In Payments

In a February Payments Coffee Chat we offered a preview of our six payments megatrends, which we explain below.

Charting the Financial Context

Before we explored the trends, we started the Chat with a macroeconomic look because, as AMI Payments Leader Lindsay Lehr observed in this Chat, “Developments in the payments industry are intimately related to macroeconomic conditions, such as consumer purchasing power and consumer confidence.”

Overall, the COVID pandemic cost Latin America and the Caribbean (LAC) $841 billion of its GDP—a massive 16% drop.

While recovery is underway, it won’t be until the end of 2022 that LAC will approach its 2019 level of approximately US$5 trillion. The region won’t surpass its 2019 level of GDP until at least 2023, though it’s forecast to rise in 2024 and 2025 to reach just under US$6 trillion, according to the Economist Intelligence Unit and AMI analysis.

The estimated timelines for GDP recovery to pre-pandemic levels for some of the major Latin American economies are:

  • Mexico: Q3 of 2022
  • Argentina: Q3 of 2022
  • Colombia: Q4 of 2022
  • Chile: Q4 of 2022
  • Brazil: Q3 of 2024

Brazil is forecast to lag behind for a variety of reasons, including inflation and currency volatility.

In addition, it’s expected that the U.S. Federal Reserve will raise interest rates, which tends to draw investment into the U.S. and away from emerging markets like LAC, which in turn can exacerbate the ongoing currency devaluation.

The economic conditions are influencing politics, so as we’ve discussed recently in another piece, Latin Americans have voted against incumbents, and left-leaning administrations should continue to take office in the region. This should result in state-owned, low-cost payment infrastructures to come into favor.

Breaking Down the 6 Payments Megatrends for Latin America

The next portion of our Chat was focused on identifying and explaining the 6 Megatrends themselves:

  1. Beyond Pix: Instant money transfers will compete for market share
  2. Open banking payment initiation accelerates ACH
  3. Shopping has become an immersive experience
  4. Credit decoupling from credit cards
  5. A decline of traditional savings
  6. Cryptocurrency trending toward the “digital dollar”

Here are some of the observations and data we shared about each megatrend during the Chat.

#1 Instant money transfers compete for market share

In explaining this trend, we started by looking at the impact of Pix’s successful launch in Brazil. Pix has cannibalized cash, bank transfers and other payment methods, but still has not yet achieved this with card payments. It’s still difficult to determine what Pix’s effect will be on payment method shares in general, but in the short term we have observed that Pix has absolutely invigorated the fintech ecosystem in Brazil. “Not only did Pix include new players, such as enablers and wallets, but it also expanded the pie tremendously for everyone. And now we see an even more diverse, competitive, and dynamic digital ecosystem in Brazil,” said Lehr.

According to Lehr, Pix has some very interesting takeaways for other regions. She cited the example of Costa Rica, where its P2B functionality via its SINPE Móvil platform took off dramatically in 2021, almost reaching debit card levels. “SINPE was not necessarily designed for merchant payments,” observed Lehr, “but rather for P2P payments and general transfers between entities, not necessarily at the POS. Yet now we can observe small merchants, aggressively advertising that they accept SINPE,” she said.  

Regulation also plays a role here. In Costa Rica, by law, acquirers must retain a portion of merchants’ earnings for tax purposes, which is above and beyond what merchants pay in MDR fees. Payments via SINPE are not subject to this retention, and so merchants have in their mind that SINPE is cheaper and better for their overall businesses.

Anecdotally, we see that this could negatively impact card volumes over the long term. This follows the trend of governments favoring central bank infrastructure that is low cost and, in their minds, more democratic. In response, the card networks are posing the following question: Is there enough value in technology built into these networks to truly make them safe and robust? This is the big question that the entire industry is grappling with.

Guatemala is a country in which P2P payments could help to awaken digital payments and transform finance in general. Guatemala has the Fri platform, a P2P platform owned by the country’s three major banks which, combined, have 73% market share. This is not a central bank initiative. This is privately owned. As such, Fri is more likely to follow the Peruvian model — for example, the Yape P2P app, owned by the country’s largest bank, has amassed more than 8 million users—than the Costa Rican model. But nevertheless, it’s our opinion that supporting such a network can really help to disrupt this market, which has been very fragmented, elitist, exclusive, and basically unavailable for the majority of the population. Fri is still only available to banked consumers, but to the extent that this starts to scale and digital transfers become a more of a daily activity, the more this will catch on and the more banks will be under pressure to open their rails to cooperativas, cajas municipales, and fintechs, and thus start to create a more robust interoperable network. Such an approach also helps a domestic market protect against pressures from international fintechs and big tech. As we know, Facebook’s Novi is focusing on Guatemala, and Revolut is investing in Mexico and potentially this will be coming into to the rest of the region. Creating a robust and dynamic local payments scheme, such as Fri in the case of Guatemala, would create a competitive barrier for these international players.

#2 Open banking initiation

“If we look at the landscape of open banking so far in the region, Brazil is the clear leader. We call it an advanced stage of regulatory implementation when we’re we’re considering the region,” said Lehr. Despite the delays, phase 3 — in which transaction information started to be shared — began in October 2021 in Brazil, and this will be implemented throughout 2022 in these different mini-phases that Brazil’s central bank has outlined.

One result of this phase 3 will be that customers in Brazil will be able to check out online using Pix directly, without needing to be redirected to their banking apps, through what is called a Payment Initiator. Currently, if a customer uses a food delivery app and selects Pix at checkout, they are provided with a code. They must then go to their banking app, open up Pix, paste the code, send the transaction, and then go back to the food delivery app—a very poor experience. However, open banking regulation now allows for “payment initiation,” meaning that non-banks (like food delivery apps and other merchants) can offer Pix payments directly.

As far as Mexico, in 2020 the Central Bank published its first open banking rules. The next phase is the transactional data phase, but this is quite stalled and there is no clearly outlined timeline for implementation of this phase as of yet.

“While in Chile in particular, the regulators are starting to talk about providing a roadmap for a regulatory framework for open banking, in other countries, like Colombia, Peru and Argentina, open banking is being driven more by the market,” observed Lehr. As a result, banks and fintechs are already connecting via APIs to share information. In addition, Lehr pointed out that “some of the top use cases that we’ve already seen include banks, which are leveraging third-party channels to sell their services. This is leading them to integrate with other entities, like mortgage companies. Banks are also integrating with car dealerships to offer car loans. There are also integrations with credit unions and fintechs, regardless of regulatory developments. This is enabling a faster digitization, less friction and more access to financial services being embedded in our daily activities throughout the region.”

#3 Shopping as an immersive experience

A recent study by Rapyd offers some insights into social commerce by Latin Americans, with significant percentages saying they prefer to shop on social media.

While Instagram and WhatsApp command similar shares of preference, Facebook is still the top choice among LatAm consumers:

Bank transfers lead all other payment methods when it comes to social commerce done by Latin Americans:

According to Lehr, “This preference could be due to Facebook and Instagram not having native checkout solutions. Companies have social media platforms where they can advertise, they can market, they can talk with consumers, but they can’t receive the payment.” As a result, “we’re seeing a vast appetite for leveraging social media but without an intuitive payment solution,” she explained.

Lehr also indicated that the social commerce boom is leading to newer options like live shopping and “shoppertainment” being introduced to Latin America that create a new paradigm of interactions between brands and consumers. “This is a next level step of social commerce in which people talk about products and interact with customers, similar to TV shopping networks like QVC in the U.S.,” said Lehr. Rappi is among the companies developing live shopping capabilities and could position itself to become a digital advertising platform, a digital space for brands to advertise and gain followings. In addition, live shopping represents 13% of e-commerce sales in China, so Chinese companies may well be interested in introducing their live shopping platforms in markets like Brazil.

“This new level of shopping interaction will require new payment enablement relationships and new partnerships as companies like Shopify and VTEX invest in enabling live commerce,” predicts Lehr. “This megatrend will also require a very intuitive instant payment method or, at the very least, a highly seamless payment method,” she observed.

#4 Credit decoupling from credit cards

This is happening in a couple of different ways. First, there is cardless credit, in which Nubank and other banks have started to create their own native shopping experiences through their own marketplaces. “They want to keep customers in their app to become profitable and increase their financial standing, capturing that customer journey on their rails in their ecosystem. This is where an optimal user experience really comes into play,” said Lehr.

Nubank is famous for issuing and expanding access to credit cards in Brazil. But with this shopping app capability, Nubank is in a very good position to offer credit directly to its customers, regardless of whether they have a credit card or whether or not they’re using credit card rails to do that. It has the customer data, the user, and the interface. “While Nubank has not announced that it is doing this, the company is in a very good position to directly offer credit at the point of sale at checkout — without involving a credit card,” indicated Lehr.

Brazil also has interesting fintechs offering credit products that range from payroll and auto loans to mortgages, allowing consumers to obtain credit directly without a credit card. Then there are the buy now, pay later (BNPL) players who are specifically dedicated to alternative lending at this point of sale, looking at customers who don’t have a credit card, who haven’t been able to access these very aggressive promotions from banks and retailers that exist all throughout Latin America. “For BNPL companies,” said Lehr, “their main targets would be the approximately 170 million debit card holders in Latin America who do not have a credit card. These consumers are banked and digitized but lack access to the promotions that we see very aggressively marketed,” she said.

The graphic below the potential growth with BNPL in two major markets, Mexico, and Brazil. NOTE: TPV stands for Total Payment Volume, expressed in billions of dollars.

Of course, the real question regarding this becomes: how leveraged is Latin America?

Here is a look at credit card penetration in 2021 in key Latin America markets vs. the United States:

This is the ratio of household debt to assets in 2021 and 2022 in key Latin America markets vs. the United States:

“The countries with low credit card penetration and low household debt/assets ratios are where we at AMI believe that BNPL has the greatest disruptive potential,” said Lehr.

#5 A decline of traditional savings

A lot of the challenges we are seeing at the macro level, which we discussed earlier in this piece, are helping drive this trend. “For Latin Americans, the challenges they are facing make it more attractive to explore alternative savings and investment products, such as cryptocurrency,” explained Lehr.

One of these challenges would be interest rates, which are projected to decline over the next few years:

This makes putting money into a savings account much less appealing for Latin American consumers.

This is further evidenced by these projections for savings rates for five key markets:

“As a result, AMI’s payments team expects to see more money flowing out of local economies and sent offshore, as well as an increased dependence on remittances,” said Lehr.

Payments ecosystem players are thus likely to see greater opportunities in offering consumers alternative savings options that go beyond a simple savings bank account and will offer better rate of return.

#6 Crypto trends toward the “digital dollar”

According to recent research conducted by AMI, which we will further detail in our LAC cryptocurrency-focused whitepaper, at least 8% of Latin Americans have purchased cryptocurrency. Here is a look at crypto penetration vs. credit card penetration in four key LatAm markets:

Our research indicated that crypto purchasers tend to be:

  • Mostly male
  • Working age (25-54)
  • Have upper to upper-middle income levels

This group is most interested in crypto to invest, avoid government influence and protect their savings.

Another 18% of surveyed consumers indicated they are “crypto-curious” and are interested in exploring cryptocurrency. This segment tends to:

  • Have a wider age range
  • Feature a higher percentage of women
  • Have middle income levels

“The crypto-curious consumers in LAC are interested in crypto to invest, protect their savings and to use stablecoins to access US dollars, given the volatility of exchange rates in many countries,” observed Lehr.

AMI analysis indicates that crypto products that provide stability or access to a “dollarized” account have a high potential for success. However, stablecoins will be competing with other products that offer access to a stable currency. Among the players in this space are:

  • Wise, offering a multi-coin wallet
  • Payoneer, with a dollarized wallet
  • Global66, with a multi-coin wallet
  • Bitso, offering the purchase of stablecoins
  • Binance, also offering the purchase of stablecoins

In 2022 we may start to see the “crypto card” gain huge popularity as a way to facilitate the utility of cryptosavings.

“Overall, the future is clearly multi-rail as consumers seek to exercise their options as much as possible. As such, platforms that enable multiple rails and the maximum number of use cases are the most likely to gain maximum customer loyalty,” indicated Lehr.


The Cryptocurrency Revolution in Latin America Payments

A free whitepaper detailing the growth of crypto, current use cases and what to expect in 2022 and beyond

Next Step

Click here to access the full presentation made in this AMI Payments Coffee Chat.

Contact us if you’re interested in exploring further research into these 6 megatrends. Our team has conducted more than 400 payments industry studies in Latin America over the past 20 years, and can customize a study to help your company understand how these megatrends will affect your business directly, as well as help you uncover new opportunities they could bring.

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