Latin America: A mobile feast
Payments, the centre of innovation
From a financial services perspective Latin America has been an interesting market to watch over the last decade. With markets opening up after long periods of dictatorship, civil wars or oppressive governments, the industry was presented with real opportunity to grow. However in 2015, growth in the region declined for the fifth year in a row, to less than 1%. Growth was an estimated 0.9 percent in 2017 after two years of contraction. Stronger-than-expected growth in Brazil was offset by a deeper-than-anticipated recession in Venezuela (The World Bank, 2018). One may think that this would lead to little innovation in a floundering financial services market.
One beacon of hope has been payments. Plastic card usage has been growing; e-commerce is strong. Local fintech startups are disrupting incumbent financial systems and large numbers of mobile wallet launches demonstrate investor determination to bring in the next wave of payment technology.
Fintechs provoking change
Latin America has seen an influx of new fintechs. Thanks to a favourable regulatory landscape, banks and card networksare investing in technology to reduce cost and expand their customer offering. According to Americas Market Intelligence, a market research company focused on Latin America, to do this, ‘banks are shifting their investment dollars away from credit cards in sharp contrast to their retail strategy over the past 20 years’.
Banks and acquirers are opting for ‘everything digital’, including online banking platforms, mobile apps, digital wallets, mPOS and support for e-commerce. According to Americas Market Intelligence, BBVA in Mexico reported that improvements to its online
offering, including online lending and a digital wallet, have resulted in attracting two million users to the online channel in just 18 months compared to the 1.5 million users it attracted over the previous 10 years. All of this does not sound too dissimilar to other markets. However, what Latin America has that other markets do not is a relaxed regulatory framework and little cultural heritage of industry cooperation meaning quicker development pace. Organisations don’t feel an inherent need (or regulatory push) to work together therefore they can develop solutions that fit their customer base much easier. Whilst some may argue this not means lack of ubiquity and consolidates dominance of larger institutions with deeper pockets, you cannot argue that it means quicker response to customer demand.
Companies like YellowPepper, are stepping in to provide new advances in the mobile payments market. YellowPepper requires a debit or credit card, then downloads an app from a retailer, bank, white label app, or branded one from the company – YellowPepper has a smart wallet in Colombia and in Mexico called Yepex. The customer registers, inputs the card data and then identify/authorise themselves as a user. Once you have registered your card, the process is as follows – you go to a shop and you want to pay with your mobile phone: you open your app which generates a dynamic 6 digits PIN, you give that PIN to the cashier. They insert it in the terminal or micro-terminal that is used today to swipe the credit card and then you get a phone confirmation that you’ve paid for the goods or services at that location.
Visa announced in May 2018 that it would strategically invest in YellowPepper and stated that the partnership “reinforces a shared vision for increasing usage of mobile payments throughout Latin American and the Caribbean,” according to a press release.
Digital is popular, but what about the unbanked?
The last five years have seen the first real wave of digital disruption in Latin America. However, these digital opportunities, for now at least are only really available for the banked segments of society. 70% of Latin Americans do not have a bank account, 60% of transactions made by SMEs are in cash and 47% of employees work in the informal economy. Credit cards still lie at the centre of mobile banking, technology is just being built to help consumers use them in different ways. Whilst mobile penetration is high, bank account penetration is not.
In recent years, banks, card networks and telcos have shown great optimism regarding mobile financial services for the unbanked. However, it provides a revenue challenge for these organisations and has meant that many players have moved away from delivering these services. YellowPepper itself noted in a recent interview that “providing banking services to the unbanked wasn’t paying enough for us to survive, so for the time being we’ve left that market.” The focus has shifted to banked market.
Argentinean ATM network provider Red Link launched the country’s first multi-bank electronic payment app, called Vale, allowing customers of 32 banks to make immediate p2p transfers using their Android devices. Users just download the app from Google Play, create a username and password and add their bank accounts to instantly transfer money. This, as does the YellowPepper solution, requires a bank account.
Note can be taken from Guatemala where pioneering partnerships have been used in the past in Chiquimula province, an area badly affected by child malnutrition, earthquakes and drought. Families received humanitarian cash transfers from Oxfam via a Tigo mobile money service. Tigo agents in this remote region delivered money via mobile networks rather than formal banks, which are sparse in these rural areas. Families issued with a SIM card and personal PIN receive this money over the counter, as soon as Oxfam has sent them authorisation via SMS message. Hundreds of thousands of dollars was distributed this way.
Additionally, BIM, the Peruvian industry-wide mobile money platform does not require a bank account.
Mobile payments therefore are sure to grow in the banked segment of society but for vast swathes of the Latin American population access to these services is limited or non-existent.
Mobile instant payments
Mobile payments in the majority of Latin America is facilitated by the use of the card networks as the backbone. The mobile payment is mimicking a card and transferring the data through the same POS system, into the same processor, to the same authorizer, through the same acquiring bank. Therefore there is no need to alter any regulation or even much technology to support mobile payments.
This makes the time to market that much quicker but requires nearly total reliance on the card schemes. Due to usage of the card rails for mobile payments, the transaction is instantaneous. However, when it comes to mobile instant payments as an overlay to interbank retail instant payment rails, e.g. PayM in the UK using the Faster Payments scheme infrastructure, there are minimal solutions in place. Latin America saw very early adoption of real-time payments initially. Brazil implemented SITRAF in 2002, operating 07.30-17.00. Mexico went on to implement SPEI in 2004, and Chile followed in 2008, with its TEF system operating 24/7. However, since then we have seen very little traction with real time payments implementations elsewhere within the region. Smaller markets such as Costa Rica, Nicaragua and Belize have instant payments systems but the larger markets like Colombia, Argentina and Peru are yet to commit. This is surprising as the interest elsewhere its almost at fever pitch, driven partly by the ubiquity of smartphone, which have catalysed consumer expectation for immediacy.
Without the underlying infrastructure in place, organisations are developing their own p2p instant payments and mobile instant payments platforms, e.g. Interbank in Peru and Davivienda in Colombia for customers within their own banks (think Barclays PingIt before PayM). Until widespread instant payments infrastructure implementations commence, mobile instant payments will most likely continue to use the card networks. Whilst Ovum’s ‘Transaction Banking Survey’ in 2017 highlighted that 67% of banks within Latin America agreed that real time payments would enable them to significantly enhance their service offering there appears to be muted sounds from the industry and the regulators across the region – with the exception of the recent announcement by the Brazilian central bank.
The combination of greater choice on how to implement mobile instant payments and a greater access to these services by the unbanked will be required for widespread mobile instant payments adoption across the region. Latin American payments are changing apace, but a long road of transformation is still ahead.