In Payments

We can observe empirically that a change in consumer behavior necessitates a change in consumption. Consumption requires the exchange of value. Whenever an exchange of value takes place, payment technology is required, whether that be gold, cash, or a biometric-powered virtual credit card payment. It can be said, therefore, that any change in consumer psychology will necessarily create a shift—and opportunities for innovation—in the payments industry.

Globally, COVID-19 has introduced new consumer psychology and agreements by which we live. Some of these agreements, like quarantining or wearing masks in public, were imposed upon us by government ruling or implicitly, by social pressures. Other agreements we have adopted voluntarily, such as using Zoom to celebrate birthday parties, working from home for an extended period, and forgoing holiday travel. These shifts have numerous ripple effects in the payments industry, but here we consider three that have immediate implications:   

1. Adoption of a savings mindset across all socioeconomic levels

2. No loyalty value proposition for the affluent

3. Leapfrogging straight to P2P

#1 Adoption of a Savings Mindset

COVID-19 shutdowns put financial stress on almost everyone, with informal workers suffering the most. Informal work is endemic to Latin American economies; 42%, 62%, and 73% of Brazilian, Colombian and Peruvian workers, respectively, are employed informally.[1] Knowing this, many federal governments in the region launched social benefit programs to support this population during the pandemic.

The most wide-reaching of these was Brazil’s coronavoucher, five monthly installments of BRL 600 paid into a digital account by state-owned bank Caixa Econômica Federal (CEF), which reached more than 60 million Brazilians. Remarkably, 36 million of these accounts were for people who had never before opened a bank account.[2] CEF also imposed restrictions on cash withdrawals, driving consumers to use the digital functions in the app. Under economic duress, with the coronavoucher lasting only through November, and with account balances visibly displayed on a smartphone screen, more low-income Latin Americans than ever are thinking about saving for their future.

This is present among middle class and affluent consumers as well, evidenced by neobanks across the region offering personal finance tools and investment accounts and consumers’ increase usage of the same. Argentine fintech Ualá, Brazilian neobank Neon and multiple others launched savings and investment tools in 2020 to help users save for their future and put their money to work (even very small amounts). Brazil’s Nubank acquired Easynvest this year and Banco Inter launched a wealth management service, catering to the savings mindset of digitally-forward neobankers.

What are the implications for industry players?

  • Enabling payments is not enough anymore to satisfy digital wallet and neobank users. Value-added services like savings tools and investments are required to stay competitive
  • More savings is tantamount to lower consumption, especially on high ticket or non-essential items, meaning less money in circulation. Installments and buy now, pay later schemes may grow as a result
  • Latin American consumers at all levels are becoming more sophisticated with respect to finances, and consumers in early stages of financial inclusion are likely to advance up the ladder faster than in previous years. Banks should consider such consumers as future drivers of their business

#2: No Loyalty Value Proposition for the Affluent

While recently the payments industry has seemed to center around neobanks and financial inclusion, card networks and banks have quietly coddled their most valued customers—affluent consumers and business travelers with big cross-border spend. They’ve fought amongst each other for these prized clients with prestigious loyalty programs touting airline miles, concierge services and travel insurance. These programs keep customers loyal and convince them to pay hefty annual fees.

Those days are gone, for now. AMI estimates that the online travel industry will fall 45% this year, and corporate and cross-border travel even further, with full recovery not taking place probably until 2022.

In the meantime, affluent credit card holders are in a pickle. With travel-based rewards programs rendered useless, these consumers do not have the same incentives to use one credit card over any other. They also cannot easily use airline miles they’ve racked up for their loyalty. These circumstances create a vacuum of rewards for high spenders, one that can be filled by providers who are smart and quick about responding to consumer needs.

So, what is the answer? Presently, the name of the game in loyalty is usage. Banks in Latin America are adopting platforms that enable cardholders to use their points for a wide variety of purchases, essentially converting them into cash (see Visa’s recently launched My Rewards 2.0 platform). For many neobanks, the easiest solution has been cashback. And while these strategies are helpful to consumers struggling in the midst of a global pandemic, it doesn’t meet the needs of the affluent who seek something special.

Thus, banks should take this opportunity to get creative with a new value proposition for their affluent customers. This could include creating a luxury experience in people’s homes—from furnishings/decor and smart appliances to wired homes and in-home chefs or other unique experiences. It could also cater to long-term savings and financial security needs, helping families to save for their futures or investing in their children’s education. What is true is that with travel loyalty useless for the moment, banks have the rare opportunity to capture the business of consumers typically loyal to competitors.

What are the implications for industry players?

  • Banks have a unique and infrequent opportunity to develop new loyalty schemes to capture new high-spend customers
  • Cardholders may opt out of re-enlisting in pricey card programs if they don’t value the benefits
  • New customer segmentation is required to understand what rewards would be appealing to cardholders at this moment in time

#3 Leapfrogging Straight to P2P

2021 will be the year of P2P payments in Latin America. This was ramping up long before COVID. Peru’s Yape was well on its way to being the regional P2P leader, and the Brazilian Central Bank was deep into its plan to develop Pix, its real-time ACH payment platform. More than a dozen wallets had accumulated 1 million+ users by 2020, with P2P being the top use case. Facebook, Visa and Mastercard’s plan to launch payments over WhatsApp was in the works far before the global pandemic.

With COVID-19, P2P has accelerated. AMI interviews with banks and fintechs reveal that the mass surge in account openings during COVID-19 lockdowns was largely due to consumers’ desire to transfer money to one another. And limitations on going to bank branches has put digital banking more in the forefront of everyone’s minds. Finally, the desire to avoid contact when making in-store purchases has accelerated the transition of P2P to P2M in Peru, where small or informal merchants are accepting payments over Yape, as well as Plin.

As digital services become even more primordial to everyday life, mobile-based P2P will hasten in 2021, especially once payments over WhatsApp and Pix (Brazil) grow legs. It may entice some consumers, particularly young ones and consumers who were previously cash-centric, to skip physical cards altogether. As the use cases for P2P/P2M become more abundant and the acceptance network grows, it is feasible that newly banked customers experience cards primarily in virtual format only. Latin America is known for leap-frogging, and physical cards could be next.

What are the implications for industry players?

  • Even though use of physical cards may wane, P2P payment schemes still depend on a virtual credential. Banks and card networks must work hard to get their credential top of wallet
  • Virtual transactions in the physical environment creates myriad opportunities for biometrics and digital identify companies that keep transactions secure
  • Massive changes await the acceptance industry, as physical hardware becomes less relevant
  • The distinction between “card-present” and “card-not-present” may no longer be meaningful in the medium term. “Hardware-based” vs. “cloud-based,” “prepaid vs. post-paid” or “bank rails” vs. “network rails” may be more helpful conceptualizations to drive strategy and customer-centric innovation going forward

These changes are only a few of the many we can expect in 2021. 2020 has been the most disruptive year in more than a decade—changing consumers’ physical and mental health, emotional state, financial future and basic daily behaviors. All of this has an impact on how consumers solve their daily problems, including how they pay for things. Payment providers and brands need to act boldly to crate emotional resonance with their customers and meet their evolving needs. Behavior shifts create massive opportunity for those who are watching closely and ready to adapt swiftly.

Contact us to find out more how our market intelligence can help you take full advantage of these market shifts and payment trends, allowing you to craft even more effective strategies to reach these consumers.

[1] Council of the Americas, OECD, CEPAL, AMI analysis

[2] Caixa Econômica Federal

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