Lindsay Lehr
Managing Director
PCMI
2023 is potentially the most difficult one on record for companies in the payments industry to make projections and anticipate risk. With real-time payment schemes proliferating, competition from central banks, credit offers exploding, open banking emerging, cross-border payments becoming increasingly fragmented, regulation impending, etc., it is a dizzying combination. One of my clients said to me recently, “It’s never been harder to connect the dots,” and even as a strategic consultant, I can’t argue that point.
The opportunities have potentially never been more exciting, and the risk never as palpable. For certain in 2023, there will be good, bad, and ugly—it just depends on who you are and which way the needle swings.
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The 2023 Latin America Forecast
Five massive trends that will shape Latin America not only for in 2023—but also throughout the rest of the decade into 2030
The Good
The biggest winners this year will be merchants. Across the region, merchants large and small have access to a low-cost payment acceptance—most notably the case of Pix in Brazil, which merchants pay around 1% to accept. Pix merchant acceptance has taken everyone by surprise. Today, around 50% of formal merchants accept Pix as a payment method, reaching north of 70% for online merchants. In Q4 2022, Pix person-to-business transaction volume became even with that of debit, hinting that Pix is unraveling the competitive landscape at the POS. For sure, merchants favor Pix, with merchants commonly offering 10% discounts if consumers use the payment method. This can beat any discount, cash back or points promotion offered by credit cards.
This is no small thing. By accepting Pix, merchants can save millions of dollars a year on merchant discount fees by replacing card payments with Pix. They also receive funds immediately, saving money on the short-term loans the get from acquirers to send them their funds early (anticipar).
Pix, combined with open banking regulation, is also enabling merchants to more easily become initiators of payments themselves, taking on agency in the checkout process. Now, merchants and marketplaces who receive a payment initiator license from the Central Bank can initiate payment from a third-party account, without the customer ever having to leave its environment. Not only does this facilitate commerce, but it allows merchants and ecosystems to become money senders, enabling new money movement use cases, and enables them to easily move funds into their own ecosystem and customer accounts. This, combined with open banking steadily on the move in Brazil, makes it easier for merchants, marketplaces and non-financial institutions to become financial service providers and develop digital liquidity.
By accepting Pix, merchants can save millions of dollars a year on merchant discount fees by replacing card payments with Pix.
This trend is not exclusive to Brazil. Low-cost payment methods are proliferating across the region, following multiple different models. Costa Rica, Argentina and Mexico have followed a Central Bank-led path. Colombia and Peru have played host to private P2P networks owned by banks, now under pressure to become interoperable with the rest of the ecosystem. While Mexico’s CoDi was not a success, payments and purchases via the domestic ACH scheme SPEI are on the rise. Costa Rica is attempting to export its SINPE platform to other Central American markets. Panama’s processor Telered recently launched instant ACH with participating banks. The trend is catching up to a global one, most successful thus far in Asia, in which money moves rapidly, for free, accessible to grand swaths of the population. This is an excellent development for merchants, who for decades have had few options: either pay the 3%-5% to accept cards, or deal with burdensome amounts of cash.
There are other exciting trends that will create untold opportunities for ecosystem players. With more companies than ever offering financial services, this creates opportunity for eKYC, identity verification and digital identity services. Fintechs are under pressure to monetize, pushing them into the credit game, creating increased demand for companies like Mo Technologies, providing alternative credit scoring. Demand for real-time money movement is inspiring innovation from all kinds of players, including Visa and Mastercard, and fintechs Arcus, Minka and PaySend. Truly, a new payments paradigm is being developed—one based on real-time, interoperable, digital money transfers, upon which hundreds of new use cases are possible, that we haven’t even begun to imagine.
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Crypto Usage in Latin America
How LatAm cryptoconsumers are behaving. Broken down by specific markets: Argentina, Brazil, Colombia, México, Perú, and Chile
The Bad
The downside to this exciting trend is that companies who have enjoyed the fruitful economics of the card business for the past four decades are seeing their margins dwindle. This includes traditional card acquirers and processors, most of whom have not integrated other payment methods, moved into non-traditional verticals, and who have been slow to optimize the digital payment user experience. As payment methods like Pix grow, acquirers face losing market share, and without the ability to quickly pivot or innovate, could see the end to the easy profits they have experienced over the past decades.
To be clear, cards are not disappearing anytime soon. Debit cards, which are nothing more than a credential to access account balances, are indeed facing an existential crisis, as banks have figured out how to move money outside the rails of Visa and Mastercard. Unless debit cards undergo a major revamp, they could become obsolete in Brazil. The rest of the region is safe from the threat—for now—but card networks should not take this for granted, as the global real-time payment trend is real, aggressive and contagious.
Credit cards still have a strong value proposition and are wildly popular in Latin America, and so are not under threat for now, but card networks need to be thinking about what the next generation of the card business will look like. They are indeed doing this and have successfully parlayed chip payments into contactless—making card payments at the POS frictionless—in the last five years. Over the next five years, “credit cards” must increasingly remove themselves from the card itself—imagine face and hand payments—and approximate a money transfer more than a payment, enabling the ability to finance things like rent, tuition payments, healthcare, construction contractors and other payments one would normally pay with a wire or check. Looking for new sources of card (or digital credential) issuers and enablers with new and exciting flavors will also be key to remaining top of wallet.
The Ugly
While a new payments paradigm built on low-cost, fully interoperable instant payment rails is certainly exciting, it’s also a bit worrisome, since much of the infrastructure is currently being built by central banks. This gives them a lot of power to control the flow of money in an economy and gives them the ability to discriminate against competitors they don’t like. To be a bit dramatic, regulators in Brazil are single-handedly deteriorating the economics within the payments system and creating an unfair competitive environment for the card industry.
It is also worrisome that central banks are operating as judge and jury—both operating and regulating the payment rails. This empowers regulators to change the rules of the game at their whim. It also leaves the fate of payment systems in the hands of federal administrations that change hands every four years. While it is unlikely for Lula in Brazil, or any incoming president, to dismantle Pix because of its popularity and penetration, it is feasible that politicians could interfere with government-run payment schemes, or fail to properly invest in their maintenance and evolution, undermining their long-term sustainability.
Finally, while Pix is succeeding now, we would be remiss if we did not reflect on the state of state-run systems around the world. From public education, to health, to oil companies, government-led systems lack investment, run inefficiently, invite rent-seeking behavior, and fail to perform at the level that privately run initiatives do. There is no immediate evidence that this will happen with Pix—on the contrary, the Brazilian Central Bank has proved itself to be completely visionary, innovative and effective. However, there is no guarantee this will last, and more importantly, things may not turn out as well in other markets with weaker or less autonomous public institutions.
Next Steps
2023 is full of unknowns. To forge a path, companies must get very specific on their value propositions—what problem do they solve, who are their customers, and what payment experiences are they best suited to serve? By getting anchored in what they are good at, they will avoid spending time in what they are bad, and likely to lost at, considering the shifting competitive dynamics.
Contact us to find out more about how our LatAm payments market intelligence can help you navigate the good, bad and ugly in this sector while growing your business during this year and beyond.
