Francisco Baquerizo, General counsel and company secretary, Citibank Colombia
Francisco Baquerizo describes the flood of regulations impacting Colombian consumer banking – and how Citibank is adapting its operating model within the country.
GC Magazine: Can you tell us a little bit about the challenges facing the financial sector in Colombia?
Francisco Baquerizo (FB): This is a very active jurisdiction for producing regulation. Laws and decrees are constantly being issued, so that poses a big challenge to companies in different sectors – pharmaceutical, construction services, financial, health. You have to have a lot of capability to adapt to these changes; you need resources to implement changes in 15 days or in one month, and to have a profitable business and ensure that you are not assuming more risks due to those changes.
In the financial sector in Colombia, if you offer both consumer and corporate banking, you have a great mix, but the regulatory ambience is different between the two sides. A lot of regulation has been issued in the last eight to ten years regarding the protection of the financial consumer. Regulators are looking for equality and transparency in the relationship, the transaction and the costs associated with having a banking product. With some of the regulations you will say, ‘Ok that makes sense’, and some you think, ‘There’s no point in that’. That represents a lot of costs to the entity, so you have to have a really significant scale and presence in the market for it to make sense to have that business.
In our case, Citibank in Colombia still has consumer banking, but the strategy has been to divest and sell the consumer business in the wider region because Citi wants to focus on the corporate business. On the corporate side, you have a regulatory framework where there is more room for negotiation in developing the transactions and the different products and the offerings that you are financing the customers to build or to produce, so there’s more space there.
The government also has the challenge of implementing the peace treaty that was agreed with FARC [Revolutionary Armed Forces of Colombia]. That impacts the financial system, because there are some initiatives related to land, and for banks that operate with mortgaged lands or lands as a guarantee of transaction financing, that poses a challenge.
There’s also the government’s intention to deepen the banking presence in different regions of the country, saying ‘You have to spread, we need the different sectors and the different segments of the population to have access to banks; what are you going to do about it?’ So that’s also a challenge that the banking sector has.
GC: You’ve been with Citi in Colombia for about 18 months, is that right?
FB: Yes, but I used to work with Citi prior to that, for 11 years. I moved from Citi in 2009 to HSBC, which operated a Panamanian bank called Panismo (?), with presence in different countries of the region. That started in 2008, so I moved to HSBC to be the country counsel there, until 2016. HSBC sold the business to a local bank, so I worked with the regional office on that sale process in Colombia, Peru, Paraguay and in Uruguay, and I supported the divestiture process in Central America. We also set up a representative office of HSBC in Colombia, because it was agreed that the bank could sell that local presence to the local bank. Then the opportunity to come back to Citi appeared, so I moved back.
GC: When you were brought back on, was that about the original time that Citi was planning to sell the consumer banking business?
FB: Yes. They were starting on that, and the experience I had in the sale process of the HSBC Bank of Colombia, and of the other countries in South America and Central America, meant that it was something Citi knew I was going to be able to help them with.
The experience I had in knowing the bank internally – I covered all the products and the services, I knew the bureaucracy, the values, the challenges you face here, the type of risk that they expect the senior management to take, so that made a lot of sense. And actually for me, it was very easy to reconnect, because HSBC and Citi international banks, so they end up having the same types of policies, regulations and controls – the way the risk is administrated is very similar.
GC: Is Citi sill looking to sell the consumer side of the bank in Colombia?
FB: That’s the strategy in the wider region, but they are not looking for a purchaser at this moment in Colombia. The transaction was suspended in November 2016 and for now, we’re keeping the business, it is reactivated and has a market segment that works very well. But I wouldn’t be surprised if there was a decision to continue with the selling process in two or three years, because that’s the strategy for the region.
GC: When the company was preparing for the potential sale of the consumer business, what role was legal was playing?
FB: We were the object of sale, so you might expect that the participation of us at the local level would be less, but they relied a lot on our participation. We had an external law firm supporting the M&A team in New York leading with the transaction, but they supported input.
When you need to split the operation between corporate and consumer, you have a lot of vendors and a lot of processes that are mixed together. Although we didn’t know if the transaction was going to happen or not, when we started putting processes together or building systems in branches, we started thinking (and this is where we relied a lot on Legal), about how should we build them so that they continue working from a legal perspective, but it’s easy for us to disconnect at a certain point in time. The decision to sell was suspended, but the idea of starting to build things in that way was set up. So with new things that we’re putting together, we’re thinking: ‘If we ultimately have to disconnect this because we end up selling consumer, how should we build this from an operational perspective, from a cost perspective, from a documentational perspective…?’ And so on.
GC: Could you tell me a little bit about the consumer regulation that has been introduced in Colombia and some of the effects on the market here?
FB: Regulation regarding data privacy and data protection is something that has been evolving in the last eight to ten years. Our main regulator is the Financial Superintendence of Colombia, but the regulator for the purposes of data protection is the Superintendency of Industry and Commerce. This has given a lot of power and a lot of faculties to the Superintendency of Industry and Commerce, and they have huge penalties and huge sanctions, which are even greater than the ones the Financial Superintendence has over the banks.
All entities that administrate data have had to put together a policy regarding data privacy, and everybody has had to put in place a process to ensure the owner of the information has the right to say, ‘I don’t want you to share that information with third parties’, or ‘I want you to amend the information you have from me’, or ‘I want you to delete the information you have from me’. And there is also an obligation to register the databases that you have by January 2018. There are a lot of rights and obligations owed to the owner of the information by us, the administrators of the information.
For the financial sector, this poses a huge challenge because a lot of international banks and local banks do not use local servers or local providers of technology for the purposes of administrating data. You use parties abroad and companies that are anywhere in the world. So this poses a big challenge to comply with how the regulator expects you to operate, and to be able to administrate data as you need to from a business perspective.
Another area would be abusive clauses and practices. Since 2009, the Financial Superintendence has said that banks cannot include in their contracts clauses that are considered abusive, or develop practices that are considered abusive. The regulator started defining what abusive meant: for example, a credit card charging a fee, or not accepting a claim for a customer. So they’ve started to enter into the way you handle the relationship with the customer. There are a lot of requirements for disclosing information prior to offering the product to the client, during use of the product, and for the rights that you have to give the customer to make changes to the product or reject transactions that have occurred. That’s a big challenge, because all in the sector have had to think about ‘How do I stand regarding this?’ Allowing the customer to reject a transaction that he made the day before for which he thinks he was charged in excess – ok, but, you might say, ‘He made the transaction, why do I have to bear the cost of undoing the transaction and reimbursing the funds to the merchant?’, for example.
There’s a lot of pressure from Congress, pretending that banking and financial products and services offered should be free. Well, they don’t say that they should be free, but they expect us to charge nothing. They are starting to say, ‘If you’re going to offer a list of products, you should state the cost associated to each of those products’. You cannot say, ‘I’m going to charge you 20 dollars per month’ for a credit card, a current account, or a savings account. You have to say which par of the account the 20 dollars corresponds to. That view from a transparency point of view makes sense, but sometimes you are providing so much information to the customer that it’s very difficult for them to take a decision.
Some of those changes come from the intention to be part of the OECD [Organisation for Economic Co-operation and Development], specifically in matters related to Know Your Customer, money-laundering, and the way the banking sector is being supervised, its corporate governance, and the disclosure of information.
GC: Have you seen legal teams and compliance teams in the banking sector grow to meet the new demand?
FB: They should, but they don’t. Local regulation has not yet established the obligation to have a compliance area from a regulatory or legal perspective. But the international banks have it in place, and the local banks have recognised the need to do that, so that’s something that’s started to be associated with being in compliance with the regulatory environment.
The amount of regulation that is being issued and the changes that this poses to the products that you put in place – because you’re trying to standardise as much as possible, to make less errors, to be more cost-efficient, and to have better protected the risk associated with the product. All these changes make it very difficult to have a standard product, so that always requires people, and this poses a challenge on where you balance the amount of people you need, against being a profitable area.
In Legal, we don’t produce anything, so we are internally viewed as a cost area that is charged to the product area. When I am charging the cost of my area, sometimes it is more heavy on the consumer side than on the corporate side, because most of the changes affect the consumer side.
GC: Do you think that new regulation and additional governmental pressure is making consumer banking less attractive in Colombia for big global banks?
FB: No. It’s a challenge. On the consumer side, you have to have the scale that justifies the costs of operating against the fees that you are able to charge to the customer. But I think that poses a challenge on how you evolve; you have to be more innovative to be able to render the same type of service – with more electronic platforms, less manual processes and more automatically – so the cost of operating continues to be low and what you are able to charge makes sense against the product you’re offering. So that’s basically what we’re doing here – we’re trying to think differently.
And banking has changed – the way banks offer their products to consumers is different. For example, you want to start purchasing banking products as you purchase things on Amazon. Or you want opening a bank account to be as simple as opening a profile on Airbnb. So that’s the challenge that we have. Regulation poses a lot of requirements to identify the customer, and on security, but you have to a find a mix that makes sense from a legal perspective and being competitive from a market perspective – because that’s what the market is asking for.
GC: Can you tell us about what Citi is doing to extend banking services to more sections of the population in Colombia?
FB: In the small towns in Colombia that are not as developed as a city like Bogotá, there are not as many banks that have presence there, so there are a lot of people offering services similar to a bank – they lend money and they charge huge rates, or they start offering structures in which people think that they are going to see a return, but they end up getting robbed.
The government has tried to say to the population, ‘You need to open accounts in banks’, and people say, ‘Banks are very onerous, we have to pay a lot’ – so that’s where the pressure on the fees comes from. But the government has not yet reached a point of obligating banks to have operations in different sectors – you have the ability to decide which cities you want to operate in, and which markets you want to target.
We have some banks that target these agricultural areas and small towns, and the government has also put through some regulation that allows banks to spread their branch network – not opening a branch but having, for example, financial cashiers at supermarkets. That’s the way Citi has started to spread presence in the country – not opening branches in all the cities, but having agreements with supermarkets or other brands where you can, under certain conditions and subject to some restrictions and regulations, allow a person to make a transaction with the bank to disburse amounts from their current account or make a payment, while they are buying their groceries.