There is plenty to celebrate in Latin American payments this year: the onset of real-time payments, lowered fees, better services and the continued expansion of neobanks (riding the coattails of Nubank’s success), to name a few. But plenty of challenges still dog the industry: ambiguous fintech laws in some countries—or the lack thereof in others, which sow uncertainty, the bane of investors and innovators. Moreover, cash remains stubbornly popular, slowing the progress of digital payments and financial inclusion.
One key positive development is the emergence of real-time payments (RTP). In Brazil, the Central Bank is developing a regulatory framework to fully enable interoperable real-time payments. This could potentially raise the dozen or so P2P and real-time payment closed-loop apps into interoperability. Brazilian regulators announced that a pilot program will commence in late 2020, although many industry players feel a more realistic launch date is Q1 2021. The advantages of real-time payments include cutting out intermediaries, reducing costs and providing better service for consumers and merchants. This also means that card networks and banks will lose out on interchange fees, so RTP are as much a disruptive opportunity for some as they are a threat to incumbents.
Mexico’s Central Bank launched CoDi in late 2019. This is a user interface that rides on top of the bank’s real-time payments infrastructure, SPEI. Free to both users and merchants, the goal of CoDi is to increase financial inclusion and decrease the use of cash. While there still isn’t much data available yet to confirm its success rate or the rate of adoption, the rails are in place, and in 2020 we should see a rise in adoption. In Peru, Vocalink — a company that builds real-time payments infrastructures and applications — is working with the local clearing house to implement real-time ACH payments.
In Colombia Q4 2019, real-time ACH was launched and it has already integrated several wallets, including Nequi (a digital wallet created by BanColombia) and Movii, a mobile wallet platform launched in Colombia in 2018.
The trend towards ever-greater digitization in payments is exemplified by the continued success of neobanks (banks or fintechs that offer 100% online experience) in major LatAm markets. There are more than a dozen in Brazil, where Nubank is the star, having amassed more than 20 million customers and expanding into Mexico and Argentina. But many others are popping up, including European neobanks making their debut in Latin America: Revolut and N26. For consumers, these neobanks offer several benefits, such as:
- A free online account
- User-friendly apps
- Free credit cards (in many, though not all cases)
- Low fees
To compete, traditional banks are offering their own mobile banking options, such as Banco Itaú’s Iti and Banco de Crédito del Perú’s Yape, a leading P2P platform that is opening up to customers from other banks.
For consumers, there has never been more choice – greater competition – more user friendly banking – lower fees.
Fintech regulation remains unclear in several Latin American countries and too restrictive in others. The ambiguity dents investor confidence and slows the industry’s development. In Mexico, the fintech law passed in 2018, launched in 2019 and soon enforcement begins of the new rules governing this nascent industry. Eighty-five companies applied to be regulated under the law and most of the approvals will be announced by March 2020. The first regulated fintech company was recently announced: Bitso, a crypto-based money sending company. While many support the fintech law, many of its provisions (such as capital requirements and other secondary laws) are still not published, creating too much uncertainty for some companies to apply. While the law is intended to weed out companies ill-prepared to deal in the financial system, others find it too restrictive. Experts estimate it will cost a fintech more than US$200,000 to comply with the law. PayPal opted not to comply with the law and thus eliminated its wallet product in Mexico.
In Argentina, the Central bank announced a regulation in January 2020 which states that all funds captured by a digital wallet or payment service provider must be liquid and deposited in a regulated bank at all times. This limits the ability of fintechs to use client funds as a bank would—for leverage and to guarantee cash flow, or to potentially get into lending. In Chile and Peru, the problem confronting fintechs is the complete lack of any fintech regulations.
The 800-pound gorilla in LatAm’s payment industry was, is and will continue to be the resilience of cash. In 2018, $1.5 trillion of retail spend was cash, 70% of the formal market. When the informal retail market (all cash) is added to the mix, cash represents closer to 80% of total retail. Contactless cards have helped reduce the amount of the average ticket (suggesting they may be cannibalizing some cash transactions), and more QR-code and other digital payment options are increasingly available. However, more than 50% of surveyed urban consumers in Latin America still prefer using cash to make everyday payments. In fact, in Mexico, consumer data indicates that cash is still the preferred payment method for 21% of e-commerce shoppers. Digital leaders like Rappi and Uber largely serve the mass affluent, credit-card holding class. Their customer acquisition efforts have yet to seriously target the underbanked.
Until the fintech industry is permitted to realize its potential, the established banking and payments industry will continue to limit its reach to 20% of retail transactions. Legacy companies (banks and card networks) whose traditional lines of business are under threat from fintech innovation will struggle to compete with these agile new companies. More realistically, legacy players will need to collaborate with or purchase fintechs to absorb their innovative DNA.
Winning the war on cash requires a healthy fintech industry. Some suspect that large banks have worked behind the scenes in key markets to slow the development of clear fintech regulations. That’s a bit like Walmart lobbying against e-commerce. It might work for a year or two but eventually, just like Walmart is doing in omni-channel e-commerce, the established payments industry will have to join, if not lead the disruptive revolution underway in payments. Rather than fighting over 20% of the pie, the industry needs to work together to go after the whole pie. Until that happens, cash will remain king.
Contact us if you’d like to obtain a deeper understanding of LatAm’s payments landscape via market intelligence. Our payments case studies give some overview of the 300+ engagements we’ve completed in this sector, as do our blog posts and whitepapers published in the Analyses section of our site.