In Latin America in 2018, an estimated $1.7 trillion dollars annually were spent in cash in brick-and-mortar retail, representing 81% of all retail spend. This is compared to 25% in the US and 18% in China. The World Cash Report 2018, published by G4S Cash Solutions and the Payments Advisory Group, reports that in Latin America, the average number of card transactions per capita per annum is well below three times that of the global average (see Figure 2 below). And even among e-commerce shoppers — a more sophisticated consumer segment than the population overall — cash remains the preferred payment method for everyday shopping among Mexicans, Colombians and Argentineans. As the data loudly declare, when it comes to payments, cash usage remains deeply-rooted in Latin America despite the financial inclusion efforts of governments, banks, card networks and fintech companies.
Why is this so? Latin America’s low credit card penetration is common knowledge in the industry, but is it also known how little progress has been made? The World Bank Financial Inclusion Index reveals that between 2011 and 2017 credit card penetration increased on average only by 1 percent in Latin America’s top seven markets and experienced negative growth in Brazil and Mexico (see Figure 3). Put another way, credit card penetration has actually declined in the region’s two largest markets.
Debit tells a different story. In the chart below, we see impressive jumps in debit card penetration in Brazil, Argentina, Chile, and Peru, achieving an average net gain of 13 percentage points. Interesting, however, is that less than 1 percentage point was gained between 2014 and 2017. In other words, debit card penetration growth in Latin America has stagnated in recent years.
But what’s potentially more telling than card penetration in Latin America is actual card usage (see Figures 4a and 4b below). The World Bank Findex tell us that, to our delight, on average 86% of credit card holders in Latin America actually used their card to make a purchase in the past year. But in debit, this is true for only 58% of debit card holders; meaning that 42% have forgotten their cards in a drawer somewhere, inevitably reverting to cash for their everyday purchases.
Two Possible Explanations
These data tell us that despite the pomp and circumstance around financial inclusion in Latin America, card issuance has barely increased since 2014. Potentially more troubling, more than 40% of cardholders have neglected to use their card in the past year.
But how can this be? Nearly all governments in the region have enabled a financial inclusion political framework. Visa and Mastercard have both made commitments to expanding access to electronic payments and banks have announced strategies to increase their cardholder base. Yet, financial inclusion remains fleeting. Given this, one or both of the following must be true:
1. The ecosystem’s efforts at financial inclusion are not working
2. The region’s financial institutions do not actually care about financial inclusion
As everyone in the Latin American payments industry is acutely aware, this situation has given rise to non-bank actors who wish to seize the monumental opportunity of retail purchases made in cash. It has also led Central Banks to think about financial inclusion from a more structural standpoint. Ultimately, new technologies are emerging that intend to challenge the dominance of traditional payment cards and capture more cash transactions. Those leading the pack include contactless payment cards and mobile wallets, QR codes, and real-time payments.
What will follow today’s article is a series of thought pieces that analyze this rising competition, based on the assumption that the ecosystem’s efforts at financial inclusion are not working and that these new technologies may deliver a solution. We will also look at the efforts of governments to understand what regulatory changes may impact the industry in the near future. Examples from outside the region will provide both inspiration and forewarning.
Of course, the second hypothesis, that the region’s financial institutions do not actually care about financial inclusion, is also likely true; the data certainly points to such. This is unfortunate, since when spoken intent differs from true intent, the results are always disappointing. In each subsequent article in our series, we will see evidence that this may be the case and consider the implications of its veracity.
What we hope to do as we analyze this “war on cash,” is to shine a spotlight on untruths. In an industry filled with brilliant and influential people, increased financial inclusion should not be so difficult to attain. This analysis will help us predict trends shaping the payments industry in the short term and identify who the potential winners might be. $1.7 trillion in cash spend is on the table — no small prize for whoever who truly seeks it.