Fintech and the Digital Age in Paraguay: Checks in the 21st Century

It was 1997 when the modest British band “Marillion” found itself facing the ambitious—at least given its circumstances—goal of traveling to the U.S. to tour the country. The problem was that they didn’t have enough resources to do so.

Faced with adversity, the British band’s creativity came to the fore, and its members created a website to raise funds. Thanks to the collective effort of their fans, they managed to raise $60,000 and were able to go ahead with the tour, which turned out to be a success.

This event is considered one of the major milestones marking the beginning of this—innovative—model for collectively financing projects with the support of a technology platform, better known as Crowdfunding.

Following that event and several similar episodes, crowdfunding quickly became a key player and is today, without a doubt, one of the most representative examples of the efforts made by entrepreneurs and companies to find new mechanisms that provide modern and innovative financial solutions. On a large scale, the broader category that systematically encompasses this type of technology is called Fintech (derived from the combination of English wordsFinancial Technology).

In addition to crowdfunding, examples such as mobile banking through apps, payment methods such as PayPal, right up to the revolutionary—and at the same time unsettling—invention of the Bitcoin, show us the countless options currently offered by the financial system, which is evolving rapidly; like any financial matter, it requires oversight to prevent excesses and protect against those who seek to misuse these innovations.

As was to be expected, fintech has arrived in Paraguay. In addition to private companies, the most interesting aspect is that the government has also invested resources to incorporate this technology into the financial system. One of the most notable examples is the regulation of the Paraguayan Payment System (SIPAP) through Law 4595/12, which essentially provides an electronic platform enabling various financial institutions to operate more efficiently when processing payments and transactions.

Currently, the government, through the Central Bank of Paraguay (BCP), has been working to modernize checks and the process of cashing them. The value of this payment method in the market is undeniable, which means per se that any attempt at innovation would represent a step forward in the development of the national financial system. To get a sense of the importance of check processing in real terms, data from the BCP show that, in 2016, more than 10.6 million checks were cleared, totaling 123.9 trillion guaraníes (approximately 22,800 million dollars).

The BCP has turned to Fintech tools to implement changes to the check format and the truncation process among the various institutions that make up the system. The government agency’s implementation plan is divided into two well-defined stages, which are part of the Check Digitization and Truncation Project, detailed in Note BC/G No. 729 dated November 24, 2016.

The first stems from Resolution No. 3, Minutes No. 1, dated January 3, 2017. Pursuant to this resolution, the BCP Board of Directors has approved the specifications manual for standardizing the format of physical checks. In other words, this document introduced several changes to the format of physical checks. One of the most notable additions, in addition to the Bank Identifier Code or BIC (Bank Identifier Code) in the upper-left corner is the Quick Response (QR) code (Quick Response), attached to the lower-left corner.

So, what is a QR code? A QR code is a two-dimensional barcode that allows encoded data to be stored for later reading and processing by scanning the image. It is commonly used in mobile apps and various types of software to store and process contacts, user data, etc. The inclusion of this code is essential for the second phase of check modernization.

In fact, the second phase of the plan prepared by the BCP involves the reform and modernization of the Check Clearing House. Pursuant to Resolution No. 4, Minutes No. 12 dated February 24, 2017, the company BANCARD S.A. is authorized to administer the Check Clearing House, and the Clearing House administered by that private entity is also recognized as a payment system.

The technological infrastructure provided by BANCARD, which is scheduled to be implemented by the end of this year, will enable the processing of check truncation through QR code readers incorporated into the new format. In other words, this will enable electronic clearing, replacing the physical clearinghouse that currently operates after the close of each business day.The procedure is relatively simple. It involves scanning the QR code on each check with a reader provided by the company to the various financial institutions, allowing the payment order data to be processed in real time by the electronic system.

These radical changes will inject greater momentum into business and the economy. The main impact relates to the time factor. The process, which currently takes between 24 and 48 hours, will be reduced to just a few hours, depending on the operational efficiency of each bank. In addition, this advancement will result in significant cost savings in areas such as transportation, logistics, and agent coordination. With the implementation of this new check-processing method, the next step will—eventually—be the dematerialization of payment orders, as is already the case in the United States.

We can conclude with the encouraging thought that Paraguay is making progress in incorporating and regulating technological tools within the financial system—tools that are necessary for our country’s progress. However, for this change to lead to productive and sustainable development, it must include the various stakeholders in society—from both the public and private sectors—and establish clear rules for the development of these technologies.

Facts always precede the law. Today, this assertion is becoming increasingly evident, given the relentless and rapid advancement of technology. Regulations are falling further and further behind market realities. The next challenge we face, therefore, is to adapt quickly to these changes and to this ever-evolving dynamic. In the Fintech sector, promising startups related to crowdfunding and electronic money—or virtual currency—are still waiting to carve out their place in Paraguay’s legal system.