Are e-payments about to take off in Latin America?

Latin America’s biggest country, Brazil, is the world’s third largest market for non-cash transactions after the US and the eurozone, right ahead of the UK and way ahead of China, Canada and Australia. It has a higher number of non-cash transactions per inhabitant than Spain or Italy – 130 compared to 126 and 66, respectively – according to latest available figures from Capgemini (2013).

With a young population and a large mobile phone market, Brazil should be one of the world’s prime markets for innovation in online and mobile payments, yet slow updates in regulation and a sluggish environment for newcomers are stifling progress.

Latecomer to fintech

This is true across Latin America, says Jorge Ruiz, the head of global digital acceleration at Citi. “Latin America is probably the last region [in the world] to come into the fintech space,” he says.

“Traditionally, banks like to build everything ourselves, own the technology and make huge investments in everything related to infrastructure. But we cannot keep making these investments at the speed of the fintech firms – there is no way that any bank would be able to offer clients solutions that respond to their lives and behaviours at the same speed.”

According to consultancy Celent, there are more than 80 fintech firms in Brazil and 60 in Colombia, but Mr Ruiz says that across Latin America these types of companies raised less than $1bn in initial funding in 2015. 

Yet opportunities abound across the region. As a consumer market, Latin America should be a cross-border payment provider’s heaven: an overall population of more than 620 million that mostly speaks one of just two languages – Spanish and Portuguese – as opposed to the many that break up the growth markets of south-east Asia or even the eurozone.

Mobile army

Mobile penetration is high across Latin America. GSMA, the international association of mobile service providers, estimates that half of Latin Americans will use mobile phones to access the internet – and therefore potentially purchase online – by 2020, up from 35% in 2014.

Banking groups with operations in multiple countries would be better placed to take advantage of these characteristics, but different systems in each markets (often inherited through past acquisitions), as well as complex and patchy regulation, make providing cross-border payments challenging, say experts.

“What [multinationals] find is that running operations in Latin America is pretty easy because of similar consumer behaviours and languages. The challenge is that each country is very different in terms of payment [systems] and regulation,” says Javier Vallaure de la Paz, chief business development officer at payment provider Allpago, which aims to solve this conundrum by providing a cross-border payment network as well as regulatory advice to merchants and corporate clients. “You may think that you have regional players in the financial services in Latam, but the reality is that [for some of the banks I work with] each country works completely independently.”

Right now, says Mr Vallaure de la Paz, the company does not face much competition. It operates in Brazil, Colombia and Mexico and plans to open offices in Peru, Chile and Argentina.

Regulation behind the curve

Equally, regulation has been to slow to keep pace with developments in most markets. In Brazil, for example, the central bank began regulating mobile payments only in 2014 despite the country being well versed in digital payments because of its harsh past of hyperinflation of the 1980s, which lasted until the mid-1990s. This drove many Brazilians away from cash into fast-settling cards, particularly debit and pre-paid cards.

And with about 90% of mobile users in Brazil owning a smartphone, according to the Mobile Marketing Association, e-commerce is on the rise. Frederico Souza, head of products at Rede, the card payments provider part of Itaú Unibanco, expects online and mobile purchases to reach 20% of the country’s total by 2020.

Mario Mello, PayPal’s general director for Latin America, adds: “When I arrived in Brazil five years ago, the penetration of e-commerce was 3.2% [of total retail sales], now it’s 4%. Even low-end consumers, low middle class or below, are using their smartphones at home or at work, and this is completely changing how people purchase.”

He is optimistic about smartphones becoming the main ‘computer’ for many of the country’s consumers, as well as the growing success of apps for everything from booking taxis to food delivery – particularly in Brazil and Mexico.

Innovation needed

But could e-commerce grow even further if more innovation was allowed in the market and participants made greater efforts to reassure consumers that online and mobile payments were safe?

“[In Mexico, e-wallets] are a solution looking for a problem because people still see taking out their card and inserting it in a point of sale easier than taking out a phone, putting in a pin number, opening an app and doing whatever you have to do to make a transaction,” says Jean-Marc Mercier, assistant general manager of retail banking at Mexican banking group Invex.

On the other hand, Mr Mello notes how investment in PayPal’s e-wallet has resulted in the simplification of the check-out process, where the system recognises the authorised user simply by their unique way of typing, rather than by the user typing in specific information.

Creating a better environment for financial technology innovation in the Latam payments system could also benefit banks and help governments’ goals of extending financial services to poorer parts of the population. Christophe Vergne, Capgemini’s global payments centre of excellence leader, notes that banks’ efforts on financial inclusion have already played a bigger role in the growth of digital payments in Brazil than e-commerce did over the past seven years. With more innovation, both areas would expand further.

Reassurance needed

Invex’s Mr Mercier says closer relations between regulators, banks and newcomers are needed where consumers are particularly suspicious of digital payments, whether because of fraud or identity theft scares, or because of unintended consequences of other new legislation. He adds that changes in the fiscal system that were meant to broaden the range of taxes people must pay had resulted in a retreat towards cash.

“We had a bit of a setback... because of the [2013] fiscal reform: people went back to cash. They were scared about the thought of [tax authorities] scrutinising debit or credit transactions,” he says.

“[Generally] even when they have a card, people would often still take out cash, go in supermarkets where cards are accepted and pay with cash. There has to be a joint effort between regulators, the banking system and other players to incentivise the use of electronic payments.”

Work to do

The good news is that the Mexican government is intent on gaining experience from abroad and develop its own fintech hub, according to Citi’s Mr Ruiz. Brazil and Colombia are also making efforts in this direction but there is much work to do to bring the region up to speed, particularly compared with what Asia has achieved, he adds.

“When you analyse Latin America, you don’t really see regulators or countries worrying about how you can support the integration of fintech. You can go from understanding what is happening [in the market] and allowing for payments to move faster, to what South Korea has done, which is for most banks to open their platforms and allow [access by external developers]. They’re not there yet in Latin America.”

South Korea has a population one-quarter the size of Brazil’s but its non-cash transactions are just under half of Brazil’s, and is the world’s fifth largest market, according to Capgemini.

As governments begin to embrace financial innovation, regulators catch up with new solutions and banks adapt their growth strategies, this could be a turning point for Latin American e-payments.

“If I were to make a prediction, I’d say that in 2017 we’re going to see leading financial institutions in Latin America opening their platforms to [external] developers to start building on what they have,” says Mr Ruiz. “That’s how the world is evolving, and the smart financial institutions will take this up faster.”