Latin America Advisor

Financial Services Advisor

A Daily Publication of The Dialogue

Is Online Banking Reducing Poverty in Latin America?

A hand pressing buttons on an ATM machine. The Covid-19 pandemic has accelerated adoption of formal financial services in Latin American countries. // File Photo: Eduardo Soares via Unsplash.com.

At least 1.6 million Colombians who had never before had a bank account have joined the formal financial system just since April, and officials say nearly 86 percent of Colombians now have some type of financial account, a level the government had not expected to reach until 2022. To what extent has the Covid-19 pandemic accelerated entry into the formal financial system in Latin America, and why? Where are people still being left out of the financial system? Will the trend of more people becoming “banked” continue after the pandemic ends, and how would such a trend affect poverty rates in the region?

Fabian Saide, member of the Financial Services Advisor board and founder, CEO and president of Paykii: “Before we jump into numbers, we need to give credit to the Colombian government for its amazing job on their bancarization process. I don’t believe the Covid-19 pandemic will be recognized as the main factor for financial inclusion. Colombia’s unbanked population has been decreasing steadily since 2015. It decreased from 30.4 percent of the population in 2015 to 23.3 percent in 2020, according to Euromonitor. The pandemic did influence this process due to government stimulus related to Covid-19. More than three million families benefited through different stimulus programs led by Prosperidad Social. Two fintech products, DaviPlata and SuRed, were chosen as the payment gateway for banked people, while unbanked people would have to wait for a text message letting them know where and when their funds would be available. Therefore, there was an indirect incentive to open a bank account. Finally, it is clear to assume how Covid-19 has dramatically altered the landscape of financial inclusion in Latin America, with an extensive migration to digital financial services. For example, in Chile, online payments doubled in March as compared to the same month last year. But what’s next? To continue this trend, two challenges must be addressed: 1.) continue building customer trust, keeping the simplicity to migrate to online platforms and 2.) anticipate the new fraud risks. New online customers are not used to online banking, and this could be an opportunity for fraudsters with social engineering or phishing.”

Ernesto Haikewitsch, executive director of Mazaltech Consultores: “Latin America is facing its worst economic crisis due to pandemic-related impacts, and a new wave of infections is creating additional and unpredictable challenges. Governments have adopted several measures to reinforce social safety needs. They are doing this through financial and digital inclusion programs that aim to reduce the pandemic’s economic consequences by taking advantage of the huge penetration of the Internet and smartphones. Entry into the formal financial system was accelerated during the first five months of the pandemic through programs such as Brazil’s Coronavoucher, through which more than 70 million vulnerable people became banked, receiving a monthly emergency subsidy through a digital account. However, cash is still deeply rooted, and people fear that their money is not safe in a bank, believing that the government and financial institutions will charge fees and taxes. Therefore, many beneficiaries simply withdraw their whole balance. Colombian officials created a broader program, connecting more than 20 financial institutions through Ingreso Solidario, promoting a massive digital deployment. By quickly assigning unbanked benefit recipients to financial institutions, governments have created a strong start toward financial integration. Flexible regulations allow fintechs to promote new digital products and financial services, bringing even more people on board for the first time. All these conditions have created an amazing opportunity for the rise of new digital behaviors. For example, millions of consumers made their first e-commerce purchase this year. Covid-19 was a catalyst in the adoption of contactless payments, such as cards, wearables and mobile devices, including ApplePay, Samsung Pay and other e-wallets that use QR code applications or near-field communication (NFC), with different approaches and outstanding acceptance results. The whole ecosystem—banks, retailers and governments—should consolidate the benefits of this so-called ‘new normal,’ investing even more in financial inclusion through enhancing trust and education, making their services truly scalable and affordable and removing barriers to entry. This is a huge opportunity that can’t be left behind and which could enhance the lives of millions of people.”

Álvaro Rodríguez Arregui, co-founder and managing partner of IGNIA Partners: “The issue that we had in the past to incorporate an important part of Latin America’s population into the formal financial system is that cash was very convenient. By now it is already a cliché that the pandemic has accelerated the digitalization of the economy and society. The problem is that when you want to incorporate yourself into the digital economy, cash is no longer convenient. It is possible to transact in the digital economy with cash, but it is very inconvenient. This pushed many to start using payment systems and therefore incorporate themselves into the formal financial system. At the same time, we have had a surge in the growth of neo-banks as they bring a much more convenient solution to the client and a better value proposition than traditional players—again, the pandemic has accelerated the demise of analog businesses. This accelerated growth in users of neo-banks generates a positive cycle that feeds itself. When you see that your neighbor has opened an account and is happy, you now feel more comfortable about opening an account. For these reasons, I think these trends are here to stay, and with them, more and more people will be incorporated into the formal financial system. The narrative that financial inclusion helps to reduce poverty was very popular, but that is now debunked. No doubt that financial inclusion has a positive impact on society, but saying that it helps reduce poverty is going too far.”

Ruben Salazar Genovez, senior vice president for products and innovation at Visa Latin America and the Caribbean: “Research shows that Covid-19 may be the most powerful force for digitization that Latin America and the Caribbean have ever experienced—accelerating the migration to a payment ecosystem that is cardless and terminal-less and operates in a commerce space that has less human interaction. Banks, issuers and acquirers will benefit from accelerating new core technologies that make remote commerce possible, from tokenization to person-to-person payments and QR codes. At Visa, during this time we have seen two important trends. The first is the acceleration of contactless payments, since people are sensitive to touching surfaces, including cash. As of September, we saw contactless penetration grow to 43 percent of all face-to-face transactions around the world. In Latin America alone, one in four debit transactions was contactless. The second important trend is an important increase in e-commerce—with millions of people shopping online for the first time in our region. In Brazil, as of July, we saw that active e-commerce credentials increased 11 percent, and in a less developed e-commerce market such as Argentina, active e-commerce card growth was more than 100 percent. Despite this, there are still more than 200 million unbanked individuals in the region and close to 50 million small merchants trying to get access to digital payments and banking. We see that the conditions to accelerate digital inclusion in our region exist today, with Internet and smartphone penetration soaring. Digital inclusion will define the quality of living conditions for billions of individuals everywhere, and it can bridge the gap and reach millions of underserved consumers. We continue working very closely with our partners around the region, to launch government subsidy programs in response to the pandemic, as we have in the Dominican Republic and Guatemala—in addition to other payment solutions that include more people digitally.”

Julia Yansura, program manager for Latin America and the Caribbean Global Financial Integrity: “Progress in Colombia and other countries in the region is exciting, though much remains to be done to deepen and broaden financial inclusion. First, it will be important to ensure that entry into the financial system is a positive experience. New users who experience technical difficulties, high costs or lack of transparency from financial services providers may decide to discontinue use. Indeed, the Colombian report mentioned above shows a 14 percentage-point gap between those with access to financial products, and those who actually report using them. Financial education can help new users take full advantage of products, while consumer financial protections are key to protecting their rights, particularly in the case of vulnerable groups. Moreover, differentiated products, such as low-cost accounts for low-income groups, or transnational products for migrants and remittance recipients, are crucial. Second, it is important to consider ways to broaden financial inclusion efforts and reach more people. One current barrier that deserves more discussion is access to identification. According to the World Bank, more than 30 million people in Latin America and the Caribbean lack a government-issued ID. Colombia’s high levels of financial access are possible in part because 99 percent of the country’s population has an ID. However, in countries such as the Bahamas, Paraguay, Bolivia, Guatemala and Nicaragua, more than 10 percent of the population has no official ID. Addressing this problem will open new opportunities for financial access while also protecting the security and integrity of the financial system.”

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