The migrant population in Latin America is in increasing need of attention from the financial industry, and while new fintechs keen to plug the gap have sprung up in recent years, millions of potential users still lack adequate access to financial services.
Migrants that would like to do business with banks and fintechs face a combination of obstacles: they’re perceived as high risk, lacking in financial history and there’s also regulatory complexity. International organizations such as the World Bank stress the need to financially include the displaced in order to generate a positive economic impact on their host country and better manage their scarce resources. For financial service providers, migrants represent a potential business opportunity.
The International Finance Corporation (IFC), the World Bank’s private-sector funding arm, is keen to invest in banks and fintechs that attend to migrants, especially Venezuelans, which represent the region’s biggest expatriate group. However, it says it has encountered multiple barriers in its quest to forge such partnerships.
“There's very strong demand right now for financial services, but migrants are poorly served by financial institutions, mainly due to misconceptions towards this segment," Jeffrey Bower, the organization’s head of investment for Latin America and Caribbean, tells iupana.
“The paradox is that formal financial institutions think migrants are a very high-risk segment, where bankruptcies or loan defaults would be very high,” he says. But that’s not necessarily the case. Studies by the IFC in Colombia and Peru show that migrants are financially educated and also repay their debts. Yet the studies also found little interest from the industry in serving this segment of the population.
“What we’ve seen is that when you lend to a migrant, they [are more likely to] repay the credit than a local, because they understand that if they don’t have access to that vehicle, there’s no way for them to generate money,” adds Bower.
Venezuelans, and to a lesser degree Haitians, account for the biggest share of migrants. More than 6.1 million Venezuelans have abandoned their country and settled in Latin America; mainly in Colombia, where there are an estimated 2.5 million, as well as Peru, Ecuador, Chile and Brazil.
Mining data to create new histories
In Chile, the misconceptions about migrants are not shared by Galgo, a fintech that specializes in serving expatriates.
“What you have to do is analyze the person taking the loan well, just like when granting any credit. In general, financial institutions have not focused on migrants, so they do not know how to distinguish who’s the good payor and who’s the bad payor,” says Diego Fleischmann, CEO of Galgo.
Fleischmann says that, in the fintech’s experience, nationality is not a factor that tilts the balance of risk unfavorably. Irresponsible borrowers can be Chilean, Peruvian, American or Venezuelan, he says.
Galgo began operations as Migrante in 2018 and incorporated digital onboarding capable of validating foreign identity documents in order to provide loans for work vehicles, such as motorcycles or cars. It later expanded into Peru, Colombia and Mexico. The firm subsequently changed its name with the aim of appealing to a broader pool of potential clients.
"After doing several experiments providing financing, we realized that migrants are very good payers," Fleischmann says, adding that it’s essential to create a risk matrix specialized in analyzing indicators tied to expatriates.
“The challenge is to have data that’s robust enough to distinguish between the good and bad payers,” he says. “To establish the extent of a person’s roots in a country. A lot of [financial institutions] say ‘they’re going to come and go.’ But a migrant who arrives in a country where they have relatives, where they have some roots, is different from a migrant that arrives in a country with no relatives,” Fleischmann adds.
Building an opportunity
The time it takes regulators to update financial rules for foreigners is another barrier.
In Colombia and Peru, for example, foreigners can’t apply digitally to open savings accounts. Bancolombia requires migrants to visit a branch, and in Peru, they can’t apply for a Yape digital wallet, the country’s most popular, two people from the platform confirmed to iupana.
The Venezuelan population in Peru numbers about 1.5 million, which prompted the regulator in March to publish a guide for the financial inclusion of refugees and migrants, where it lists the documents required in order to apply for a financial product.
However, the IFC says, the lack of real-time data integration between the government body that issues IDs for migrants and the financial system prevents banks from offering a digital onboarding option.
“The vast majority of institutions are saying: ‘If I can't validate the documents in real time, I'm not interested,’” the IFC’s Bower says. “A fintech, with its flexibility and agility, could serve needs in a format that's impossible for a fairly large financial institution,” he adds.
There’s a long way to go before such solutions become widespread.
Bower says that, in the case of the Ukrainian refugees in Poland, the IFC helped integrate financial information from the migrants’ home country with that of their receiving country. That would be virtually impossible to do with the Venezuelan government, for example, due to its unwillingness to share information and weak ties with international organizations.
In Peru and Colombia, the IFC encouraged the BBVA Microfinance Foundation’s local arms —Financiera Confianza and Bancamía, respectively— to create financial products for migrants.
“We’ve found that finding partners who are interested in working directly with the segment is a major challenge. It’s important to clarify that we’re not looking for diversity, equity and inclusion partners. This isn’t a question of inclusion nor is it charity—it’s a business,” Bower says.