Despite the growth of fintechs in Latin America, cash is still king in the region. Cash management company Brink’s estimates that 85 percent of Brazil’s market relies on cash, while in Mexico, the figure is 90 percent. Why is Latin America clinging to cash? How likely is it that cash will remain dominant despite the region’s digitization and embrace of mobile tech? How would wider use of credit cards and other financial technology in Latin America, and less of a reliance on cash, affect consumers?
Luciana Resende Lotze, senior vice president of marketing for Visa Latin America & the Caribbean: “Latin America is clinging to cash for a few reasons: the high percentage of consumers who are underbanked and unbanked, the low acceptance of electronic payments in many parts of the region and consumers’ habitual use of cash. We think the two will co-exist for some time, but we know that increasing access to digital payments changes people’s lives, as well as businesses and economies. For instance, a woman who does arts and crafts in the interior of Brazil or Guatemala was confined to sell her pieces to buyers who had physical access to her work, and she had little bargaining power to negotiate the price of her pieces. Now, with access to the Internet and payment technology, she can better price her work and use digital payments to sell it directly to larger stores. The proliferation of this is transformational. Collaboration among banks, merchants, government, fintech and start-ups is essential to solving these problems. We work with several governments in the region to design public policies that move consumers and merchants toward adopting digital payments. The gig economy is also driving change in consumer payment behavior, since it is digital by nature. Digital payments are fast, more secure than cash and give consumers instant buying power. Contactless payments are effective at converting cash to card-based payments, particularly in everyday spending. In Brazil, we launched our first major open-loop transit contactless solution in the region with MetrôRio, and in two months, it has seen more than 50,000 contactless transactions. We are working to expand this to other cities in Latin America as mass transit has become crucial to accelerating the adoption of digital payments and transform the way people pay.”
Julia Yansura, program associate in the Remittances and Development Program at the Inter-American Dialogue: “For consumers in Latin America, cash has two important advantages over digital: it doesn’t require access to a bank account, and it is much more widely accepted by merchants. The first point is critical and often misunderstood. Although it is sometimes assumed that fintech can offer a shortcut to financial inclusion, the reality is more complicated. Many digital financial products require consumers to have a bank account as a starting point. According to 2017 data from the Global Findex, only 55 percent of adults in Latin America have any kind of account, only slightly up from 52 percent in 2014. Mexico is even lower than the regional average, just 37 percent in 2017. Digital products can contribute significantly to financial inclusion through greater accessibility, convenience, security and even lower costs, yet very rarely do they replace accounts, and rarely are they the first step taken toward financial access. With regard to the second point, consumers in the region will adopt cards and other digital payment methods to the extent that they are useful in everyday life. The reality is that most merchants in Latin America are not currently able to accept digital payments due to barriers such as cost, infrastructure, informality and limited access to business bank accounts. For those of us who are excited about fintech and optimistic about the benefits of digital, it’s important to address some of these barriers through efforts that promote financial inclusion and increase merchant adoption of digital payment options.”
Alejandra Ruales, manager for programs at the Financial Health Network: “Cash remains widely used in Latin America for two reasons: the high cost of using financial services and the size of the criminal economy in most countries in the region. The cost of using financial services is prohibitive for the majority of the population. The use of checks, debit transactions, service fees and transfers is expensive, prompting a heavy preference for cash. Additionally, corruption, contraband and a heavily informal economy are important reasons for the prevalence of cash in the region. The size of informality stimulates a preference for cash because it does not leave a transaction record. Cash allows for anonymity and opportunity to conduct illegal activities, including money laundering, tax evasion and corruption; this disincentivizes people to use financial products that trace their money movements. The reliance on cash has caused severe issues with corruption in both the private and public spheres, which has permeated in the social structure. Mobile banking and fintech adoption by consumers will likely grow in the next few years with a growing tech-savvy population. Wider adoption of financial technology would positively affect consumers by increasing efficiency and effectiveness, saving them money and time. With new players in the market, bank monopolies in the region will be challenged to improve customer service, update technology and, most importantly, reduce costs for the consumer. The introduction of new technology and infrastructure can result in lower transaction costs and reduced usage of cash and ultimately widen participation and integration of Latin American consumers into the formal economy.”
Andres Fontao, managing partner and co-founder, Finnovista: “Cash is king in Latin America for many reasons: financial inclusion, informal economy, a lack of trust in financial institutions and a low prevalence of bank branches, particularly in rural areas, just to name a few. That being said, we are very bullish on the digitalization of financial services in the region, and that will most certainly lower cash usage across Latin America. We’re already seeing a wide array of tech-based start-ups delivering digital value propositions across the region, from challenger banks such as Nubank, Ualá, Vexi and Flink, to payment start-ups such as Clip, Conekta and Dapp. Fintechs are aggressively pursuing an opportunity to disrupt and reinvent financial services at its core, and this will certainly result in lower cash usage in the region. Also, we can’t overlook the digital transformation of banks and payment companies, which will also reduce the use of cash in Latin America. Lastly, but not less importantly, we have to consider the direction and efforts taken by larger tech players in the region, particularly digital-commerce and sharing-economy players such as MercadoLibre, Rappi, Uber and Amazon. Their quest to become super apps with a multitude of products and services, financial services and, specifically, lending and payments projects will be fundamental to their success. If we consider these three factors, plus regulatory and central bank initiatives such as CoDi in Mexico, there is no doubt that cash will be reduced significantly in the coming years. As a frequent traveler to the region, it’s been years since I’ve needed to exchange currencies and carry cash thanks to Uber, Clip and Rappi, among others.”