As we mentioned in our last article on the persistence of cash payments, very little has been done in Latin America to expand payment card issuing: credit card penetration increased by only 1% between 2011 and 2017. Far and wide, banks have done little to expand credit card access beyond its traditional client base. As a Mexican banking executive said to me over coffee recently, “We’re [the banks] all battling each other for the same handful of men in suits.”
There is but one predominant exception. Brazil’s Nubank, the innovative digital-only bank that launched in 2013, has skyrocketed to become the country’s fifth-largest credit card issuer, capturing nine million customers. By issuing a free credit card and a 100% digital experience, Nubank has attracted young, underbanked Brazilians who felt snubbed by traditional financial institutions.
Following in Nubank’s footsteps are other Brazilian digital banks including Banco Original, Neon, Banco Next (from Bradesco) and Superdigital (from Santander), all of which have moved the needle on account access. However, this model has yet to spread to other markets. Mexico’s first and only digital-only bank, Bankaool, went broke in 2017. A multitude of fintechs in Mexico, Colombia, Peru and Argentina offer “digital accounts”—stored-balance digital wallets —but most are languishing with just a few thousand users. Most of these digital players remain fragmented, are scrounging for funding, and ultimately, have failed to scale.
Why has the Brazilian market successfully embraced digital banking—and by that token, inclusiveness—while others have not?
The primary reason is that Brazilian banks have created a digital experience with the express goal of attracting new customers; issuers in other markets have opted to add a digital feature for existing clients. These “digital wallets,” instead of promoting access, have attempted to change the way people pay by enabling P2P transfers and QR code payments for retail purchases. Dozens of fintech companies around the region offer something similar.
The crux here is that these solutions are almost entirely closed-loop, meaning transactions can only take place between users who have the same digital wallet. This leads to confusion, fragmentation and ultimately, stagnation. On a universal level, openness creates expansion; remaining closed off has a shrinking effect. The payments industry is essentially a network, in which funds flow to and from innumerous individuals, and must be, by definition, inclusive. Closed-loop environments are counterintuitive to creating the network effect they seek to create.
This is why fintech in Latin America has not markedly changed the experience at the POS. Despite billions invested in NFC/contactless payments, QR codes, and mobile money, very little disruptive innovation has been brought to the table. Nubank and other digital banks have expanded account access, but they have not tackled the payment experience. With a few exceptions, closed-loop solutions aiming to do this are struggling to take off.
With Iti, Banco Itaú Opens Payments Doors Wide for All
Ultimately, what separates Brazilian digital success stories is a question of culture and mindset: Inclusiveness vs. exclusion, creating something new vs. tacking something onto existing infrastructure. In the wake of multiple digital-bank launches by fintechs and banks, many wondered what Brazil’s leading bank, Banco Itaú, would do along this vein.
In May 2019, Banco Itaú showed us. The bank announced that in Q3 2019, it would launch Iti, a new mobile payment platform enabling P2P payments and P2M payments via QR code. At first glance, Iti looks similar to other bank apps offering QR code payment. However, Iti is innovative and potentially disruptive in a multitude of ways.
First is Iti’s marketing. The app’s promotional video is reminiscent of a pajama party meets a beach picnic, rather than a payment platform. The most arresting line in the video translates to, “Do you believe that winning together is better than winning alone? If so, Iti is for you.” With this statement, Itaú casually separates itself from the pack of competitors that believe that payments are a zero-sum game.
This statement nods to the openness of the Iti platform—anyone can use Iti, not just Itaú customers. The importance of this cannot be overstated—in a context in which banks built up stone walls to freeze out non-customers, Itaú has opened the gates to all. Their model is not based on establishing limits. Instead, they are loudly proclaiming “Come one, come all, we have something of value to offer, and that something does not need the protection of exclusivity.” Here, Itaú is moving away from the fear-based mentality that asserts, “If I win, you must lose,” to a true win-win paradigm.
Of course, this will all work to benefit Itaú in the long run. In theory, Iti is the platform upon which millions of transactions will take place and which provides access to the most valuable asset in today’s economy: data. And not just any data, but data on non-Itaú customers, on young, underbanked customers, on merchants accepting electronic payments for the first time. This data can then be used to support further product development, support cross-selling, hone marketing techniques and even monetize in its own right.
Secondly, Iti is disruptive in how it works. It charges merchants a flat 1% commission for accepting payment, which is extremely attractive to small retailers who routinely pay between 4%-6% or higher to accept credit card payments. Additionally, merchants receive payment in up to one business day, if not instantaneously. This is a colossal improvement over the typical 30 days it takes banks to pay merchants for credit card sales. In a country where cash represents nearly $700 million in retail spend each year, Iti has a massive addressable market to explore.
Iti Points to 3 Disruptive Trends in LatAm Payments
With Iti, Brazil’s banking behemoth is marking a departure from old industry thinking. Itaú’s announcement is underpinned by three industry evolutions already taking place, which Iti will surely accelerate. At the end of the day, payments are finally becoming both consumer- and merchant-focused instead of bank-focused. User experience and value delivered will be the determinants of success. Here’s a look at three key disruptive trends to watch:
#1: Fees Trending toward Zero
Across Latin America, most P2P payments are already available for free. And while fees to consumers are still present for ATM withdrawals, credit card annuities, and most deposit accounts, nearly all banks offer at least one zero-fee product. Charging consumers for banking is swiftly going out of style.
Merchants have not yet enjoyed such consideration. Most, especially SMEs, fork over a hefty percentage of card sales to their banks, not to mention POS terminal rental fees. These costs act as a huge deterrent to the expansion of electronic payment acceptance.
Bold new players are changing this, however, and merchants will, over time, see merchant discount rates go down. RappiPay, the payment play of rapidly-growing home delivery app, Rappi, is offering merchants 0% commission for the first year to accept RappiPay QR codes in stores. MercadoPago, the foremost digital wallet in the region, has a similar strategy. The Bank of Mexico is in the throes of launching CoDi, a QR-code payment capability attached to Mexico’s interbank real-time payment platform, which is by law, free to merchants and consumers. And now Iti is offering its 1% flat commission for merchant payments. In a dramatic turn from the status quo, these players are willing to sacrifice fees in pursuit of scale, user engagement, and loyalty.
As such, banks will be required to move away from a fee-based business model (or at least de-emphasize it). Cross-selling credit products, expanding lending and diversifying product portfolios (insurance, investments) are some examples of alternative revenue streams. And as open banking in Latin America pushes forward and banks connect with partners via APIs, data monetization become a powerful money-making tool.
#2: Payments Taking Place in Real Time
Instantaneous payments have arrived in Latin America. The days in which merchants must wait 7, 14 or even 30 days to receive funds from credit card sales are short-numbered. Real-time payments are an innovation sweeping Latin America, led by regulators and Central Banks who wish to make electronic payments more attractive to the masses. As of June 2019, Brazilian regulators are defining the regulatory framework to enable and promote real-time payments. As mentioned, Mexico’s central bank is developing a platform to make its real-time payment infrastructure more accessible. Peru’s ACH clearing house struck a deal in late 2018 with Vocalink, Mastercard-owned real-time payments technology company, to enable interoperable real-time payments.
Most real-time payment schemes are bank-account based, which poses a threat to card networks and banks’ lucrative interchange business. This means that banks will likely follow Iti’s precedent: guarantee swift payment of funds even for credit cards payments.
While more nebulous than the first two points, the ethos of openness must not be underestimated. Openness and interoperability are not only being embraced by industry players but is being legally required. In Argentina and Colombia, regulators have officially mandated the adoption of EMVco standards for QR codes, enabling interoperability between QR code platforms. Mexico’s CoDi regulation requires all banks to provide technology that can read interoperable QR codes. And on the coattails of Europe, both Brazil and Mexico are developing open banking regulatory frameworks. The process of achieving openness in all aspects — of payment platforms, of data, of technology — will define the Latin American payments industry over the next ten years.
SEE RELATED STORIES
With this analysis in our consciousness, we can now return to our emblematic Iti with fresh eyes. The promotional video has even more profound messages for us. It describes the app as “fair,” “democratic,” “transparent,” “easy” and “Brazilian” (a neat jab at international credit card schemes). It explains that anyone can sign up, leave when they want, and that the app has “no barriers.” These are descriptions that other mobile banking apps and fintechs have been touting for years — without really delivering on them. Iti asserts that with Iti, the “win-win is for everyone.” This fresh angle is in contrast to less creative digital wallet taglines, such as “The new, easy way to pay” or the mind-numbing, “Pay without cash.” The video ends with, “Iti is the revolution that money needed.” With Iti, Banco Itaú has the mentality, marketing smarts, ingenuity and the financial muscle to possibly accomplish such a revolution.
More on Payments Disruption
We have explored these trends in additional depth in a recent webinar presentation on technological disruption in Latin America. Below you can watch the payments portion of this webinar, in which I discuss Iti and key disruptive trends in the LatAm payments sector:
Contact us to find out more how our market intelligence can help you navigate the disruption happening in the Latin American payments industry, develop new products that speak to customer needs and drive profitable innovation.