Many of Latin America’s big problems, from crime to inequality, seem entrenched to the point of intractability, but here is one area where you can find good news: On the key issue of informality and financial inclusion, the region is making giant leaps forward.
The preference for cash in the region — typically a reflection of its shadow economy — is quickly declining thanks to growing digital payment alternatives. At the same time, the number of new financial start-ups has mushroomed, as more entrepreneurs and traditional players vie in a red-hot market.
Authorities and regulators should promote this positive trend. It is an opportunity to include the unbanked population, making financial products more available to formal and informal workers, and enabling small businesses to expand operations at less cost.
At the same time, it helps to reduce the region’s infamous bureaucracy and to spur much-needed productivity increases through technology.
The evidence of this new trend is eye-popping: According to a May report by McKinsey & Co, in just two years, the debit card has replaced cash as the preferred payment method among Spanish-speaking Latin Americans.
A study by the Inter-American Development Bank and Finnovista released last month showed that the number of fintechs in Latin America and the Caribbean grew 340 percent to more than 3,000 firms in just six years through last year.
And seven out of 10 Latin American adults have already made or received payment through digital means, according to the Beyond Borders 2024 survey.
Many factors are driving these developments, not least the confinement of the COVID-19 pandemic: Months spent at home and working remotely meant millions tried new mobile payment options and e-banking platforms to avoid going to physical branches, thereby becoming familiar with the mechanics.
Ease of use, speed and better control of expenses are cited as among the top reasons for relying on digital payments and debit cards, particularly among the younger population. There are also technology adoption reasons; Latin Americans are heavy mobile phone and social media users.
The boom of remittances — there were almost US$160 billion in transferences to the region last year — has also prompted customers to try new digital options for their finances.
The disruption is most visible in Brazil, with the central bank’s instant-payment system, Pix, reaching more than 160 million users since its launch in late 2020.
This is nothing short of revolutionary: When I was living in Rio de Janeiro, I had to print out a PDF receipt and head to the bank to pay my rent to a cashier every month. And that was between 2010 and 2016, not that long ago.
Now Sao Paulo-based Nu Holdings Ltd, a fintech that was only starting when I was living there, has already amassed more than 100 million clients across its regional operations, mostly in Brazil, but also in Mexico and Colombia, making it one of the world’s largest digital banks.
In Argentina, triple-digit inflation had the unexpected side effect of boosting the use of payments apps among suffering Argentines tired of carrying worthless bills on their wallets — while at the same time making decent returns thanks to the platforms’ investment options.
Of course, big structural shortages must be overcome, from the difficulty of changing customers’ behavior to the irresistible charm of cash when doing irregular or tax-avoiding transactions.
In the McKinsey survey, 70 percent of respondents still said they have used cash within the previous 30 days. This is an obvious area where the government has an interest in promoting digital tools that provide transparency and formality — starting with the state’s own tax and procurement platforms to working toward the so-called interoperability enabling different apps to operate with any merchant or customer without regulatory distinctions.
Pedro Rivas, the head of Mercado Pago in Mexico, also cites telecommunication infrastructure problems such as the lack of cellular network coverage in parts of the country.
“On a scale from one to 10 in the market development cycle, we are only at four,” Rivas told me. “Cash continues to be our main competitor.”
Mercado Pago, which is the fintech unit of MercadoLibre Inc, reported a 38 percent annual increase in monthly active users in Latin America during the first quarter, to 49 million customers, and more than US$5.5 billion in assets under management.
With its population of almost 130 million and a sizeable informal market, Mexico is the battleground where traditional banking players and fintechs are stirring up the competition.
Regulators would do well to follow the Pix strategy to accelerate the process, especially now that Brazil plans to take the system beyond its borders.
In any case, the era of consumers and merchants getting anything from loans to credit cards through a mobile app is here and unstoppable. Thanks to the digital revolution, a generation of Latin Americans who never had access to financial tools can finally benefit from them.
Cash is looking to be diminishing as the king of the region.
J.P. Spinetto is a Bloomberg Opinion columnist covering Latin American business, economic affairs and politics. He was previously Bloomberg News’ managing editor for economics and government in the region. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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