By Diana Taylor First published by Emerging Markets magazine, April 8, 2016 Latin America’s financial institutions are microfinance and financial inclusion pioneers. Bolivia’s BancoSol was the first commercial bank focused on the base of the pyramid, helping establish a model that now serves 200 million people worldwide; in Mexico, Compartamos’ 2007 IPO remains the largest in microfinance’s history; and Peru has captured the top financial inclusion regulation rating for the last eight years. Is Latin America’s innovator status fading? With only hundreds of high-quality microfinance institutions (MFIs) in the region, the industry has rarely needed to compete or innovate; in North America, thousands of banks fight to win and retain customers, and a host of emerging fintech players makes that competition even fiercer. High-quality, independent MFIs focused on the base of the pyramid are already too rare in Latin America. And commercial banks are increasingly looking to acquire privately-owned MFIs and consolidate the sector further. In 2009, Scotiabank bought Peru’s Banco del Trabajo, and purchased Mexico’s Crédito Familiar in 2012. In 2014, Credicorp acquired a majority stake in MiBanco. These moves indicate microfinance’s successes creating scalable, well-governed institutions, but also pressure remaining MFIs to adapt, sell, or differentiate themselves. I hope it’s the latter. For too long, Latin American microfinance has been too risk-averse and conservative. That can’t continue. Latin American microfinance is a cornerstone of the effort to provide the world’s 2 billion financially excluded people with the tools and services that they need. It supports countless individuals and businesses, and should invest in, improve, or partner with fintech startups or other alternative financial services to secure its future. The most immediate way for Latin American MFIs to differentiate themselves is finally committing to fintech. While it’s taking hold in the region, Latin America lags behind Asia and East Africa in promoting digital financial services. Inter-American Development Bank (IDB) President Luis Moreno recently reviewed how Latin American and Caribbean governments had digitized government services in the Financial Times, writing that they should “make these investments now” to “modernize devices, improve quality of life and share the benefits of technology more equitably” to “create the conditions to foster enterprise and prosperity.” Governments have yet to act adequately on this. The future belongs to innovators. There are significant markets across Latin America that fintech can serve: in 2014, people throughout Latin America and the Caribbean received over $65 billion in remittances. Leaner digital services will continue forcing remittances’ costs down, and banks should find ways to capture some of that revenue through fintech, rather than watch apps steal it away. But the business case for supporting fintech is broader than one service. Fintech makes it possible to make better bets while reaching more markets with more products. By analyzing digital footprints, financial institutions can know their customers, understand their needs and confirm their identities. And by analyzing phone usage, social media, and other sources of Big Data, innovators can develop sophisticated profiles of the people who are left out of the current system. Today, these individuals are invisible; with alternative data and the algorithms to analyze it, we can make 2 billion people visible. The Internet of Things even makes it possible to create pay-as-you-go mechanisms that can dramatically expand markets and financing for services in remote areas. Apart from the business case, by innovating, Latin American MFIs can reaffirm their commitment to promoting economic and social development. Despite the considerable contributions that Latin American MFIs have made advancing financial inclusion, too many in the region are still left out of the world’s formal economy. Roughly 210 million people across Latin America don’t have a bank account. That’s too many people for a region that others see as an example for inclusive finance. Many MFIs throughout Latin America were created to promote access to financial services. It’s up to their boards of directors and staff to live up to this mission, rather than grow complacent. Fortunately, there are a number of ways for regulators, management, and investors to address these challenges and promote innovation. Regulators should follow the Economist Intelligence Unit’s Microscope, an annual ranking and review of 55 countries’ policy for financial inclusion. Created by the IDB, the Microscope helps regulators adopt effective legislation. During this week’s IDB-IIC Annual Meeting, policymakers should discuss the Microscope’s recommendations, and consider how to enable partnerships between MFIs and startups. These relationships benefit both: startups can use MFIs’ banking licenses, and through partnerships, MFIs can refresh their brands while reaching new customers. Management should harness technology, which can reduce the time, effort, and cost of enrolling and servicing clients. A recent study of MFIs’ usage of digital financial services found that institutions using technology in the field saw increased revenue as a result of enhanced efficiencies, cost savings resulting from the elimination of paperwork, reduced fraud, and improved client service. Shareholders should influence their investments to embrace innovation. By challenging management to pursue new opportunities, they can help ensure the future well-being of Latin American MFIs, and ultimately assist more people and businesses access and benefit from the financial services that they need to build better lives. Diana Taylor is the Vice Chair of Solera Capital LLC and Chair of financial inclusion pioneer Accion’s Board of Directors Read about our clients. This article is also available in Spanish and Portuguese.