colombia, in Argentina. That is the structural deadly sin of any industry in which large investments have to be made, and someone makes that decision. In the case of Chile, it was the banks”.
Santelices, who has led the company since December 2019, highlights the advances achieved – “just look at the region and (you will see that) nobody has reached these levels of development (in contactless technology)” and recognizes some flaws. “But, undoubtedly the (lack of) competition was not one of them because the authority itself intended to make changes in 2017, and here we are, in the middle of this process”.
“When you see that 50% or more of the transactions are still made in cash in the country, you say ‘there is room to grow.’ And the introduction of the competition is going to help that. A competition that was already on the street. 10% of transactions are self-processed. Almost 6% or 7% of sales are made through PSP (Payment System Provider). Which means: competitors that are a reality and that are growing more and more. We are convinced that this is the way to keep growing,” Santelices says.
“The shift to the four-part model is a necessary change and one that is being done with a lot of pain. There is a lot of uncertainty. And it is highly probable that next year many large businesses will have higher costs. Not the small and medium, but 15% of the largest businesses. Could things have been done better? Yes. If the interchange fees, the brand regulations, the access fees for redistributors were regulated first… But in practice, it was impossible to do it perfectly, and it was something that had to be done,” says Kiphu’s CEO.
Santelices, from Transbank, believes that the solution to the controversial interchange fees is to seek a balance. “The interchange fee is a cost for us that we pass directly on to the businesses, and in which we have no interference. And it seems that Visa and Mastercard have not made sufficient efforts, especially Mastercard, to review their fees. If, in the end, this process means a price hike, then it didn’t make sense. The authority also understood that it is necessary to regulate them (the fees) because the brands didn’t do their job. What will happen is what happened in virtually all markets where there is acquiring: an adjustment of fees ”, stresses Santelices.
“In the end, it is easier said than done, but certainly it is necessary to seek a balance as technical as possible for the definition of these fees. So that incentives do not favor some and harm others,” he warns and gives an example: “Meager interchange fees are going to impact the card industry. That is obvious”.
Julio Tapia, from the CeCo, also refrains from pessimism. Asked if he shares the fear that this could go from the Transbank monopoly “to the Visa and Mastercard duopoly,” he recalls that in this matter, there is an essential regulatory consensus, among different institutions, that the country needs to take a step towards a four-part market. “The TDLC, the Financial Market Commission, the National Economic Prosecutor’s Office, the Central Bank, all public, technical and independent institutions, have shown that this is the way to improve the payment market.” “The industry is still waiting for important regulations that can determine the players’ incentives and how the market behaves, so some time will have to pass to evaluate the strengths and challenges of this structural change in the payment methods,” ponders the UAI expert.
Less optimistic is the Colombian Ángel Sierra, executive director at FINTECHILE, an association representing startups focused on the financial market. Sierra has managed to get them heard and include observations in bills for the financial system, such as the long-awaited Fintech law and the legal regime that will apply to the country’s four-part market. But he believes that his commitment collides with an “inadequate mindset”.
Those who are optimistic about this potential are the Inter-American Development Bank and The Economist. In the latest version of the Global Microscope report, which measures financial inclusion indicators in 55 emerging countries, they sent a little message to the white star country, which fell three places compared to 2018: Chile must improve its digital financial inclusion, and for that, allow non-banking entities to issue electronic money and the presence of financial services agents; encourage digitization and emerging technologies; generate an inclusive insurance industry.
“Fintech is financial inclusion; that’s my definition. And although the metrics are highlighted by the RUT account (of BancoEstado), all of Chile knows that one thing is access and another is use,” Sierra highlights. And the key is the shift to the four-part model. But he confesses that he has lowered expectations since the government of President Sebastián Piñera is almost saying goodbye to La Moneda Palace.
However, at the end of the interview, the leader of FINTECHILE was able to smile when it was known that the former member of the Commission for the Financial Market (CMF), Rosario Celedón, will return to the Ministry of Finance to draft a fintech bill. A timely decision, acknowledges Sierra, since “we need to capitalize as soon as possible on the enormous capabilities of financial technology for the economic recovery process ahead.”
Banks and fintechs: extended companies
“At the end of the day, as a consumer, we love competition, but when we have a business, not that much. It is rational behavior. They (the banks) are not averse to technology because they developed bank transfers. “What I have seen is resistance to a competition that provides digital tools in areas where they are not yet developed,” says the computer engineer, Leo Soto, partner of the consulting firm Continuum. He is a kind of teacher for dummies when it comes to untangling the tangled thread of Chile’s payment system and believes that, with more or fewer restrictions, digital will prevail, with banks and fintechs working together.
What Soto sees as necessary regarding the fintechs coincides with one of the pillars of the cultural change in Transbank’s development, which, according to Santelices, includes a quota of humility. “Part of that change has to do with connecting. Internally we call it ‘extended company’: how we seek alliances with other players that may be for the common good, to make this market expand”.
But the delay in regulatory changes has reduced the growth of financial inclusion in Chile. Proof of this is the minimal effect that the passing of Law 20950 has had. In force since October 2016, the law authorizes non-banking entities to issue and operate payment methods with funding provision, such as “prepaid cards.”
What if everyone wins?
Ray Ruga, CEO of the consulting firm Fintech Americas, with a long professional experience in banking, considers that the brakes that impact the Chilean financial market (tension due to the four-part model and shy collaboration between traditional banking and fintechs) have also appeared in other areas of Latin America. “The regulatory issue is critical for all markets. Unfortunately, we are seeing a major bottleneck in the ability of regulators to absorb and create regulations in emerging economies with industries that are modernizing,” he says.
“And the banking industry should be clear about the importance of sharing clients to give them the most innovative services. The average cost of a visit to a bank branch is around $4, due to the implications of fixed costs, employees, etc. So there is no more effective way than to go to the base of the pyramid hand in hand with fintechs,” explains Ruga.
The former Citi executive has become a sort of evangelizer of the banks, aiming to entice them to collaborate. However, he is aware that “the longer you have been in the system, the more calcified your ideas are. But since the pandemic, many bankers who had told me that they had transformation plans for one, two years, have now called us to say, “we want it now!”
“Undoubtedly, the consumer is driving the change, but if the bank and the regulator don’t act quickly, fintechs, like water, will continue to advance through all possible spaces… We tell the banks: ‘This is going to happen whether you want it or not. And if you don’t change, in a while, you will no longer be able to compete,'” he highlights.
The Robin Hood effect of fintechs in Chile
Fernando Araya, CEO at Tenpo, one of the fintechs of the Peruvian Credicorp and of its open innovation arm Krealo, says that the concept of “financracy” motivates them to innovate in the financial market, a neologism that means “democracy in finance,” by generating a real and greater financial inclusion, a mission that in Chile is shared by all fintechs.
He would like to see regulatory changes that allow generating positive discrimination for fintechs, leaving behind “the phenomenon of David and Goliath, to move to the collaborative economy,” he projects, because “it is definitely a utopia to think that a fintech of digital accounts and prepaid cards can be financially sound only with the income it receives from the card brands, with their interchange fees.”
Sebastián Robles, CEO of the Chilean fintech Kredito, recognizes that startups “should be considered and that a law could be a sign for international investors to bet on Chile” but, at the same time, he celebrates alliances as the one Banco Estado made with European SumUp, the joint venture between BCI and Evo Payments, or the opening of “by all criticized Transbank” to fintechs and the creation of a payment gateway model.
Kredito leader’s thought is based on the desire that, whether with more or fewer disputes, the important thing is to go to the aid of the Chilean population: although it is true that “90% of the population is banked, only 16% have access to credit and 20% to a checking account ”. That is why its business model has been based on “freely available credits,” a modality close to that of the neobank WeBank, distributing capital from third parties from an investment fund that allows them to give loans without guarantee to SMEs, of up to $15,000. Risky? No, he clarifies, because, through technology, they have been able to predict who will pay and who will not, achieving a level of bad loans much lower than that of local banks and similar to their Asian peers.
On the other hand, Robles stresses that it’s frustrating to see the new, and so far failed Financial Portability Law, which promises that people and SMEs can quickly change their financial product provider, following the telecom’s successful model industry. Only a few requests were made and have not yet materialized. “When you see these projects that are designed to help people, it hurts to be left out. Because fintechs have a Robin Hood mentality. In the COVID-19 financial aid, they also left us out. In Colombia, they relied on fintechs to distribute aid credits during the pandemic,” he compares.
Motivated by the same imprint of Robin Hood, the fintech Cumplo operates what its CEO Gonzalo Kirberg defines as “the largest platform for financing SMEs in Latin America.”
“During this pandemic, we have achieved something very important, entering a segment in which it was very difficult to enter, and that has allowed large companies to realize that their suppliers, medium and small, are very relevant,” he says.
Cumplo has just set a partnership with one of the largest fund managers in Latin America, Moneda Asset Management, and is raising a fund that starts at $200 million to finance mainly small and medium suppliers of large companies. “Imagine how powerful it can be for a small supplier of security guards for Falabella, for example, to borrow at a risk rate similar to that of the big Chilean retailer,” says Kirberg.
But Robin Hood doesn’t forget the troubled past that he used to live in at Sherwood Forest. “Recently, some players have stopped constantly attacking the fintech industry. The only thing that executives of the traditional system told was’ be careful with these people; it’s dangerous, there are systemic risks.’ That has been changing. Although I feel sorry for all that because the fintech industry started in Chile before the rest of Latin America, and we have already lost a large part of the Latin American game,” he analyzes.
And what remains to be done to make it up for the lost time? “Regulate by activity and apply proportionality in the regulation of fintechs in Chile. If you put the same regulation on everyone, innovation becomes too difficult if you are small. It is extremely important that the regulatory burden increases following the operation’s size, but we’re taking too long to get there. Unfortunately, in Chile, only risks are regulated, without encouraging the generation of industries,” he regrets.
Unbanked population: one of the reasons that attract
Marco Roca, CEO of Krealo, shed light on why some foreign players, of significant impact, still land in Chilean territory. “We saw a great opportunity since although the traditional financial industry, both private and public, has done a great job in financial inclusion, there is still a big gap because the use of cash represents almost 80% of share in purchases, in Chile,” he details.
Thus, its inclusive goal has been split into three: “the millions of people with a low level of banking; a growing segment that we call ‘trend seekers,’ young people who want as a gateway to the financial industry a model in line with the digital age; and seniors, especially those who after their retirement begin to be unbanked,” lists the CEO of Krealo.
Citizens are just as attentive as the entrepreneurs behind the fintechs, waiting for the four-part model that Transbank promised, which is expected to boost the financial inclusion of the bottom of the pyramid and, why not, erase the “deadly sin” of the payment methods in Chile.