It has been nearly one year to the date since the first case of COVID-19 was reported in Latin America. On February 25th, 2020, Brazil reported the region’s first case, and within weeks, most of the region was in strict lockdown mode. Madness then ensued, as policymakers battled over quarantining to protect public health vs. keeping the economy open to protect citizens’ livelihoods. All in all, the region lost 9.7% in GDP in 2020, while both e-commerce and digital banking grew.
2021 will be a year of continued adaptation to a hybrid way of life, in which most businesses, schools and institutions are open, but social distancing and mask-wearing are still present, in anticipation of widespread access to vaccines. On the payments front, digital payments have taken a more prominent role than ever, to help people maintain some normalcy in their daily activities and to limit contact with others. Although, cash has proven to be sticker than expected during the pandemic, and regulators continue to thwart the expansion of fintech opportunities in some markets. Hence, 2021 will have some good, a decent amount of bad, and a whole lot of ugly.
In 2017—when the last World Bank Financial Inclusion Index was published—bank account penetration across Latin America stood at just over half the population (55%). The number of bank accounts offered by traditional banks grew slowly, just 3%-5% per year through 2019. While fintechs and neobanks have grown rapidly in recent years, on the whole just ~20% of these were previously unbanked, most customers being pre-banked by another institution.
Yet, in 2020, this landscape changed dramatically. With most businesses shut down and mobility greatly reduced, people found themselves in severe need of digital financial services, in particular debit cards to be able to shop online and online bill pay service. Both traditional banks and fintechs rose to the challenge to meet this demand, and as a result, AMI estimates that the banked population grew by 24% in 2020. Brazil experienced the most dramatic increase; today in 2021, access to a digital account either by bank or fintech has escalated to 88% of the adult population. After Brazil, Colombia experienced the most dramatic growth of 26% in the banked population in 2020. Laggards were Mexico (13% increase in banked population) and Chile (7% growth but reaching high penetration of 82%).
In 2021, in many markets, the “unbanked” have almost disappeared. Except for rural areas and people over the age of 65, banking services are readily available at no cost and with very few barriers to entry. This means millions of new customers who can generate revenue, profitability and open up new use cases for innovative financial service providers. The challenge of course is for banks and fintechs to promote long-term usage of banking services by their new customers—figuring out what products and services will make them stay.
AMI early estimates show that retail e-commerce grew 21% in 2020 and that digital goods grew by more than 40%, all good news for the digital payments industry. Contactless payments also grew; Brazil’s card association ABECS reported that contactless volume grew over 200% and Visa reports that contactless has exceeded 50% penetration of face-to-face card volume in Chile and several Central American markets. And, multiple consumer surveys conducted in 2020 suggest that consumers’ cash use had significantly reduced. There is ample evidence to suggest that digital payments made massive headway.
However, when taking a hard look at the numbers, it is important to realize that face-to-face retail fell 18% in 2020, meaning the use of all payment methods declined. Credit card took the hardest hit, as consumers stopped buying high ticket items and avoided taking on new debt. Cash also fell, but only three percentage points faster than retail overall. Debit was the winner, nearly remaining stable. As a result, compared to 2019, cash lost only two percentage points in overall share and still represent an estimated 75% of in-store retail payments among the region’s top six markets.
The silver lining here of course is that a good chuck of face-to-face spend, much of it in cash, migrated to e-commerce via credit or debit card. This highlights an important lesson: the practice may not be to compete against cash at the POS, where cash continues to be a convenient way to pay—but instead focus on transferring in-person spend to the online environment, where digital rules.
Presently, more than 120 million people across the region utilize the service of fintechs, neobanks and digital wallets. Most of these are in Brazil, where fintech giants Nubank, PicPay, PagBank, MercadoPago, and at least a dozen others battle for customers and their loyalty. Massive retail players are also in the mix, including Ame Digital from the B2W group and Magazine Luiza’s MagaluPay. All offer something similar: a digital account attached to a prepaid or debit card, and the ability to make various payments—P2P, bill pay, top-ups and in some cases gift cards and digital goods.
While each have slight differences, they are in essence very similar and struggle for competitive differentiation, including throwing money at consumers in the form of cash back, discounts and free services. This competitive effort is of course undermined by the Central Bank’s launch of Pix, its real-time payment platform, in November 2020, which enables interoperability between participating institutions and free money transfers for users. With the number of players increasing and basic banking services becoming commoditized, the question remains as to how long digital banking competitors will be able to burn cash in an attempt to lure customers into staying loyal.
As Pix ramps up throughout 2021, both traditional and digital banks will have to work harder than ever to please their customers. In the end, it will come down to the emotional connection banks can generate with their customers, based on branding and messaging, UX and customer service; products are secondary.
2021 will be perhaps even more interesting than 2020, as industry players confront a huge task: to maintain the digital momentum gained during 2020 and create lasting digital behaviors among the population. With reduced consumer spending and a more competitive payments environment, the landscape is more harrowing than ever, but also more prepared to produce digital business opportunities than ever before.
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 Economist Intelligence Unit