Anabel Pérez
Co-Founder and CEO
Novopayment
/
Startup Contributor

Nonbanking Financial Institutions Face Historic Opportunity

By Anabel Perez | Wed, 03/03/2021 - 09:19

Mexico’s nonbanking financial institutions (NBFIs), which were created to extend affordable financial services to sectors not generally suitable for traditional banks, are today facing a historic opportunity to leap forward and achieve their purpose through recent changes in the field of financial technology, or fintech. But, opportunities, like waves, come and go and also can manifest first as challenges.

Thanks to a combination of factors, these entities, which are variously known by their associations and acronyms (Sofipo, Sofom, Sapi), find themselves in a relatively favorable position to equip themselves in ways they could have scarcely imagined just a few short years ago.

That’s because the increased simplification, access and affordability of key financial technologies, which are the foundational blocks to present and future financial services, are within their reach, presenting not only a chance to match the efficiencies and experiences enjoyed by other financial entities around the world, but to ensure their relevance amid an increasingly digital population.

What are Sofipos and Sofoms?

For illustrative purposes, we’ll focus on two of the most discussed types of NBFIs: Sofipos and Sofomes. A Sofipo – Sociedad financiera popular – is a microfinance entity that operates under the authority of the National Banking and Security Commission (CNBV, Comisión Nacional Bancario y de Valores), providing financial services including savings, credit and investment to its members and clients.

Sofomes – Sociedad financiera de objeto múltiple – are entities that grant credits or financing. Most are unregulated, though some are regulated. Sofomes can grant credit through financial products and services but, unlike a bank, they cannot obtain their resources from the general public; that is, they are not allowed to open savings accounts, etc.

Different Entities, Similar Challenges

Understanding how NBFIs are different is important, but what’s far more relevant at this moment in time is how they’re similar. The first factor is demographic. Naturally, they operate in the same population. Even before the pandemic, and like the rest of the world, this population had shown a growing affinity for modern digital financial experiences – things that feel less novel by the day, like the ability to pay for goods and services and receive payment or monies through a mobile phone. Remote and contactless payments.

The second factor, also global in nature, is the disruption of the financial technology industry, spurred by more affordable, secure and compliant cloud-based technologies and a far-reaching and diverse network of investors willing to fund the next great fintech. But, what a lot of people don’t realize about these fintechs is that, unlike those that target end users, a great many of them sell back-end technologies for banks and other financial players that enable those same front-end user experiences. The other thing to note about this trend is just how badly it needs the Sofipos and Sofomes of the world to join it. And the reason is simple: numbers.

You see, the Software as a Service (SaaS) business, which is the predominant model under which these revolutionary technologies are sold to financial entities, is about paying as you go for what you use as opposed to the old model of building it and owning it yourself. And, every day, the innovators in this space are finding ways of making those technologies easier to adopt and deploy and more affordable to Sofipos and Sofomes – entities chartered to serve the masses.

However, most Sofipos and Sofomes operate on technologies that are outdated and obsolete. To make matters more pressing, since the pandemic, some newer technologies that one could once have maybe postponed, have now become a requirement of doing business. Like for example, a popular use case that lets entities onboard a new customer 100 percent digitally, over a cellphone, without the need to come into a branch and complete physical paperwork to obtain a financial product. And, like this use case, there are many others that could be highly relevant to NBFIs, such as digital lending and loan disbursement via cellphone.

In recent years, Mexico’s consumer-facing fintechs have demonstrated an ability to grow exponentially and organically using these and other use cases, especially among younger populations. All of this strongly suggests that the next generation of customers will experience the range of their financial lives – opening accounts, paying, borrowing, investing – digitally. It also means that the sofipos and sofomes have a wave to catch.

Like being in the trough between two waves, it may seem to many that the world around them has changed, that the latest wave is leaving them behind, but many will soon realize there is another wave behind it ready to propel them and the country forward.

Photo by:   Anabel Pérez